Texas ends data center subsidies, demands grid infrastructure funding
In brief
- Abbott directs PUC and ERCOT to require data centers to finance grid infrastructure, substations, and transmission upgrades
- Data center sales tax exemption costs Texas $3.2 billion in forgone revenue over two years
- Texas hosts 6.5 gigawatts of data center capacity under construction, roughly one-fifth of the national pipeline
- Large-load grid interconnection requests surged 270% in 2025, with 73% from data centers
The shift
On June 10, Abbott sent a letter to the Public Utility Commission and ERCOT with a clear directive: developers should expect to shoulder the upfront costs of substations, transmission upgrades, and interconnection work that used to be spread across all ratepayers. The move marks a sharp reversal from Texas's long-standing playbook of attracting high-load industries through tax breaks and cheap power.
The numbers tell why. There are 121 facilities currently drawing on the sales tax break, and the state's exemption will cost Texas roughly $3.2 billion in forgone revenue over the next two years, with about $1.3 billion of that landing this year alone. That's a budget hit the state can no longer ignore.
Grid strain at scale
The timing isn't random. Texas now has roughly 6.5 gigawatts of data center capacity under construction, about a fifth of the national pipeline. The grid is buckling under the load. ERCOT set its all-time peak at 85,508 megawatts in August 2023, but the grid operator's preliminary long-term forecast now estimates peak demand of up to 367,790 megawatts by 2032, more than quadrupling the 2023 record.
The data center boom is driving this surge. Large-load requests in the interconnection queue rose about 270% in 2025 to roughly 226 gigawatts, and 73% of that demand comes from data centers.
"stop subsidizing one of the fastest-growing industries in the world" — Governor Greg Abbott, directive to state regulators
What comes next
Abbott's directive doesn't stop at cost-shifting. He ordered the commission to begin lowering residential transmission costs by the end of July and asked both agencies to deliver a joint memo by July 17 spelling out what they can do under existing authority and what will need fresh legislation in 2027. His directive also included calls for water-efficient cooling, mandatory reporting on power and water use, and a hard look at whether the sales tax exemption should survive.
The policy shift is already reshaping developer behavior. Behind-the-meter generation, co-located gas or solar, and large battery installations all become more appealing once a company finances its own grid connection. An approach already visible in projects like Fermi America's Project Matador near Amarillo, which is funding its own private power grid.
The broader stakes are high. JLL projects Texas could overtake Northern Virginia as the world's largest data center market by 2030. If Abbott's framework holds, it could reshape how other states handle the same tension between attracting capital and protecting grid stability. What Abbott laid out could serve as a regulatory roadmap for other states.
