Texas data center construction boom hits the brakes! Governor tightens approvals under election pressure, forcing developers to seek alternatives.

Just as American voters were about to head to the polls, Governor Greg Abbottwho once touted Texas as the "center of artificial intelligence (AI) development"has begun erecting obstacles to slow data center construction, and that effort is starting to show results. Texas had been poised to overtake Virginia as the world's data center capital. But with a surprisingly strong Democratic challenger making Abbott's bid for a fourth termand status as Texas's longest-serving governormore difficult, he has changed tack. Abbott said the state's environmental regulator will not issue new 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 seen as an alternative site for these projects. The 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 tied to a Texas data center that will be leased to Anthropic, which is preparing 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 on which its AI models depend. Texas attracted data center developers because of its abundant land resources and its ability to generate power from sources including CECEP Solar Energy, wind and natural gas. Curt Holcomb, who heads JLL's Texas data center business, said Texas's grid can add new capacity faster than any other region in the United States. But investors and bankers are now struggling to understand what the governor's actions mean for the future of Texas's data center industry. One person familiar with the matter said lenders are scrutinizing companies seeking financing for Texas data center projects, adding that more speculative projects will struggle to attract investors. Jack Painter, vice president of the energy and utilities practice at Washington-based consultancy Capstone, said Texas "remains one of the most attractive data center markets in the United States." But he added that "that doesn't mean some of the projects currently in the ERCOT queue won't consider moving elsewhere, such as Arizona, Utah or Georgia." ERCOT refers to the Electric Reliability Council of Texas, which operates the state's 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. Until then, no state agency will issue the relevant permits, and any project that fails to meet these standards will be rejected." Developers complain of approval delays Some developers have already lodged 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 expected its proposed 500-megawatt data center near San Antonio to be approved for grid connection, but was told last month 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, one of 14 active projects it currently has across seven states, is now mired in a dispute with ERCOT. In a complaint filed with the Texas Public Utility Commission on September 30, Tract wrote: "If any delay in this process persists beyond ERCOT's completion of the audit and verification process, it will cause irreparable harm." The company said being required to conduct more studies "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," part of a data center campus north of Austin with a total investment of US$4.2 billion. In a complaint, Rowan wrote that the pause 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 drawn the ire of 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 communities. The governor appears to be responding to widespread antipathy toward data centers among voters of both parties. Many developers believe the Texas 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 for cash-strapped local governments. Although many data center projects in Texas qualify for tax breaks, voters worry about their water and electricity consumption. Some also believe data centers are powering technology that could take away people's livelihoods. Nowhere is this tension more evident than in Texas, which has the most data center projects in the country. Democratic gubernatorial candidate Gina Hinojosa has seized on that 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 governorship Democrats have not held since 1990. Gina Hinojosa said earlier this month: "Greg Abbott's tough talk on data centers is nothing but election-year political theater. Abbott used the most generous tax incentives in the country to lure these data centers to Texas, and then pretended to pause approvals to gain political advantage." Raul Martynek, chief executive 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 homes. Despite the new regulations and long grid connection queues, the company is pressing ahead with 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 developersthose that submit large numbers of power demand applications without sufficient ability to complete the projects. In addition, the audit has helped delay an ERCOT report that was originally due to be published before the November 3 election and would forecast electricity demand from high-power industrial users, including data centers. Jack Painter said: "Any headline about that number could have affected his re-election campaign and further angered voters." "Ultimately, the audit pushed those headlines until after the election."