Texas data center boom faces grid and water limits

Texas has become the biggest U.S. state for planned data center development, attracting projects tied to artificial intelligence, cloud computing, and other high-demand digital services. But the same pipeline that made Texas a favorite among developers is now raising sharper questions about power, water, taxes, and neighborhood impacts.

The change does not mean Texas is suddenly losing the industry. It does mean the path from announcement to construction is becoming less automatic. State regulators are auditing major projects, some local governments are trying to limit development, and public opposition is giving officials more reasons to demand stronger conditions before new facilities move forward.

Texas still has the largest planned pipeline

Texas remains in a strong position due to the large number of proposed projects. Cleanview data cited by RealClearMarkets says Texas has roughly 100 GW of planned data center capacity, more than Virginia and Utah combined. The Texas Tribune separately identified at least 335 operating data centers in Texas and at least 248 planned projects in 2026.

Those numbers help explain why developers continue to treat Texas as a leading growth market. The state offers large amounts of land, major energy infrastructure, rapid population growth, and established technology hubs in areas such as Dallas-Fort Worth, Austin, San Antonio, and Houston.

But planned capacity is not the same as completed capacity. Some projects are early concepts, some still need permits or grid studies, and others may never reach construction. That gap matters more now because Texas is imposing new checks on large projects seeking access to the electric grid.

The grid queue has become a major bottleneck

On Aug. 3, Gov. Greg Abbott ordered the Public Utility Commission of Texas and ERCOT to conduct a comprehensive audit of data centers moving through ERCOT’s interconnection process. Projects covered by the order cannot advance until the review is complete.

At the time of the directive, ERCOT was considering more than 474 GW of requests to connect large loads to the Texas grid. The governor’s office said about 90% of those requests came from data centers, a level far above the state’s record electricity demand.

The first audit group is narrower than the full queue. ERCOT officials said roughly 250 to 300 projects, representing about 200 GW of future demand and mostly involving data centers, are subject to the initial review. On Aug. 20, state regulators approved a timeline that runs into December.

Texas is asking developers to pay more of the cost

The new review is about more than technical grid studies. Abbott’s June directive called for data centers to fully fund the electric infrastructure required to serve their operations, rather than shifting those costs to households and small businesses.

The state is also asking projects for more information about on-site power, peak electricity needs, water sources, cooling systems, tax incentives, and steps to reduce effects on nearby communities. Projects that fail to comply with the audit requirements can be denied a grid connection.

Several large operators have publicly agreed to the standards, including Meta, QTS, Digital Realty, Galaxy, and Compass Datacenters. One proposed East Texas project from Diode was withdrawn after state officials said it did not meet the governor’s expectations. That shows the rules can affect which projects move ahead.

Local communities are testing their power

The pressure is also coming from cities and counties. San Marcos became the first Texas city to ban data centers within its limits in June, using its zoning authority after officials raised concerns about the strain on water and electricity supplies.

Hill County took a different route. Commissioners approved a one-year moratorium on new data center construction in May, then rescinded it in June after a developer filed a lawsuit seeking $100 million in damages. The county replaced the moratorium with a development checklist.

Public opinion gives local officials more reason to act. A June University of Texas/Texas Politics Project poll found that a majority of Texans opposed construction of a data center in their community, with opposition especially strong in rural areas. National polling has shown similar concerns.

Water use is becoming harder to ignore

Water has become one of the biggest transparency issues. A survey developed by the Public Utility Commission, in collaboration with the Texas Water Development Board, asked data center and cryptocurrency mining operators about water use, cooling systems, electricity demand, and power sources.

Less than one-third of the companies surveyed responded, according to testimony reported by The Texas Tribune. The agency received responses from 28 companies covering 92 facilities, leaving lawmakers concerned that the state still lacked a complete picture of current and future water demand.

Abbott’s August audit now requires projects to disclose projected annual and peak water use, water sources, and cooling technology. That means developers who once could move through planning with limited public detail may now face more pressure to explain how their projects will operate during drought or rapid local growth.

The economic case is still powerful

Texas has strong reasons to keep attracting data centers. A 2026 PwC study commissioned by the Data Center Coalition estimated that the industry contributed about $65.8 billion to Texas’ GDP in 2024 and generated about $4.5 billion in state and local tax revenue, excluding cross-state spillover effects.

The same study estimated a total employment contribution of about 428,660 jobs in Texas, including direct, indirect, and induced effects. Industry supporters also point to construction spending, local property taxes, and long-term demand for electrical and technical services.

At the same time, lawmakers are questioning whether older incentives are still necessary. Texas has offered qualifying data centers a sales tax exemption, and state officials have estimated the program can cost more than $1 billion a year in forgone revenue. Abbott has called for phasing out outdated incentives.

Texas now has to convert plans into projects

Texas is unlikely to lose its data center position overnight. Its current pipeline is too large, and companies continue to announce investments. The bigger question is how much of that planned capacity survives stricter grid reviews, new infrastructure costs, water requirements, and local opposition.

Other states are competing for the same investment, while developers increasingly look for sites with available power, transmission capacity, and clear permitting rules. A project that cannot secure electricity or community support in Texas may have more reason to consider another location.

Texas, therefore, faces a different challenge than it did during the early data center boom. Attracting announcements is no longer enough. Keeping its lead will depend on whether the state can add power and infrastructure quickly while convincing communities that new projects can grow without shifting unacceptable costs or risks onto residents.

TL;DR:

• Texas has one of the nation’s largest planned data center pipelines, with Cleanview data cited by RealClearMarkets showing roughly 100 GW of planned capacity.
• Abbott’s Aug. 3 audit covers roughly 250 to 300 large-load projects in the first review group, with regulators now working toward a December timeline.
• New state requirements focus on grid costs, power supply, water use, tax incentives, and community impacts before projects can move forward.
• San Marcos has banned data centers within city limits, while Hill County briefly imposed a moratorium before withdrawing it after a lawsuit.
• Texas still offers major economic advantages, but maintaining its lead will depend on converting planned projects into reliable, locally acceptable operating facilities.

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This article was made with AI assistance and human editing.