Everything is bigger in Texas. That also applies to demand for data centers in the Lone Star State, where developers are rushing to capitalize on the artificial intelligence boom.
Cheap land and cheap energy are combining to attract a flood of data center developers to the state. The potential demand is so great that it will no longer be met by the end of the decade, energy experts say.
Speculative projects are clogging the pipeline to connect to the grid, making it difficult to estimate how much demand will actually materialize, they say. But if inflated demand forecasts result in more infrastructure being built than is actually needed, investors will be left behind.
“It definitely looks, smells, feels — it behaves like a bubble,” said Joshua Rhodes, a researcher at the University of Texas at Austin and founder of energy consulting firm IdeaSmiths.
“The top-line numbers are almost ridiculous,” Rhodes said.
According to December data from the Electric Reliability Council of Texas, more than 220 gigawatts of large-scale projects have applied to connect to the Texas grid by 2030. According to ERCOT, which manages the Texas power grid, more than 70% of these projects are data centers.
That's more than double the Lone Star State's record peak demand this year of about 85 gigawatts and total available generation for the season of about 103 gigawatts. Those numbers are “insanely high,” said Beth Garza, a former ERCOT supervisor.
“There is not enough material to cover that much load on the equipment or consumption side,” said Garza, director of ERCOT’s independent market monitor from 2014 to 2019.
Rhodes agreed. “There's just no way to physically put that much steel in the ground to reach those numbers. I don't even know if China could do it that quickly,” he said.
“Not everything is real”
Data center demand has exploded in Texas since state legislation in 2023 required projects that have not signed power connection agreements to be included in power demand forecasts.
The number of large projects requesting an electricity connection has almost quadrupled this year. But more than half of them, representing about 128 gigawatts of increased potential demand, have not yet submitted studies to ERCOT for review. Around a further 90 gigawatts are either under review or have already been approved planning studies.
“We know not everything is real. The question is how much is real,” said Michael Hogan, senior adviser at the Regulatory Assistance Project, which advises governments and regulators on energy policy.
The huge numbers in Texas reflect a broader data center bubble in the U.S., said Hogan, who has worked in the electrical industry for more than four decades, starting at General Electric in 1980.
“Like everything else in Texas, it’s an outsized example of this,” he said.
The number of projects that have actually come online or been approved by ERCOT is significantly lower, at only around 7.5 gigawatts. It is still a large number, equivalent to almost eight large nuclear power plants. But Texas can meet that demand, Rhodes said.
“We could easily build out 8 gigawatts of data centers,” Rhodes said. Texas could be able to meet 20 gigawatts or 30 gigawatts of data center needs by 2030, he said.
Texas has taken steps to separate serious data center projects from purely speculative ones. A law passed in May requires developers to pay $100,000 for the initial study of their project and prove that a site is secured by an ownership interest or lease. And they must disclose whether they have outlined the same project anywhere else in Texas.
The Texas Public Utility Commission has proposed a rule that would require data centers to pay $50,000 in security per megawatt of peak power. The cost to a developer would be at least $50 million for a gigawatt-scale data center.
“The reputable developers with long-term contracts with anchor tenants will be willing to put down that money,” Rhodes said. More speculative developers would likely exit and opt for a power connection, which would help authorities get a more accurate forecast, he said.
Risk for investors
The risk is that electrical infrastructure such as power plants, transmission lines and transformers are built for speculative data centers that either don't materialize or use less power than expected, Rhodes said. And excessive construction comes at a time when the cost of that infrastructure has skyrocketed as data centers and other industries all compete for the same scarce equipment, he said.
“When the bubble bursts, payment will depend on how much steel was moved,” Rhodes said. The cost of a natural gas plant, for example, has more than doubled in the last five years, he said.
“It's like buying your house at a premium price,” the analyst said. “If the house price goes down in five years, you’re out of luck.”
The cost of building new power plants to supply the Texas electricity market is generally borne by investors, Rhodes and Hogan said, giving households some protection from higher electricity prices if too much capacity is built.
By contrast, electricity prices in some Midwestern and Mid-Atlantic states have skyrocketed due to demand for data centers because grid operator PJM Interconnection buys generation years in advance – shifting the burden to consumers.
In Illinois, where the northern part of the state is served by PJM, residential electricity prices rose about 20% in September compared to the same month last year. However, according to data from the Energy Information Administration, Texas prices rose just 5% year-over-year, below the average national increase of more than 7%.
Because of the market structure, there is less risk of overbuilding in Texas compared to PJM states, Hogan said. But “whatever.” [new] “If we end up with the construction that we end up seeing in Texas, the people who invested in the excess capacity will end up suffering,” he said.