Red hot Texas gets so many data center requests that some see a bubble

Everything is bigger in Texas. That’s also true for data center demand in the Lone Star State, where project developers are rushing to cash in 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 vast that it will be impossible to meet by the end of the decade, energy experts say.

Speculative projects are clogging up the pipeline to connect to the electric grid, making it difficult to see how much demand will actually materialize, they say. But investors will be left on the hook if inflated demand forecasts lead to more infrastructure being built than is actually needed.

“It definitely looks, smells, feels — is acting like a bubble,” said Joshua Rhodes, a research scientist at the University of Texas at Austin and a founder of energy consulting firm IdeaSmiths.

“The top line numbers are almost laughable,” Rhodes said.

More than 220 gigawatts of big projects have asked to connect to the Texas electric grid by 2030, according to December data from the Electric Reliability Council of Texas. More than 70% of those projects are data centers, according to ERCOT, which manages the Texas power grid.

That’s more than twice the Lone Star State’s record peak summer demand this year of around 85 gigawatts, and its total available power generation for the season of around 103 gigawatts. Those figures are “crazy big,” said Beth Garza, a former ERCOT watchdog.

“There’s not enough stuff to serve that much load on the equipment side or the consumption side,” said Garza, director of ERCOT’s independent market monitor from 2014 to 2019.

Rhodes agreed. “There’s just no way we can physically put this much steel in the ground to match those numbers. I don’t even know if China could do it that fast,” he said.

‘Not all real’

Data center requests have exploded in Texas since state legislation in 2023 required projects that have not signed electric connection agreements to be considered in power demand forecasts.

The number of big projects requesting an electric connection has nearly quadrupled this year. But more than half of them, representing about 128 gigawatts of increased potential demand, have not submitted studies for ERCOT to review yet. About another 90 gigawatts are either under review or have had planning studies approved.

“We know it’s not all real. The question is how much is real,” said Michael Hogan, a senior advisor 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 electric industry for more than four decades, starting at General Electric in 1980.

“As with everything else in Texas, it’s an outsized example of it,” he said.

The number of projects that have actually connected to the grid or have been approved by ERCOT is much smaller, at only around 7.5 gigawatts. It is still a large number, equivalent to nearly eight large nuclear plants. But Texas can meet that level of demand, Rhodes said.

“We could comfortably grow 8 gigawatts of data centers,” Rhodes said. Texas might be able to meet 20 gigawatts or 30 gigawatts of data center demand by 2030, he said.

Texas has acted to separate serious data center projects from those that are merely speculative. A law passed in May requires developers to pay $100,000 for the initial study of their project and show that a site is secured through an ownership interest or lease. And they have to 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 security per megawatt of peak power. The cost to a developer would total at least $50 million for a gigawatt-scale data center.

“The serious developers with long-term contracts signed with anchor tenants, they’re going to be willing to put that money down,” Rhodes said. More speculative developers will likely drop out of the line for an electric connection, which will help authorities get a more accurate forecast, he said.

Risk to investors

The risk is that electric infrastructure such as power plants, transmission lines and transformers will be built for speculative data centers that either do not materialize or use less electricity than anticipated, Rhodes said. And overbuilding would come at time when the cost of that infrastructure has soared as data centers and other industries all compete for the same scarce equipment, he said.

“When the bubble bursts, who pays is going to depend on how much steel has been moved,” Rhodes said. The cost of a natural gas plant, for example, has more than doubled over the past five years, he said.

“It’s kind of like buying your house at the top of the market,” 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 serve the Texas electric market is generally borne by investors, Rhodes and Hogan said, providing some protection to households from higher electricity prices if too much capacity is built.

By contrast, electric prices have spiked in some Midwestern and mid-Atlantic states from data center demand because the grid operator, PJM Interconnection, buys power generation years in advance — with the burden falling on 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. But prices in Texas increased just 5% year over year, below the average national increase of more than 7%, according to data from the Energy Information Administration.

Texas has less risk of building too much generation compared to PJM states because of the way the market is structured, Hogan said. But “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,” he said.