Estimated Time to Read: 10 minutes
Texas now stands at the center of America’s race to build the next generation of data infrastructure. President Donald Trump’s (R) national innovation agenda, anchored by projects like Stargate, envisions Texas as a foundation for reshoring technology, powering AI systems, and securing U.S. digital independence from authoritarian regimes. These goals depend heavily on reliable, affordable, and predictable energy access. Yet, state policy decisions risk undermining that opportunity.
Recent legislation, such as Senate Bill 6, expands regulatory control over large-load customers, including data centers, in the name of grid reliability. While the intent is understandable, the effect may be to burden a key driver of innovation with costly mandates, redundant generation requirements, and the threat of government-triggered shutdowns during emergencies. Instead of strengthening Texas’s role as the backbone of the national AI economy, these measures risk turning the state’s competitive advantage into a regulatory bottleneck.
Texas as the Digital Frontier
Texas has long branded itself as a state open for innovation. Low taxes, abundant land, and a largely deregulated electricity market have drawn companies eager to build the physical backbone of the digital economy. From Abilene to Austin and down to the Rio Grande Valley, new data centers are transforming once-quiet communities into hubs of high-tech infrastructure.
These projects promise jobs and investment, yet they also introduce enormous demand on electricity and water resources that were not designed for growth of this scale or speed. The expansion of artificial intelligence computing has dramatically increased the intensity of these facilities, which must run around the clock to train and operate large machine-learning systems. Each megawatt of computing power requires significant electricity, and many cooling systems depend on millions of gallons of water each year. The result is that Texas is now balancing its reputation for economic growth with growing anxiety about how to sustain it.
Electricity Demand and Grid Strain
The Texas grid operator, the Electric Reliability Council of Texas (ERCOT), has documented one of the sharpest increases in projected load growth in its history. Large-load projects such as data centers, cryptocurrency mining facilities, and manufacturing plants are entering the queue faster than new generation or transmission lines can be built. ERCOT’s most recent long-term load forecast projects demand could rise to well above 200 gigawatts before the end of the decade, nearly double the peak demand seen just two years ago.
This surge is driven in part by energy-intensive industries, and the footprint of the digital economy is particularly large. A single hyperscale data center can draw more power than an entire small city, often several hundred megawatts per campus. In Abilene, for example, a facility expected to reach full operation in 2026 will have a capacity of roughly 1.2 gigawatts, equivalent to powering more than one million homes.
Texas policymakers have begun taking steps to manage this new pressure on the grid through legislation such as Senate Bill 6 (SB 6), which was enacted in 2025. The law directs the Public Utility Commission of Texas to establish interconnection standards for large power users exceeding 75 megawatts of demand and requires them to share in the costs of connecting to and maintaining the state’s transmission system. It also grants ERCOT authority to require these large-load customers to either deploy on-site backup generation or curtail usage during declared energy emergencies. While the legislation aims to prevent stranded infrastructure costs and improve reliability, its heavy reliance on regulatory mandates over market incentives raises concerns about long-term competitiveness and government overreach. Texas Policy Research therefore recommended lawmakers vote against SB 6 unless specifically amended, urging a more market-driven approach that preserves reliability without expanding bureaucratic control.
Even with these measures, the underlying question remains whether the Texas grid can sustain this pace of demand. Market observers note that in a deregulated system like ERCOT’s, rapid consumption growth without proportional investment in generation and transmission can lead to higher prices and lower reliability. That scenario runs counter to the free-market principles that helped build Texas’s competitive advantage. If industrial users depend on the grid without bearing the full cost of upgrades or backup capacity, ordinary Texans ultimately pay through higher bills or taxpayer-funded incentives.
Recent research by the Energy Alliance and prior analysis by Texas Policy Research have already demonstrated how interventionist energy policy drives up costs for Texas consumers. From 2021 to 2023, wholesale electricity prices in Texas rose more than 200 percent, and retail rates climbed by over 20 percent as lawmakers doubled down on subsidies for both renewable and thermal generation. These government interventions were intended to stabilize the grid, but instead distorted market signals, increased costs, and reduced reliability. SB 6 continues down that same path by expanding regulatory authority rather than returning to a truly competitive market structure. Texas does not need more bureaucratic planning or subsidized infrastructure. It needs policymakers willing to restore market discipline, reduce distortions, and let competition, not government, determine the most efficient and reliable energy solutions.
The Hidden Cost Beneath the Surface: Water
Electricity is only half of the story. Data centers also require large volumes of water for cooling, and Texas’s arid climate makes that a growing concern. Unlike the grid, where data on usage is carefully monitored, the state’s understanding of water consumption by data centers remains incomplete. The Texas Water Development Board (TWDB) relies on self-reported surveys to estimate how much groundwater and surface water these facilities use, but compliance is inconsistent. Only a fraction of operators submit responses, and there is no centralized registry of all data centers operating in the state.
