Just as American voters prepare to head to the polls, Texas Governor Greg Abbott, who once championed the state as an "AI development hub," has begun erecting obstacles to slow data center construction, and this effort is already showing results. Texas had previously been poised to overtake Virginia as the world's data center capital. But as a surprisingly strong Democratic challenger made Abbott's bid for a fourth term—and his path to becoming Texas's longest-serving governor—more difficult, he changed his strategy.
Abbott stated that Texas environmental regulators will no longer issue permits to data centers until the state's grid operator completes audits of the relevant applicants, all of whom are waiting for approval to use electricity. With Abbott's sudden shift from data center supporter to skeptic, developers are beginning to consider other regions. According to people familiar with the matter, Utah and Georgia have become destinations discussed within the industry, and Iowa is also being viewed as an alternative location for these projects.
This shift could threaten the pace of data center development in Texas. Even the most powerful companies are feeling the impact. Banks are delaying the sale of bonds related to a Texas data center that will be leased to Anthropic, which is preparing for what could be the largest initial public offering (IPO) in history. Anthropic said this week that Texas regulations are limiting the expansion of computing capacity that its AI models depend on.
Texas attracted data center developers because of its abundant land resources and its ability to generate power from solar, wind, and natural gas. Curt Holcomb, who leads CBRE's (JLL) Texas data center business, said Texas's grid can add new capacity faster than any other region in the United States. But now, investors and bankers are struggling to understand what the governor's actions mean for the future of Texas's data center industry. A person familiar with the matter said lenders are carefully scrutinizing companies seeking financing for Texas data center projects, adding that more speculative projects will struggle to attract investors.
Jack Painter, vice president of energy and utilities at Washington-based consulting firm Capstone, said Texas "remains one of the most attractive data center markets in the United States." But he added that "this does not mean some projects currently in the ERCOT queue won't consider moving elsewhere, such as Arizona, Utah, or Georgia." He was referring to ERCOT, the Electric Reliability Council of Texas, which operates the state's power grid.
A spokesperson for Abbott's office said: "Governor Abbott's position is clear—Texans come first. Data centers must bear their own costs, protect our grid and water resources, and complete the audits required by the state government. Until then, no state agency will issue relevant permits, and any project that fails to meet these standards will be rejected."
Developers Complain About Approval Delays
Some developers have already filed complaints about approval delays. They say the delays caused by these audits are jeopardizing their deals. Among them is land developer Tract. The company had originally expected its proposed 500-megawatt data center near San Antonio to be approved for grid connection, but last month it was told that state regulators wanted more assessment of the project site. The Colorado-based company owns a 265-acre development project in Medina County. The project is one of 14 active projects it is currently pursuing across seven states, and it is now mired in a dispute with ERCOT.
Tract wrote in a complaint filed with the Texas Public Utility Commission on September 30: "If any delay in this process continues beyond ERCOT's completion of the audit and verification process, it will cause irreparable harm." The company said being required to conduct additional research "is not just a delay of a few months, but could cause a project to die entirely."
Denver-based data center developer Rowan Digital Infrastructure is also challenging ERCOT's review. Just a year ago, the company received preliminary approval for "Project Stampede." The project is part of a data center campus north of Austin with a total investment of $4.2 billion. Rowan wrote in a complaint that the suspension created "a significant risk that the project may be unable to obtain additional financing due to regulatory uncertainty."
Political Reasons
Some analysts and developers believe Abbott's actions may be more of a political strategy than a genuine attempt to slow the state's embrace of data centers. Data center projects have already sparked dissatisfaction among most voters. A poll by the University of Texas and the Texas Politics Project found that 57% of Texas residents oppose building data centers in their own communities. The governor appears to be responding to widespread antipathy toward data centers among voters of both parties.
Many developers believe Texas's permitting pause is a political tactic that will disappear after the midterm elections, but they also recognize the need to adjust how they lobby local governments and skeptical residents. Data centers can bring some jobs and, over time, billions of dollars in tax revenue to cash-strapped local governments. Although many data center projects in Texas qualify for tax breaks, voters are worried about their water and electricity consumption. Some also believe data centers are powering technology that could take away people's livelihoods.
Nowhere is this contradiction more evident than in Texas, which has the most data center projects in the country. Democratic gubernatorial candidate Gina Hinojosa has seized on this discontent in her campaign, calling for a moratorium on data center development. She trails Abbott by only a few percentage points in the polls, giving her a real chance to win a governor's office that Democrats have not captured since 1990. Gina Hinojosa said earlier this month: "Greg Abbott's tough talk on data centers is nothing more than election-year political theater. Abbott lured these data centers to Texas with some of the most generous tax incentives in the country, then pretended to pause approvals for political gain."
Raul Martynek, CEO of Dallas-based data center developer DataBank, likewise believes there are "political reasons" behind Abbott's permit freeze. Raul Martynek said: "He needs to drag this out until after the election, and then he can restart from there." DataBank has already developed nearly 350 megawatts of data center facilities in Texas, enough to power nearly 90,000 Texas households. Despite new regulations and long grid connection queues, the company is still advancing its Texas projects and expects Texas to remain one of the preferred destinations for new data center facilities.
Raul Martynek believes increased scrutiny will weed out some of the more speculative developers. These developers have submitted large numbers of power demand applications without sufficient ability to complete the relevant projects. In addition, implementing the audit has helped delay an ERCOT report. Originally, the report was to be published before the November 3 election and forecast electricity demand from high-consumption industrial users, including data centers. Jack Painter said: "Any headline about this figure could affect his re-election campaign and further anger voters." "Ultimately, the audit pushed those headlines until after the election."
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