Everything is bigger in Texas. This also applies to data center demand in the Lone Star State, where project developers are rushing to cash in on the artificial intelligence boom.
A combination of cheap land and cheap energy is drawing a slew of data center developers to the state. Energy experts say the potential demand is so huge that it will be impossible to meet it by the end of 2010.
Speculative projects have clogged the pipelines that connect to the power grid, making it difficult to determine how much demand will actually be realized. However, if demand forecasts inflate and more infrastructure is built than is actually needed, investors will find themselves in a bind.
“It definitely looks, smells and feels like a moving bubble,” said Joshua Rose, a research scientist at the University of Texas at Austin and founder of energy consulting firm Ideasmith.
“The top-line numbers are almost laughable,” Rose said.
More than 220 gigawatts of large-scale projects are seeking to connect to Texas’ power grid by 2030, according to December data from the Electric Reliability Council of Texas. More than 70% of these projects are data centers, according to ERCOT, which manages Texas’ power grid.
That’s more than double the Lone Star State’s peak demand this summer, which is about 85 gigawatts, and brings the total generation available for the season to about 103 gigawatts. Former ERCOT supervisor Beth Garza said those numbers are “extraordinarily large.”
“There’s just not enough on the equipment side or on the consumer side to meet this kind of load,” said Garza, who served as director of ERCOT’s independent market monitor from 2014 to 2019.
Rose agreed. “It’s physically impossible to put that much steel in the ground to match that number. I don’t even know if China can do it this quickly,” he said.
“Not everything is real”
In Texas, demand for data centers has skyrocketed since a 2023 state law mandated that electricity demand forecasts take into account projects without power connection agreements.
The number of large projects requiring power connections has almost quadrupled this year. But more than half of those, representing about 128 gigawatts of additional potential demand, have not yet submitted studies for ERCOT to review. Approximately 90 additional gigawatts are under consideration or have planning studies approved.
“We know it’s not all real. The question is how much of it is real,” said Michael Hogan, senior adviser at the Regulatory Assistance Project, which advises governments and regulators on energy policy.
Hogan, who has worked in the electrical industry for more than 40 years since joining General Electric Co. in 1980, said Texas’ huge numbers reflect the broader data center bubble in the United States.
“Like everything else in Texas, this is a supersized example of that,” he said.
The number of projects actually connected to the grid or approved by ERCOT is even smaller, at only about 7.5 gigawatts. Still, this is a large number, equivalent to nearly eight large nuclear power plants. But Texas can meet that level of demand, Rose said.
“We can comfortably expand an 8 gigawatt data center,” Rose said. He said Texas could meet 20 or 30 gigawatts of data center demand by 2030.
Texas has worked to distinguish between serious data center projects and merely speculative data center projects. The law passed in May requires developers to pay $100,000 for an initial study of their project and prove the site is secured by title or lease. And it needs to reveal whether it has outlined the same project elsewhere in Texas.
The Public Utilities Commission of Texas has proposed a rule that would require data centers to pay $50,000 per megawatt of peak power in security. For a gigawatt data center, the total cost to the developer is at least $50 million.
“A serious developer with a long-term agreement with an anchor tenant will be willing to invest that money,” Rose said. He said more speculative developers are likely to come off the line for electricity connections, which will help authorities make more accurate forecasts.
Risks to investors
The risk is that power infrastructure such as power plants, transmission lines and transformers that are built for speculative data centers either never materialize or use less power than expected, Rose said. And overbuilding will occur at a time when the cost of that infrastructure is rising as data centers and other industries compete for the same scarce equipment, he said.
“When the bubble bursts, who pays depends on how much steel is moved,” Rose said. For example, the cost of natural gas plants has more than doubled in the past five years, he said.
“It’s like buying a house at the top of the market,” the analyst said. “If house prices go down in five years, you’re out of luck.”
Rose and Hogan said investors typically pay for the construction of new power plants to serve Texas’ electricity market, which can provide some protection for households from rising power prices if excess capacity is built.
By contrast, data center demand is driving up electricity prices in some states in the Midwest and Mid-Atlantic. That’s because grid operator PJM Interconnection has been purchasing electricity generation for years, leaving the burden on consumers.
In Illinois, where PJM is supplied to the northern part of the state, household electricity rates rose by about 20% in September compared to the same month last year. But prices in Texas rose only 5% from a year earlier, lower than the national average of more than 7%, according to Energy Information Administration data.
Hogan said the risk of overbuilding in Texas is lower than in PJM due to the structure of the market. But “whatever (new) construction ends up happening in Texas, the people who end up investing in excess capacity are going to suffer,” he said.