Estimates vary, but researchers generally agree that both direct and indirect water use are substantial. The direct component comes from cooling systems that evaporate water to regulate server temperatures. The indirect component arises because most of Texas’s electricity is generated by power plants that also consume water for cooling. Together, these effects mean that every kilowatt hour used by a data center represents not just electricity consumption but water withdrawal somewhere in the system.
Because cooling technology and sourcing vary by site, the true statewide total is difficult to quantify. Preliminary modeling suggests that data center water use could reach tens of billions of gallons per year by 2030, rivaling the needs of several million households. For a state that faces recurring droughts and strained aquifers, that uncertainty is significant.
The lack of reliable reporting undermines accountability and responsible planning. When communities do not know how much water a new facility will draw, they cannot assess whether existing supplies or infrastructure are sufficient. The TWDB has acknowledged this challenge and begun reclassifying data center reporting categories to improve future tracking, but without strong compliance and enforcement, the data will continue to lag behind the industry’s rapid expansion.
From a liberty-based standpoint, the lack of transparency reflects a breakdown in accountability rather than a flaw in the market itself. Efficient allocation of scarce resources depends on accurate information freely exchanged between those who use and those who supply them. When major water consumers operate without disclosure or rely on outdated reporting systems, local governments and ratepayers end up bearing costs that should properly rest with the users who drive demand. Transparency and responsibility, not additional regulation, are what ensure that markets function as intended.
Balancing Growth with Innovation
While these trends raise legitimate concerns, they also present an opportunity for innovation driven by private enterprise rather than government intervention. Some developers are rethinking how data centers interact with both the grid and the environment, seeking ways to improve efficiency without imposing new costs on taxpayers.
In South Texas, a new project in Willacy County demonstrates how local initiative and market incentives can sometimes complement grid efficiency. The facility is located near an existing wind farm that often generates more electricity than can be transmitted to population centers because of limited transmission infrastructure. By placing a flexible-load data center next to those turbines, the company uses power that would otherwise go to waste, reducing congestion on the transmission network. This arrangement allows a private business to respond to market conditions without public subsidy or reliance on state-mandated renewable quotas.
It is important, however, not to conflate such innovation with the heavily subsidized expansion of so-called “renewable” energy. Wind and solar installations in Texas have benefited from billions of dollars in state and federal subsidies and still fail to provide reliable power during peak stress events like the 2021 winter storm. Those subsidies distort price signals and shift risk onto taxpayers, undermining the reliability and affordability that should define the Texas energy market.
The value in examples like the Willacy County project lies not in the source of the energy but in the principle behind it: voluntary cooperation and flexibility. By allowing private actors to innovate in response to market realities, Texas can strengthen grid resilience without forcing ratepayers to bankroll unreliable energy sources or top-down mandates.
Toward a Market-Driven Path for Sustainable Infrastructure
The challenge Texas faces is not the existence of data centers but the way public policy distorts the systems meant to support them. The solution lies in transparency, restraint, and respect for the principles that made Texas prosperous in the first place.
State leaders should focus on ensuring that existing laws are applied evenly and that market participants have access to accurate information. When water use and grid data are publicly available and reliable, communities and businesses can make informed decisions without new mandates or bureaucratic oversight. Markets perform best when the government stays in its lane and participants understand the real costs and trade-offs of their choices.
Local governments, in particular, should resist using tax abatements or direct subsidies to lure development. These incentives shift risk from private investors to taxpayers and erode the competitive advantage that comes from a predictable, low-tax environment. Texas succeeds not because it subsidizes growth but because it creates space for entrepreneurs to take risks and bear the results of those risks themselves.
In the energy market, policymakers should maintain the competitive framework that allows companies to negotiate their own power arrangements and respond voluntarily to market signals. Large industrial users are already incentivized to conserve and plan responsibly when they face transparent prices that reflect scarcity. No additional mandates are needed to achieve that outcome, only the discipline of markets and the predictability of limited government.
By keeping policy simple and rooted in accountability rather than control, Texas can meet its infrastructure challenges without undermining its economic freedom. Growth, reliability, and innovation will follow naturally when the state trusts Texans to act responsibly in a system that rewards prudence and efficiency.
Conclusion: Growth with Stewardship
Texas’s rise as a data-center hub illustrates both the promise and the peril of rapid technological growth. The state’s open market and entrepreneurial spirit have made it attractive for investment, yet those same advantages can become vulnerabilities if growth proceeds without transparency or accountability.
To preserve both prosperity and liberty, Texas must ensure that expansion in digital infrastructure does not erode the foundations that make the state competitive. Reliable data, fair cost allocation, and respect for local resources are not barriers to progress; they are preconditions for sustainable growth. When businesses and governments operate with full visibility and responsibility, Texans can continue to welcome innovation without sacrificing the principles of stewardship and limited government that define the state’s success.
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