Recent directives create uncertainty for data center projects seeking ERCOT interconnection or requiring TCEQ permits.

By Nikki Buffa, Joshua W. Marnitz, Jeremiah Davis, and Nathaniel L. Glynn

In response to unprecedented growth in data center development and increasing public scrutiny of such projects, Texas officials have launched a series of regulatory and policy initiatives aimed at evaluating the effects of large-load facilities on ratepayers, electric reliability, natural resources, and local communities.1 Texas is currently the second-largest market for data center development behind Virginia, and the fastest-growing data center market in the country.2 The Electric Reliability Council of Texas (ERCOT) is considering approximately 474 gigawatts of demand for electricity from the Texas grid, more than five times Texas’ record peak electricity demand for ERCOT.3 Roughly 90% of these new power requests are for data centers.4

Texas has effectively paused new data center approvals through both the ERCOT interconnection process and the Texas Commission on Environmental Quality (TCEQ) permitting process while state agencies evaluate grid, water, and community impacts. On August 3, 2026, Texas Governor Greg Abbott directed ERCOT and the Public Utility Commission of Texas (PUCT) to conduct an audit of all data centers currently advancing through the ERCOT interconnection process.5 Additionally, on September 21, 2026, Governor Abbott directed TCEQ to halt the issuance of all TCEQ permits to data centers until ERCOT completes its audit,6 creating uncertainty regarding the timing of permit approvals for affected projects.

Link to Texas Government Acts on Data Centers Texas Government Acts on Data Centers

Governor Abbott’s September 21 directive is the latest in a series of recent moves by the Texas state government to address the potential effects of the rapid growth in data center development in Texas. Below is a brief timeline:

  • June 10, 2026: Governor Abbott directed the PUCT and ERCOT to develop measures intended to require that data centers bear their infrastructure costs and to propose additional regulatory and legislative actions.7
  • August 3, 2026: Governor Abbott ordered an audit of data centers seeking ERCOT interconnection approval and a pause on all such approvals until the audit is complete. In his August 3 letter, Governor Abbott stated that this “comprehensive verification and audit of all data centers” in ERCOT’s interconnection process must be completed before any additional data centers are approved to move forward in that process.8 Governor Abbott has also directed that any data center that fails to comply with the audit process will be denied connection to the ERCOT grid.9 ERCOT’s audit is gathering information on (i) the amount of state financial assistance each data center is receiving, (ii) the extent to which each data center is bringing its own power versus relying on the grid, (iii) each data center’s water sources and uses, (iv) measures by each data center to reduce impacts to neighboring communities, and (v) ownership and controlling interest in each data center.10
  • September 14, 2026: Governor Abbott directed the Texas Water Development Board (TWDB) to work with the PUCT and ERCOT to carry out the August 3 audit and to compel data centers to respond to surveys regarding their water use.11 Data centers that fail to timely respond to the TWDB survey can be held civilly and criminally liable and denied TCEQ permits, amendments, or renewals.12 TWDB is expected to provide a progress report on its enforcement activities to the governor by October 14, 2026.
  • September 21, 2026: Governor Abbott directed TCEQ to halt issuance of all permits relating to data center projects pending completion of the ERCOT audit.13

Governor Abbott’s August 3 directive does not establish a deadline by which ERCOT and the PUCT must complete their audit, although ERCOT has said that it intends to complete its review by December 2026.

Link to Practical Implications for Developers Practical Implications for Developers

The governor’s directives create uncertainty for data center projects seeking ERCOT interconnection or requiring TCEQ permits. Developers should anticipate:

  • Potential delays in ERCOT interconnection approvals
  • Greater scrutiny of electricity demand forecasts and onsite-generation plans
  • Increased review of water use and cooling technologies
  • More detailed disclosure requirements regarding ownership, incentives, and community impacts
  • Potential legislative proposals addressing infrastructure cost allocation, water efficiency, tax incentives, and local impact mitigation

Although the scope and duration of these measures remain uncertain, developers should expect heightened regulatory review and longer approval timelines while state agencies implement the governor’s directives.

Latham & Watkins will continue to monitor developments in this area.