By , Chief Economist
Data centers have held the US economy and construction industry afloat over the past year or so, but significant backlash to the AI investment enthusiasm is building. The Texas audit of large-load projects is the latest community driven pushback against the AI build out that will temper the white-hot data center market.
On August 3, the Public Utility Commission of Texas (PUCT) and the Electric Reliability Council of Texas (ERCOT) were directed to audit large-load projects and temporarily halt new data center grid connections. ERCOT, the regional transmission organization serving most of Texas, said it expected the audit will last for several months.
Texas, along with Virginia, has been the go-to location for data center construction. Before the pause, the pipeline stood at a staggering 474 GW of requested power demand, with data centers making up roughly 90% of those requests. This represents a significant increase in capacity since hourly peak load in ERCOT reached a historical record of 91.1 GW in late July.
The build out of data centers does extend beyond Texas and Virginia, and the top 8 states have increased planned construction from below 10 million square feet in 2021 to well over 50 million square feet 2025 (see Chart 1). Beyond cheap available land, speed through the permitting process has been another main attraction of these top 8 states. But the rapid acceleration of development has caused concern outside of the industry.
Across the country some states and local governments have paused data center approvals to better understand their impacts on resources and to implement strategies to mitigate those impacts. In July 2026, New York enacted a first-in-the-nation statewide pause of up to one year on state environmental permits for large data centers. Meanwhile, Arizona enacted a three-year pause on its data center sales tax exemption through June 2029, while Illinois paused data center tax incentives effective July 1. Virginia, the current top destination for data centers, recently established an electricity consumption tax on data centers beginning July 1 (it is capped at $600 million annually).
We believe the Texas directive will accelerate projects that rely exclusively on on-site 鈥渂ehind-the-meter鈥� generation (i.e., power outside the public transmission network). This will create near-term delays but will not hurt Texas鈥� reputation as a top data centers destination. The broader AI compute industrial complex will likely face similar challenges over the coming years which will slow, but not stop development. For our forecast, that means growth moderating toward single digits within the next couple of years.