Abbott’s Texas Data Center Directive

Estimated Time to Read: 13 minutes

Texas Governor Greg Abbott (R) has formally directed the Public Utility Commission of Texas (PUC) and the Electric Reliability Council of Texas (ERCOT) to take action on large data center development in Texas.

The directive also touches on many of the same issues Texas Policy Research (TPR) explored earlier this year in its written testimony to the House Committee on State Affairs and its two-part examination of Texas data center policy.

Abbott is asking state regulators and grid officials to ensure that data center growth does not increase costs for residential ratepayers, burden local communities, or shift infrastructure costs onto Texans.

The direction is significant because Texas is rapidly becoming a national hub for artificial intelligence infrastructure, cloud computing, and large-scale data center development. That growth brings major electricity demand, water concerns, transmission needs, and local infrastructure questions, but the policy debate is not simply about whether data centers create new demand. They do. The larger question is how Texas should respond.

Abbott’s directive reflects two competing instincts. On one hand, it embraces a sound principle: data centers should pay their own way. On the other hand, several proposals move toward prescriptive mandates that raise questions about free enterprise, regulatory certainty, and whether state government should be directing private operational decisions.

The following is a list of the directives:

• The Public Utility Commission of Texas (PUC) to take action to ensure that data centers’ interconnections will result in reduced residential electrical bills; and
• The PUC to take action to require data centers to pay for all of their electric infrastructure costs to ensure that no residential ratepayer is burdened by those costs; and
• The PUC and ERCOT to review their existing authorities and to identify necessary actions that can be taken under those authorities to safeguard Texans, their property, and resources.

The following is the list of legislative requests:

• Codify the PUC’s actions to require data centers to pay for their own electric infrastructure costs, resulting in lower residential ratepayer costs; and
• Ensure data centers add to Texas’ electric capacity, not just its electric demand; and
• Require that all new data centers be built with water-efficient technologies such as closed-loop cooling systems; and
• Require large data centers to annually report electricity and water usage data to the PUC; and
• Repeal sales tax exemptions and other outdated or unnecessary incentives for data centers; and
• Require data centers to reduce impacts on local communities by implementing best practices such as setbacks, noise-reduction technology, and other measures that take into account the concerns of neighbors.

Abbott’s Data Center Directive to PUC and ERCOT

Gov. Abbott’s letter directs the PUC to take action to ensure that data center interconnections result in reduced residential electric bills. It also directs the PUC to require data centers to pay for all electric infrastructure costs so residential ratepayers are not burdened by those costs.

The letter further directs the PUC and ERCOT to review their existing authority and identify actions that can be taken to safeguard Texans, their property, and their resources. That review is not open-ended. Abbott directs the PUC and ERCOT to submit a joint memorandum to the governor by July 17, 2026. That memo must summarize actions taken under existing authority, identify statutory limitations, and recommend legislative proposals needed to implement the objectives. Abbott also directs the PUC to initiate action to reduce residential ratepayer transmission costs by July 31, 2026.

This creates a two-track approach. First, the PUC and ERCOT are expected to act under existing authority. Second, Abbott is signaling that the 90th Texas Legislature will be asked to codify additional data center requirements in 2027.

Texas Data Centers Should Pay Their Own Infrastructure Costs

One of the central themes of Abbott’s directive is the idea that data centers should bear the costs associated with the infrastructure they require.

As a general principle, that is difficult to dispute. Businesses should bear the costs they create, and private investment should not depend on shifting expenses onto taxpayers, residential ratepayers, or small businesses.

The more important question is whether a meaningful cost-shifting problem currently exists and, if so, whether data centers are uniquely responsible for it.

Texas Policy Research previously raised similar concerns in its written testimony to the House Committee on State Affairs, arguing that policymakers should focus on market distortions and cost allocation rather than treating data centers themselves as the problem.

Policymakers should be precise about the problem they are trying to solve. Data centers already pay electric bills and participate in existing utility and interconnection processes. If state officials believe infrastructure costs are being shifted onto residential customers, they should clearly identify which costs, under what circumstances, and why existing mechanisms are inadequate.

