Red hot Texas gets so many data center requests that some see a bubble

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 AI ​​boom.

Cheap land and cheap energy are combining to attract data center developers to Texas. Energy experts say the potential demand is so great it will be impossible to meet by the end of the decade.

They say speculative projects clog the pipeline that connects to the electricity grid, making it difficult to see how much demand will actually occur. But investors will be in a difficult situation if inflated demand forecasts lead to more infrastructure being built than is actually needed.

“It definitely looks, smells, feels — it acts like a balloon,” said Joshua Rhodes, a research scientist at the University of Texas at Austin and founder of energy consulting firm IdeaSmiths.

“The top line numbers are almost laughable,” Rhodes said.

More than 220 gigawatts of major projects have requested connection to the Texas power grid by 2030, according to December data. Electric Reliability Council of Texas. More than 70 percent of those projects are data centers, according to ERCOT, which manages the Texas power grid.

That’s more than double the Lone Star State’s record Summer demand is high this year is around 85 gigawatts and total available energy production for the season is around 103 gigawatts. Beth Garza, a former ERCOT watchdog, said those numbers are “crazy large.”

“There just isn’t enough material on the equipment side or the consumption side to serve that much load,” said Garza, who was ERCOT’s director of independent market watchdogs from 2014 to 2019.

Rhodes agrees. “There’s no way we can physically put that much steel into the ground to get to those numbers. I don’t even know if China can do it that fast,” he said.

‘It’s not all real’

Data center demands exploded in Texas State legislation in 2023 It made it mandatory for projects that have not signed an electricity connection agreement to be taken into account in electricity demand estimates.

The number of major projects requiring electricity connections has almost quadrupled this year. But more than half of those, about 128 gigawatts, represent incremental potential demand and have yet to submit studies for ERCOT’s review. Approximately 90 more gigawatts are either under consideration or planning approval.

“We know all of this is not real. The question is how much is real,” said Michael Hogan, a senior advisor at the Regulatory Assistance Project, which advises governments and regulators on energy policy.

Hogan, who worked in the electrical industry for more than four decades, starting at General Elect in 1980, said the big numbers in Texas reflect a broader data center bubble in the United States.

“As with everything in Texas, this is a huge example of that,” he said.

The number of projects connected to the grid or approved by ERCOT is much less; only around 7.5 gigawatts. This is still a pretty big number; equivalent to almost eight large nuclear power plants. But Rhodes said Texas can handle that level of demand.

“We can easily scale up to eight gigawatt data centers,” Rhodes said. He said Texas could meet demand for 20 gigawatts or 30 gigawatts of data centers by 2030.

Texas has moved to separate serious data center projects from merely speculative ones. A law passed in May requires developers to pay $100,000 for initial work on their projects and show that a site is secured through an ownership interest or lease. And they need to disclose whether they have outlined the same project anywhere else in Texas.

Texas Public Service Commission suggested a rule This would require data centers to pay $50,000 in security per megawatt of maximum power. A gigawatt-scale data center would cost the developer at least $50 million.

“Serious developers who have signed long-term contracts with anchor tenants will be willing to invest that money,” Rhodes said. He said more speculative developers would likely leave the line for the electricity connection, which would help officials get a more accurate estimate.

Risk to investors

The risk is that electrical infrastructure like power plants, transmission lines and transformers will be built for speculative data centers that either don’t materialize or use less electricity than expected, Rhodes said. Overbuilding will also occur at a time when the cost of that infrastructure is rising as data centers and other industries all compete for the same scarce equipment, he said.

“Who pays when the bubble bursts will depend on how much steel is being moved,” Rhodes said. For example, the cost of a natural gas power plant has more than doubled in the last five years, he said.

“It’s like buying your house at the top of the market,” the analyst said. “If the house price drops in five years, you’re out of luck.”

The cost of building new power plants to serve the Texas electricity market is generally covered by investors, giving households some protection from high electricity prices if too much capacity is built, Rhodes and Hogan said.

In contrast, electricity prices in some Midwestern and Mid-Atlantic states have soared due to grid operator data center demand. PJM Interconnectionpurchases electricity production years in advance; The burden falls on consumers.

In Illinois, where PJM serves the northern part of the state, residential electricity prices rose nearly 20% in September compared to the same month last year. But prices in Texas rose only 5% year over year; this rate was below the average increase of more than 7% in the United States. Energy Information Administration.

Hogan said Texas is less at risk of producing too much compared to the PJM states because of the way the market is structured. But “no matter what [new] “In Texas, we see that those who invest in excess capacity will suffer,” he said.