Texas Grapples with Data Center Boom and Water Concerns

Texas is experiencing a significant boom in data center development, driven largely by the rapid expansion of artificial intelligence (AI). Over 400 data centers are either operating or under construction, projected to consume between 29 and 161 billion gallons of water annually by 2030. This surge has raised alarms among local communities, particularly in Hays County, where state Representative Erin Zwiener has formed the Hays County Data Center Working Group to address constituents' concerns regarding water usage and the environmental impact of these facilities.

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The Texas Legislature is currently evaluating how to regulate this burgeoning industry, which has been incentivized by generous tax breaks and a lack of mandatory reporting on water usage. Data centers are exempt from the 6.25% state sales tax on major operational costs, costing the state an estimated $3.2 billion over the next two years. Local governments have limited power to impose regulations, often relying on tax incentives to encourage developers to adopt more sustainable practices, such as closed-loop cooling systems. However, Zwiener notes that many smaller developers lack the credibility of larger companies like Google and OpenAI, complicating negotiations.

The Texas Observer

During an interim hearing on April 9, 2026, Texas House State Affairs Committee Chairman Ken King highlighted the urgency of addressing the data center boom. The hearing featured testimonies from industry representatives and regulators but notably excluded local officials and groundwater advocates. Pablo Vegas, CEO of the Electric Reliability Council of Texas (ERCOT), reported that the demand from new data centers has significantly strained the state's electricity grid, with over 410,000 megawatts of new projects queued, 87% of which are data centers.

The Texas Observer

The expansion of data centers is expected to lead to higher electricity prices, with projections indicating a potential increase of up to 50% by 2028. A recent study from the Federal Reserve Bank of Dallas found that existing data centers have already raised average wholesale electricity prices by 2% to 6%. Additionally, the environmental impact is concerning, with data centers linked to an increase of 5 to 16 million tons of carbon dioxide emissions per month by late 2025.

How the AI Boom Could Raise Emissions and Electricity Prices

Critics, including public education defender Anthony Elmo from Good Jobs First, argue that the Texas Legislature must reconsider its tax policies to avoid repeating the mistakes seen in Virginia, where generous tax breaks for data centers led to significant revenue losses. Public comments submitted ahead of the interim hearing reflected widespread concerns about water usage, rising electricity bills, and the limited long-term job creation associated with data centers.

The Texas Observer

As Texas navigates the complexities of regulating its data center boom, the balance between fostering economic growth and protecting community resources remains delicate. The state must act swiftly to implement effective regulations that address the environmental and economic challenges posed by this rapid expansion, ensuring that the benefits of AI infrastructure do not come at the expense of local communities.

The Texas Observer