Otherwise, “pay their fair share” risks becoming more of a political slogan than a policy diagnosis.

If reforms are necessary, they should be applied neutrally across comparable large-load customers rather than targeting a single industry.

Texas Data Centers and New Electric Capacity

Gov. Abbott also says he will work with lawmakers to ensure that data centers add to Texas’ electric capacity, not just its electric demand. This idea is understandable. Texas is facing rising electricity demand from population growth, industrial expansion, electrification, and artificial intelligence infrastructure. Data centers are one part of that larger demand picture.

If new data centers are required to support additional power generation, co-located generation, or long-term capacity arrangements, that could help protect grid reliability while allowing growth to continue.

The key question is how this requirement is structured.

If the state allows flexibility and lets companies determine how best to secure or add power, the policy could reinforce market incentives. If the state creates a rigid mandate, it could move Texas closer to centralized planning.

Texas should want more generation, more transmission, more private investment, and more competition. It should be careful about creating a system where government decides which business models or energy arrangements are acceptable.

The right principle is simple: build supply, do not suppress demand.

Earlier this year, TPR argued that Texas has historically responded to economic growth by expanding energy supply rather than restricting demand, a principle that remains central to the current debate.

Water-Efficient Technology Mandates for Texas Data Centers

Gov. Abbott’s directive also calls for all new data centers to be built with water-efficient technologies, such as closed-loop cooling systems. Water use is a legitimate concern, especially in parts of Texas already facing rapid growth, drought conditions, or local infrastructure stress. Communities have a right to ask how major industrial facilities may affect water supplies, but this is where the directive begins to move from cost accountability into operational mandates.

Data centers already have incentives to reduce water consumption. Water is a cost. Efficiency can reduce expenses. Competition pushes companies to innovate, conserve, recycle, and adopt better cooling technologies over time. Closed-loop cooling may be a good option in many cases. But state government should be cautious about mandating specific technologies or preferred systems. Today’s best practice may not be tomorrow’s innovation.

A better approach would focus on outcomes, transparency, and local coordination rather than one-size-fits-all technology mandates. This concern reflects a broader question explored in TPR’s data center primer: whether policymakers should prescribe specific technologies or allow innovation and competition to determine the most efficient solutions.

Annual Reporting on Data Center Water and Electricity Use

Gov. Abbott also proposes requiring large data centers to annually report electricity and water usage data to the PUC. This is one of the more defensible pieces of the plan if it remains narrow and transparent.

Reliable information can help policymakers, local communities, utilities, and grid planners understand actual impacts. Transparency and better information were recurring themes during the House State Affairs Committee’s examination of data center development earlier this year. Transparency can also reduce speculation and allow debates to be grounded in facts rather than fear.

However, reporting requirements should not become a backdoor regulatory regime. If the purpose is transparency, the state should make that clear. If reporting becomes the foundation for future restrictions, rationing, or political targeting, it could discourage investment and create uncertainty.

Texas should collect useful data without creating unnecessary compliance burdens.

Repealing Data Center Sales Tax Exemptions and Incentives

Gov. Abbott’s directive also calls for repealing sales tax exemptions and other outdated or unnecessary incentives for data centers. This is another strong part of the proposal.

Texas should not give targeted tax carveouts to one industry while forcing others to operate without similar treatment. Special incentives distort markets, favor politically selected industries, and shift costs elsewhere. Texas Policy Research previously warned that shifting costs away from those creating demand can distort investment decisions and create unintended consequences throughout the market.

If a data center project is economically viable, it should not need special treatment from state government. If it is not viable without taxpayer-backed advantages, lawmakers should question whether the public should be expected to help make the project work.

Repealing data center tax exemptions would move Texas closer to a neutral tax environment. That is better than using government incentives to pick winners and losers.

Ending corporate welfare is also consistent with Texas Policy Research’s (TPR) Texas Liberty Compact.

