Texas Data Center Boom Faces reality Check: Is a Bubble Brewing?
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A surge in demand for data centers in Texas, fueled by the artificial intelligence boom, is raising concerns about overbuilding and potential financial risks for investors.
Texas is experiencing an unprecedented rush of interest from data center developers, drawn by the state’s cheap land and abundant energy resources. However, the scale of proposed projects is so vast-exceeding 220 gigawatts of requests to connect to the state’s electric grid by 2030-that experts are questioning weather the demand is sustainable.
Demand Dwarfs Current Capacity
According to December data from the Electric Reliability Council of Texas (ERCOT), which manages the state’s power grid, over 70% of these proposed projects are data centers. this represents more than double the amount of new capacity ERCOT expects to need over the next decade.
“The top line numbers are almost laughable,” another expert added.
Speculative Projects Cloud the Forecast
The explosion in data center requests followed a 2023 state law requiring projects without signed electric connection agreements to be included in power demand forecasts. This led to a nearly fourfold increase in projects seeking grid connections this year. However, a notable portion-representing roughly 128 gigawatts of potential demand-have yet to submit detailed studies for ERCOT review. Another 90 gigawatts are currently under review or have had preliminary planning studies approved.
“We certainly know it’s not all real. The question is how much is real,” said Michael Hogan, a senior advisor at the Regulatory Assistance Project. The situation mirrors a broader trend of potential overbuilding in the U.S. data center market, with Texas representing an “outsized example” of the phenomenon. Currently, only around 7.5 gigawatts of projects have actually connected to the grid or received ERCOT approval, equivalent to nearly eight large nuclear plants.
New Regulations Aim to Separate Substance from Speculation
Texas lawmakers are attempting to address the issue of speculative projects. A law passed in May now requires developers to pay $100,000 for an initial project study and demonstrate site control through ownership or a lease agreement. They must also disclose if the same project is being proposed elsewhere in the state. The Texas Public Utility Commission is also considering a rule requiring data centers to post a $50,000 security deposit per megawatt of peak power, possibly totaling $50 million for a gigawatt-scale facility.
“The serious developers with long-term contracts signed with anchor tenants, they’re going to be willing to put that money down,” one analyst explained. “More speculative developers will likely drop out of the line for an electric connection, which will help authorities get a more accurate forecast.”
Investor Risk Looms Large
The primary concern is that infrastructure-including power plants, transmission lines, and transformers-could be built to serve data centers that never materialize or consume less power than anticipated. This overbuilding is especially risky given the soaring costs of such infrastructure, driven by competition from data centers and other industries.
“When the bubble bursts, who pays is going to depend on how much steel has been moved,” one analyst warned, noting that the cost of a natural gas plant has more than doubled in the past five years. “It’s kind of like buying your house at the top of the market. If the house price goes down in five years, you’re out of luck.”
The financial burden of new power plants in Texas typically falls on investors, shielding households from potential electricity price increases. This contrasts with states like Illinois, served by PJM Interconnection, where grid operators purchase power generation years in advance, passing the costs onto consumers. Residential electricity prices in Illinois rose approximately 20% in September compared to the previous year, while Texas prices increased by only 5%, below the national average of over 7%, according to data from the Energy Facts Administration.
Despite the risks,Texas appears better positioned to avoid widespread overbuilding than some other regions due to it’s market structure. Though, Hogan cautioned that “whatever [new] build we do end up seeing in Texas, the people who ended up investing in the excess capacity are the ones that are going to suffer.”
