Recent Directive from Governor Abbott

On August 3, 2026, Texas Governor Greg Abbott issued a directive requiring an audit and verification process for data centers advancing through the interconnection process required by the Electric Reliability Council of Texas (ERCOT).^{1, 2} This directive reflects a dramatic shift in the political landscape for data center development in Texas. In particular, the directive signals that data center development projects, and in particular large ones, face increased scrutiny in Texas and a heightened risk of delay as new oversight processes are imposed on them.

In response to the directive, ERCOT announced that it would postpone issuing “large load classifications,” which were originally due on August 7, to interconnecting transmission and distribution service providers.³ Those classifications are needed to identify whether projects were eligible for ERCOT’s “Batch Zero” – a group of qualified projects, 75 megawatts (MW) and greater, that will be evaluated together by ERCOT to help address a backlog of interconnection requests.⁴ ERCOT also does not believe it will be able to meet the April 9, 2027 deadline for delivering the Batch Zero study results and is evaluating a revised timeline upon completion of the verification process.⁵ ERCOT has estimated that Batch Zero eligibility verification will take several months.⁶ ERCOT also paused approvals for energizing of large load data centers and crypto-mining operations (75+ MW).⁷ Smaller projects and truly “islanded” facilities with no grid connection may fall outside the pause, though separate registration and regulatory requirements may still apply.⁸

In recent years, Texas has increased its oversight of certain large power consumers by statute rather than by executive action. For example, in 2023, Texas enacted a law adding a registration requirement for certain large crypto-mining operations over 75 MW.⁹ In 2025, Texas enacted SB 6, directing regulators to adopt new requirements for very large power users, including new disclosure obligations and cost-allocation rules for serving large electric loads.¹⁰ Now, the Governor’s new directive adds a layer of review on top of the state’s evolving framework.

New Political Risks

The Governor’s directive reflects a significant new political trend. State and federal candidates are focusing on grid reliability, power consumption, AI development, foreign technology, and the economic incentives associated with data center projects. As a result, developers can no longer assume that the rules governing data center development, interconnection, incentives, and operations will remain unchanged over the life of a project to build a data center. Instead, such projects now carry several parallel risks that increasingly influence each other:

• interconnection and energization timing risk,
• regulatory and legislative risk,
• community and political risk, and
• technology and supply chain risk.

That means the opposition playbook now extends across the life of a project. Accordingly, developers should prepare counternarratives, incentives, and meaningful conditions to respond at each phase of development.

Diligence and communications planning should extend beyond power availability, land use approvals, and tax incentives. Recent statements from elected officials and candidates suggest data centers are becoming a high-profile policy issue, particularly with respect to grid reliability, water consumption, AI development, tax incentives, consumer concerns about rising electricity costs, and the use of foreign-sourced technology in critical infrastructure.¹¹ Owners and investors should consider these developments an indicator of future requirements, rather than background noise. Whether or not current proposals become law, they offer a preview of the coming legislative or regulatory changes as Texas continues to develop its framework for large-load customers.

The trend is not limited to Texas. On August 26, 2026, President Trump issued an executive order restricting certain types of foreign-produced bulk-power system electric equipment, associated software, and digital capabilities from being purchased or installed in the United States.¹² The practical effect of the order will depend on how it is implemented by the US Department of Energy (DOE), but overall the effort introduces an additional layer of procurement and supply-chain risk for data center developers. The order also could affect existing facilities because it authorizes DOE to impose conditions on the continued use and operation of covered equipment where national security, cybersecurity, or grid reliability concerns are identified. The fact that DOE’s rules will likely be promulgated during the life of any currently contemplated project, and during the life of many projects that have already been started, creates regulatory uncertainty – and that uncertainty adds to costs of development.

New Litigation Risk: Vendor Technology

Texas is also home to litigation that could have important implications for the data center industry, such as the case In re Valtrus Innovations Ltd. Patent Litigation, MDL No. 3190 (J.P.M.L. Aug. 7, 2026). This newly consolidated patent case involves cooling technology used in data centers and is notable because the claims have been brought not only against the companies that make the equipment but also against certain data center operators that use it. While it is too early to predict the outcome, the case serves as a reminder that technology-related risks do not always stay with the vendor. Developers and operators should therefore apply the same level of scrutiny to cooling systems, backup power equipment, network infrastructure, and other critical technologies that they have traditionally applied to major permitting and environmental issues. Contract terms addressing indemnification, intellectual property claims, and the ability to substitute equipment should be reviewed and negotiated early in the procurement process, before those rights and remedies are locked in. Many intellectual property indemnification provisions provide that once there is an allegation of infringement, a claim of infringement, or the potential for injunctive relief, the vendor may modify the system to be non-infringing or procure licenses; in some cases, the vendor may also terminate the agreement, which a vendor may use as leverage for renegotiation if substituting a different vendor is not practical. A vendor may also have the right to substitute non-infringing alternatives, which may be acceptable if the performance is the same.

What Companies Should Do Now

• Developers and operators should:

• Verify where each project stands in the ERCOT review process and avoid relying on power delivery dates that have not yet been confirmed.
• Carefully review technical submissions to ERCOT before responding to ERCOT’s requests for information. ERCOT has reported that only 18% of submitted dynamic models passed its initial review.¹³
• Build potential power-related delays into project schedules and contingency plans.
• Monitor proposed changes to tax incentives, AI regulation, electricity regulation, and sourcing restrictions that could affect project costs, schedules, or operations.
• Review planned bulk-power system electrical equipment, associated software, and digital capabilities for potential exposure to the August 26 executive order and associated DOE rulemaking, and identify alternate suppliers where replacement could affect project costs or schedule.
• Review vendor contracts to understand who bears the risk if technology-related disputes arise, what protections are available if intellectual property claims are asserted, including as to vendor rights and obligations if there is an allegation of infringement, and whether critical equipment can be replaced if necessary.

• Investors and lenders should:

• Treat power availability and grid-related risks as a major diligence item rather than assuming they can be addressed through routine contract representations.
• Assess whether the project remains financially viable if power service is delayed and whether financing milestones, funding dates, and outside dates can accommodate potential delays in ERCOT review or energization.
• Monitor proposed changes to tax incentives, power regulations, and permitting requirements, and evaluate how those changes could affect project costs, development schedules, and long-term operations.
• Review project documents to confirm that they provide appropriate protections if regulatory reviews or utility interconnection processes take longer than expected.

• Equipment vendors and other counterparties should:

• Make sure contracts clearly state who is responsible for ERCOT-related filings and delays.
• Understand what happens if an intellectual property dispute affects the technology being supplied, including whether replacement equipment can be used and what the vendor’s rights and obligations are.
• Not build project schedules or contractual obligations around power delivery dates that have not yet been approved.

Conclusion

Texas remains one of the most attractive data center markets in the country, but its approach is changing, as are the politics and oversight of data center development there. The lesson of the past month is not that Texas is shutting its borders to new data centers; it is instead that project success now turns on factors well beyond raw access to power and real estate. Grid approvals, political developments, community acceptance, and technology-related risks have become interconnected, and data center project sponsors that manage them together will be better positioned than those that treat them as separate workstreams.