Texas data centers face uncertain future after Hinojosa wins governor’s race

HOUSTON/NEW YORK (Reuters) -- Texas governor-elect Gina Hinojosa has rattled the state's data center industry with a campaign pledge to halt new projects, injecting new uncertainty into one of the country's fastest-growing markets for server warehouses worth billions of dollars.

With plentiful energy supplies, relatively cheap land and a pro-business policy, Texas has become one of the leading regions in the world for data center developments. Big Tech companies including Meta, Google and Microsoft have announced major data center projects in the state over the past two years.

The data center industry there had already come under pressure before the midterms. On Aug. 3, Greg Abbott became one of the first Republican governors in the US to halt the connection of new data centers to the state's electric grid amid growing opposition from rural communities and a surge in requests to connect to the state's power grid.

Abbott, who had supported data centers a month earlier, also ordered a comprehensive audit of the projects, with a focus on power demand, environmental impacts and tax breaks given to developers.

Even before Hinojosa's dramatic upset of Abbott on Tuesday, she had vowed to take the crackdown on data centers a step further by banning all data center approvals until the state legislature passes laws "to protect Texans, so that Texans have a seat at the table to decide if and how data centers come into our community."

By the time Texas halted data centers connecting to its grid, state grid operator ERCOT said it was tracking more than 400 gigawatts of data center projects -- roughly equivalent to what it would take to power the entire US South -- seeking to connect to the grid.

Abbott's about-face also threw tens of billions of dollars of data center projects planned in Texas into jeopardy and raised doubts over whether hundreds of millions in grid deposits paid by data centers seeking to connect to the grid would be returned. Since ordering the audit, Abbott has also taken actions to penalize data center water violations retroactively and temporarily banned the state from issuing air permits for the projects.

Abbott, however, did not issue a formal moratorium on data centers, which Hinojosa has vowed to do. Certain measures by Abbott also had a near-term expiration date, like the air permit ban and the audit, which was expected to conclude at the end of 2026.

The new governor's administration and the Texas legislature will now need to get up to speed on the state's patchwork of recent actions and regulations on data centers before solidifying a new set of laws and rules around the industry, said Austin McCarty, a Texas data center attorney with K&L Gates.

"It's a brand-new day in Texas for a ton of what was probably considered settled policy -- not just for data centers, but energy as a whole," McCarty said.

Some Texas data center projects are likely to get delayed or to see developers exit the state entirely, while others are expected to speed up the process of completing and powering up the centers before new restrictions take hold, he added.

The Data Center Coalition, which represents Big Tech and other data center developers, said its members would continue to pursue their infrastructure build-out in the state while working with state and local governments.

"Enhancing affordability, creating jobs, and keeping the state's economy strong are top priorities for Texans. Data centers can continue to play a crucial role in advancing those priorities by bringing investment to local communities," said Jess Heck, Texas director of government affairs at the Data Center Coalition.

Some 42 percent of registered voters in a Reuters/Ipsos poll published this week said limiting the construction of data centers used to power AI was very important or the most important issue for them.

"The data centers connect economic development to everyday concerns," University of Houston political scientist Brandon Rottinghaus said a day before the vote, citing electricity bills, water supplies and property rights.

Polling showed rural voters, who are "at the epicenter of so many of these fights," were unhappy with the spread of data centers heading into the election, he said.

Brittany Kaiser, CEO of data center developer Alpha Compute, said the results in Texas and Ohio, where winning candidates made opposition to data centers a big part of their platforms, will make some companies question whether to invest in those states. Developers that don't already have signed contracts and financing are more likely to look elsewhere, including abroad in Canada, Mexico and Europe, she said.

"What I really think is that a lot of companies are going to be investing in very red states and purple states," Kaiser said in an interview on Wednesday. "Definitely over the past six months, that's been most of the pipeline that I've created for my own business, because it looks like less of a political risk."

Kaiser said the skepticism comes from voters' fears about AI and what data centers mean for their electricity bills, the environment and jobs, and that many AI CEOs have "not made it easy to be excited about the future of AI."

Industry efforts to keep data center costs from being passed on to ratepayers never reached voters, she said, and developers now need to engage directly with legislators, regulators and communities and go beyond regulatory compliance to be good neighbors.

"I definitely never thought data centers would be in a position where people would rather live near a nuclear facility or a prison," Kaiser said.

Some 76 percent of voters nationwide said they opposed the construction of a new data center in their community, according to an NBC and SSRS exit poll. Ahead of the vote, a University of Houston poll in October found that 79 percent of likely Texas voters supported limits on the number of data centers that can be built in the state.

Texas accounts for 25 percent of planned data center capacity in the US, according to a note by Goldman Sachs. New Democratic governors in the Lone Star State and other burgeoning data center hubs, including Georgia and Michigan, could result in state legislation that would end tax breaks for the industry, tighten environmental and electricity rules and pave the way for towns and cities to pass their own moratoria, the note said.

"Data centers in space looking pretty appealing right now," Elon Musk, who supported Abbott in the election and had spent $158 million to promote Texas Republican US Senate candidate Ken Paxton alone, wrote early Wednesday on X.