In a July 2026 client alert, we examined the rapidly evolving legal landscape surrounding data center development, focusing on the growing wave of nuisance, environmental and land-use litigation targeting data center projects. Since publication, several notable developments have further illustrated the pace at which legal and regulatory risks in this area are evolving.

This update highlights two such developments: (1) recent US Environmental Protection Agency (EPA) guidance concerning the applicability of the Acid Rain Program (ARP) to “islanded” power facilities serving AI and data center operations and (2) a novel segmentation argument in a threatened Clean Air Act (CAA) lawsuit challenging source aggregation and permitting assumptions for behind-the-meter power generation at a data center in San Antonio. Together, these developments underscore the expanding range of regulatory, permitting and litigation issues confronting participants across the data center ecosystem. Key takeaways and practical considerations for companies evaluating or developing behind-the-meter generation projects are summarized at the end of this alert.

1. EPA Clarifies ARP Applicability for Power Generation

Exempting “Islanded” Power Generation Facilities With Data Centers in Mind

On July 16, 2026, EPA issued a guidance memorandum clarifying that the ARP under Title IV of the CAA does not apply to power generation facilities that are “not connected in any way to the larger electricity grid,” commonly referred to as “islanded” power generation facilities.¹ This addressed a question that has become increasingly salient as data centers pursue dedicated energy sources to avoid grid-connection delays and ratepayer-cost disputes. In fact, the only example given by the memorandum of such an islanded facility is that of “a planned power generation facility, consisting of approximately 500 megawatts (MW) of simple cycle natural gas-fired combustion turbines and reciprocating engines to exclusively power an adjacent, data center.”² megawatts is enough energy to power between 375,000 and 500,000 homes.³

EPA’s accompanying press release further touted how the guidance would expand opportunities for companies to develop and operate islanded power generation facilities for data centers while simultaneously reducing burdens on communities’ electric gris by furthering the principles of President Trump’s Ratepayer Protection Pledge.⁴ Companies that sign the President’s pledge “are committing to build, bring, or buy all of the energy needed to power their facilities and to pay the full cost of that energy and its supporting infrastructure, no matter what.”⁵

Some commentators and publications have expressed concern over exempting islanded power plants from the ARP, which set a permanent cap on SO₂ emissions from electric generating units in the contiguous United States and applied rate-based NOₓ limits to coal-fired plants, and has been instrumental in reducing power-plant SO₂ emissions by 95% since 1990.⁶

The Exemption Is Significant but Limited, and Other CAA Requirements Remain

At the same time, EPA states that the memorandum is not final agency action concerning ARP applicability for any particular facility and that it does not address the applicability criteria for any other statutory provisions, regulations or programs under the CAA.⁷ Moreover, ARP permitting programs are implemented by states under approved programs, and EPA advises sources to consult state permitting authorities because state regulations may vary from federal regulations. Those caveats are important for project planning: The guidance may resolve one federal applicability question for certain facts, but islanded power plants continue to be subject to other CAA requirements such as New Source Review, New Source Performance Standards and National Emission Standards for Hazardous Air Pollutants. In this way, moving generation “behind the meter”—the term used to describe electricity generated on-site—changes the regulatory focus rather than eliminating regulation altogether. Also, by framing the guidance as a “clarification” of a potentially major question and not going through notice-and-comment rulemaking, this guidance is more susceptible to legal challenge or reversal by a later administration, so it is hard to predict how durable its effect will be.

The practical takeaway is to treat EPA’s guidance as a useful but narrow input into diligence for the time being. Islanded projects should document the basis for any ARP nonapplicability, evaluate whether future grid interconnection could alter that conclusion, and separately analyze any other federal and state permitting requirements that may apply. They should also consider that the same project features that make islanded generation commercially attractive—speed, scale, proximity to load and independence from the shared grid—may become focal points for citizen suits, local opposition and state permitting scrutiny.⁸ In that sense, EPA’s guidance may accelerate one path for AI infrastructure, but it also reinforces the need for integrated energy, environmental, land-use and litigation planning before a data center power strategy is finalized.

