Texas Data Centers and ERCOT: Navigating the Grid for CRE

Texas has emerged as one of the fastest-growing data center markets in the world, driven by abundant land, business-friendly regulations, and aggressive economic development incentives. But a single constraint threatens to define the market's trajectory: the Electric Reliability Council of Texas (ERCOT) grid.

Understanding ERCOT's dynamics is now essential knowledge for every data center developer considering Texas.

The Interconnection Bottleneck

The numbers are staggering. According to ERCOT filings, over 220 GW of new generation and load projects have requested grid interconnection — but only approximately 7.5 GW have been approved and are moving forward. The queue includes data centers, cryptocurrency mining operations, hydrogen production facilities, and industrial loads, all competing for limited grid capacity.

For data center developers, this means that securing a grid interconnection agreement is no longer a procedural step — it's a competitive process that can determine project feasibility.

The Deregulated Market: Opportunity and Risk

Texas operates a deregulated electricity market, which creates both opportunities and challenges for data center operators.

On the opportunity side, deregulation means developers can negotiate directly with power generators, sign bilateral power purchase agreements (PPAs), and potentially secure favorable long-term rates. Some operators are co-locating with generation assets — building data centers adjacent to natural gas plants, solar farms, or wind installations — to bypass transmission constraints entirely.

On the risk side, ERCOT's energy-only market design means there is no capacity payment mechanism to ensure adequate reserve margins. The grid has experienced well-publicized reliability events, including Winter Storm Uri in 2021 and subsequent summer heat events. Data center operators must invest in robust backup power systems and carefully evaluate the reliability implications of their grid connection point.

Emerging Corridors

While Dallas-Fort Worth has historically been Texas's primary data center market, new corridors are emerging as developers seek available power:

San Antonio has attracted significant interest due to CPS Energy's relatively strong grid position and available capacity. The city's lower land costs and growing fiber infrastructure make it increasingly competitive.

Temple/Central Texas is emerging as a greenfield market where large parcels with favorable power access are available at a fraction of DFW prices.

West Texas offers abundant renewable energy resources but faces water scarcity challenges that complicate cooling design and permitting.

Houston provides strong connectivity and diverse power supply options but faces hurricane exposure that requires enhanced resilience design.

Water: The Overlooked Constraint

Texas faces chronic water scarcity in many regions, and data center cooling is water-intensive. A 100 MW data center using traditional evaporative cooling can consume 300,000+ gallons of water per day.

Municipalities are increasingly scrutinizing water allocation for data centers, particularly in drought-prone regions. Developers must evaluate water rights, municipal allocation policies, and alternative cooling technologies (air-cooled or closed-loop systems) as part of site feasibility analysis.

Incentive Landscape

Texas offers some of the most aggressive data center incentives in the country. The Texas Data Center Development Program provides sales tax exemptions on equipment purchases for qualifying facilities. Local jurisdictions layer additional incentives including property tax abatements, job creation grants, and infrastructure cost-sharing.

However, the incentive landscape is evolving. Some Texas legislators have questioned whether data center tax exemptions provide adequate return on public investment given the relatively low job creation per dollar of capital deployed.

Site Selection Implications

Texas data center site selection requires a fundamentally different analytical framework than other markets. Power availability and interconnection feasibility must be evaluated first — before location, fiber, or land. Water access and cooling strategy must be integrated into feasibility analysis from day one. And the incentive analysis must account for evolving political dynamics.

At Build, our agentic AI platform integrates ERCOT grid data, utility capacity analysis, water resource mapping, and incentive modeling into a unified site selection framework. The result is a comprehensive feasibility picture that accounts for Texas-specific constraints — delivered in days rather than the months required by traditional approaches.

Texas will remain a major data center market. But the developers who succeed will be those who navigate its unique constraints with precision.