Local Community Impacts, Noise, and Best Practices

Abbott’s final legislative priority would require data centers to reduce impacts on local communities by implementing best practices such as setbacks, noise-reduction technology, and other measures that account for neighbors’ concerns.

Local concerns should not be dismissed. Noise, land use, backup generation, water access, and transmission infrastructure can all affect nearby communities.

The question is whether those concerns require statewide mandates or whether they are better handled through property rights, local processes, transparency, and voluntary agreements between developers and communities. Best practices can be useful, but once best practices become mandates, the policy begins to look less like guidance and more like regulation.

Texas should encourage responsible development, but lawmakers should be careful not to create a vague standard that invites regulatory creep.

Free Enterprise Versus Mandate-Driven Regulation

Gov. Abbott’s data center directive gets the biggest issue right: Texans should not be forced to subsidize private infrastructure costs created by large data centers, but the broader package also raises an important philosophical question.

What happened to free enterprise figuring out what works best?

The same question applies to the cost allocation debate. If lawmakers are concerned about large-load customers imposing costs on the grid, they should focus on the underlying issue rather than the industry involved. Texas has many large industrial, manufacturing, petrochemical, commercial, and institutional users that place significant demands on infrastructure. Sound policy should be based on objective cost impacts, not the political visibility of a particular industry.

Readers interested in a deeper examination of this debate can review Texas Policy Research’s two-part series, Texas AI Data Center Debate: Growth vs Regulation and Texas AI Data Centers: Build Energy, Not Barriers, which explored the competing visions for addressing Texas’ growing energy demand.

A free market approach would require data centers to bear their own costs, end special tax treatment, protect property rights, and maintain transparency. After that, companies should generally be allowed to determine how best to operate, conserve water, secure power, and respond to local concerns.

If electricity is scarce, prices and reliability needs will encourage companies to add generation or contract for power. If water is expensive, companies will conserve or invest in better cooling systems. If local opposition becomes a problem, companies will have incentives to reduce noise and address community concerns.

Markets are not perfect, but they are often better at finding efficient solutions than statewide mandates.

The risk is that Texas replaces one bad approach with another. Subsidy-driven growth is a problem. But mandate-driven regulation is not the answer.

Texas Data Center Policy Before the 90th Legislature

Gov. Abbott’s directive makes clear that data center policy will be a major issue before the 90th Texas Legislature when it convenes in January 2027. Lawmakers should separate the good ideas from the risky ones.

Requiring data centers to pay their own electric infrastructure costs is sound policy. Repealing targeted tax incentives is sound policy. Improving transparency may also be reasonable if the requirements are limited and clearly defined.

But lawmakers should be cautious about mandates that dictate cooling systems, operational practices, or vague community impact standards. Those policies may begin with reasonable intentions, but they can quickly expand into a broader regulatory framework that undermines Texas’ economic competitiveness.

Texas does not need to choose between data center growth and protecting ratepayers. It can do both.

The right approach is to prevent cost shifting, avoid subsidies, expand energy supply, protect property rights, and maintain regulatory certainty.

Texas Should Avoid Central Planning

Gov. Abbott’s Texas data center directives represent an important shift in the state’s approach to artificial intelligence infrastructure, electric grid reliability, and large-load development.

The strongest theme is cost accountability. To the extent infrastructure costs are being shifted onto residential ratepayers, policymakers should address that problem directly. But lawmakers should also be careful not to assume that data centers are uniquely responsible for costs that may be associated with large-load customers more broadly.

The goal should be to identify actual market distortions, correct them where necessary, and apply those solutions consistently across industries.

But the mandate-heavy parts of the proposal deserve scrutiny.

Texas should not respond to growth by micromanaging private industry. The state should set clear rules, prevent cost shifting, and protect property rights. Then it should let businesses innovate, invest, and compete.

For additional background on the issues discussed in Governor Abbott’s directive, readers can review Texas Policy Research’s written testimony submitted to the House Committee on State Affairs, its analysis of legislative proposals during the 89th Legislative Session, and its two-part primer on Texas data center policy.

Data centers are not the problem. Bad policy is. Texas should build energy, not barriers.

---