2. San Antonio CAA Notice Challenges Segmentation of Behind-the-Meter Power Generation at Data Centers

A New Challenge to Source Aggregation and Permitting Assumptions

Our July client alert describes an emerging wave of suits against data center developers, operators and regulators, including common-law nuisance and negligence actions, environmental claims and land-use challenges. A recent environmental citizen suit in San Antonio raises another novel question: whether data centers and their dedicated islanded power generation facilities should be treated individually as separate sources or collectively as a single source for the purposes of CAA permitting.

On July 22, 2026, the Environmental Integrity Project, Sierra Club and Public Citizen sent a CAA notice of intent to sue concerning two West Side San Antonio data center campuses.⁹ The groups allege that the data center projects include two behind-the-meter natural gas power plants and 151 backup diesel generators, but the developers improperly segmented the facility under multiple minor-source permits rather than treating the data center and power plant facilities as a single source and obtaining the major-source preconstruction permit, pollution controls, monitoring and public-hearing opportunities that the groups contend were required under the CAA.

Lesson for Data Center Developers: Permitting Decisions Can Determine Litigation Outcome

Because a complaint cannot be filed until 60 days after a notice of intent to sue,¹⁰ the government may intervene as it did recently when it moved to intervene and to dismiss a citizen suit as a threat to national and energy security (discussed in our July client alert), or EPA may commence and diligently prosecute its own enforcement action, thereby barring the environmental groups from pursuing their claims—either of which could substantially alter the ultimate outcome. For data center developers and power partners, there are lessons to be learned: principally, that permitting compliance by power generation facilities can be outcome-determinative. If emissions units are aggregated, a project may move from minor-source permitting into major-source review, with materially different controls, monitoring, modeling, public participation requirements and litigation exposure. If emission units are not aggregated, plaintiffs may challenge the source determination itself, particularly where the data center and power plant are colocated, codeveloped or economically interdependent.

And as discussed in our July client alert, challengers may assert other claims. For example, a CAA notice framed around source aggregation and major-source permitting may also beget nuisance or land-use and zoning claims, especially where plaintiffs emphasize ozone nonattainment, proximity to residential areas, lack of public process and the scale of dedicated on-site generation. To put it another way, the same facts that may support a CAA claim may also inform local zoning debates, state permitting comments, financing diligence, insurance exclusions or reputational risk assessments. A prudent response, therefore, includes contemporaneous documentation, early engagement with permitting authorities, review of whether operational limits are practically enforceable, attention to public notice requirements and coordination with counsel before construction begins.

Bottom Line: What Companies Should Be Doing Now

• Do not assume that EPA’s ARP guidance eliminates broader CAA obligations. Developers should continue to evaluate New Source Review, Title V, , state permitting and other applicable requirements for on-site generation facilities.
• Analyze source aggregation issues early. Projects involving colocated data centers, dedicated power plants and backup generators should carefully evaluate whether regulators or litigants may argue that multiple emissions sources should be treated as a single facility.
• Document permitting and compliance decisions. Maintaining a clear record supporting source classifications, emissions calculations, operational limits and permitting strategies may be critical if projects later face regulatory scrutiny or citizen-suit challenges.
• Coordinate power-development and environmental strategies. Decisions about whether to rely on grid power, islanded generation or hybrid approaches increasingly have regulatory and litigation consequences that should be evaluated alongside commercial and operational considerations.
• Expect continued scrutiny of behind-the-meter generation. As developers pursue dedicated power solutions to meet growing AI and data center demand, environmental groups, regulators and local communities are likely to focus increasing attention on the permitting and emissions implications of those facilities.

WilmerHale’s lawyers regularly counsel clients across the AI and infrastructure sectors and are well positioned to help companies assess and mitigate these emerging risks, defend against novel claims, and navigate the rapidly developing intersection of data centers, environmental law and the communities in which these facilities operate.