In short
Texas runs the only deregulated retail electricity market in the country. About 85 percent of Texas electricity consumers live in areas where they can choose among competing retail electric providers, called REPs, while the local transmission and distribution utility, called a TDU, delivers the power. ERCOT An AI data center buys its power from a REP just as any other large customer does.
What makes 2025 and 2026 different is the new rulebook for connecting a large load to the grid. Senate Bill 6, enacted June 20, 2025, sets a default large load threshold of 75 megawatts and requires site control, detailed disclosures, backup generation reporting, and heavy financial security before a project can interconnect. Tax alert The Public Utility Commission of Texas, or PUCT, is building out the detailed rules now. A proposed interconnection rule, published March 2026, would require $50,000 per megawatt in financial security. For a 1 GW campus, that means $50 million up front. Proposed 16 TAC § 25.194
Co-locating an AI data center behind an existing generator also changed. A new net metering rule requires an ERCOT study and PUCT approval unless a narrow exemption applies, such as when the generation resource was co-located with the large load at energization or the large load customer’s parent company held a majority ownership interest as of January 1, 2025. 16 TAC § 25.205 The first such approval came in April 2026 for Crusoe’s Goodnight campus co-located with a 265.5 MW wind farm. E&E News
Transmission cost recovery rules are under review, with a final decision due by December 31, 2026. The current four coincident peak method may be replaced, and a minimum demand charge for large loads is on the table. Tax alert
A third-party BTM arrangement where the generator and data center are separate entities may need a REP certificate, though the boundary is not yet settled in every case. Tax alert
What makes the Texas power market different
Two structural facts separate Texas from every other major US build market for AI data centers. Both matter at every step of a project.
ERCOT is not under FERC
The Electric Reliability Council of Texas, or ERCOT, operates the grid that covers most of the state. Electricity that is generated, transmitted, and consumed entirely inside ERCOT does not move in interstate commerce under the Federal Power Act. The Federal Energy Regulatory Commission, or FERC, therefore has no jurisdiction over ERCOT wholesale sales, transmission service, or interconnection. Law firm analysis Texas sets its own grid rules through the state legislature and the PUCT.
That means a developer answers to one primary regulator, the PUCT, rather than navigating a dual state and federal framework. It also means that the rules can move, and have moved, faster than in FERC-jurisdictional markets. Senate Bill 6 is the clearest proof.
Retail competition, REPs and TDUs
In most of ERCOT, the generation, the retail sale, and the delivery of power are three separate businesses. A customer chooses a retail electric provider, the REP, to buy energy. The REP handles billing and price plans. The local TDU, such as Oncor or CenterPoint, owns the poles and wires and delivers the power. The TDU charges a regulated delivery rate on every bill. Amigo Energy
A large AI data center can negotiate a power purchase agreement with a REP, or it can become its own REP, or it can self-supply behind a private network, though that last path raises a licensing question we cover below. In all cases, the TDU delivery charge and the PUCT interconnection rules still apply.
The queue tells the story
ERCOT’s large load queue is enormous, and the numbers justify the new rules.
By late March 2026, ERCOT was tracking roughly 410 GW of large load interconnection requests. About 87 percent came from AI data centers. That is roughly 4.8 times ERCOT’s all-time peak demand record of about 85.5 GW, set in August 2023. ERCOT April 2026 testimony, ERCOT Peak Demand Records
Through mid-November 2025, ERCOT had received 225 new large load interconnection requests in 2025 alone, compared to 152 across the entire 2022 through 2024 period combined. The average request size also jumped, from roughly 415 MW in the earlier years to about 725 MW in 2025. Dave Friedman analysis of ERCOT data
Only a small fraction of the queue is real by the strictest measure. Of roughly 226 GW in the queue as of October 2025, only about 1.8 percent, roughly 4 GW, was actually energized and drawing power. More than half of the requests had not submitted enough information for ERCOT to begin review. Dave Friedman Substack That speculative pressure is what SB 6 was designed to address.
Senate Bill 6, the new large load framework
On June 20, 2025, Governor Greg Abbott signed Senate Bill 6 into law, effective immediately. It is a major overhaul of large load interconnection rules in ERCOT history. Law firm analysis
SB 6 added several new sections to the Texas Utilities Code. The PUCT then broke implementation into at least five separate rulemakings. The most important ones for an AI data center developer are the interconnection standards rulemaking, the net metering rulemaking, the large load forecasting rule, the large load reliability and demand reduction rulemaking, and the transmission cost allocation review. Tax alert
Who is a large load customer
The statute defines a large load customer as an entity that requests new or expanded interconnection where the total load at a single site exceeds 75 MW. The PUCT may lower that threshold, but has not yet done so. SB 6 § 37.0561(a) to (c) A 100 MW AI data center campus is clearly covered. A 50 MW site is not, unless the PUCT acts to lower the line.
What a large load must disclose
Several new disclosure duties apply before a project can proceed.
First, the customer must tell the interconnecting utility whether it is also pursuing a substantially similar interconnection request at another location in Texas. That disclosure is required if the other request, if approved, would materially change, delay, or withdraw the current one. A large load customer may withhold or anonymize competitively sensitive details in that disclosure. SB 6 § 37.0561(d)
Second, the customer must disclose any on site backup generating facilities. The law’s definition is specific. Backup generation is not capable of exporting to the ERCOT grid, and in the aggregate it can serve at least 50 percent of on-site demand. SB 6 § 37.0561(e) If an AI data center has, for example, 200 MW of gas turbines that stay behind the meter and can serve 100 MW of a 120 MW campus, that facility crosses the 50 percent threshold and must be disclosed.
Backup generation and emergency deployment
The disclosure is not just paperwork. ERCOT must set an emergency alert threshold at which it may direct a covered large load to deploy its backup generation or curtail load. ERCOT may do so only after it has exhausted all other available market services, except frequency responsive services. When backup generation is deployed, it counts as firm load shed for pricing purposes. SB 6 § 37.0561(e)
This rule creates an operational risk. An AI data center with on-site generation above the 50 percent threshold must be ready to island from the grid and run on its own power during severe grid emergencies, or else curtail.
Curtailment protocols for new large loads
SB 6 also requires electric cooperatives, TDUs, and municipally owned utilities to develop curtailment protocols for any new large load interconnected after December 31, 2025. During a firm load shed event, the utility may curtail these loads. The rule does not apply to critical load industrial customers or critical natural gas facilities. The utility must confer with the customer, to the extent feasible, to shed load in a coordinated manner. SB 6 § 39.170(a)
Separately, ERCOT must build a voluntary demand reduction service. This service competitively procures demand reductions from large loads over 75 MW. The reductions are deployed during periods that anticipate grid emergencies, and the customer must receive at least 24 hours’ notice. Loads that are purely price responsive are not eligible. SB 6 § 39.170(b)
Financial commitment, the baseline in the statute
The statute itself requires the PUCT to establish uniform financial commitment requirements. These may take the form of a dollar-per-megawatt security, a contribution in aid of construction (CIAC), an advance payment for equipment and services, or other forms the commission approves. SB 6 § 37.0561(h) The specifics are left to the PUCT rulemaking, which we turn to next.
The proposed interconnection rule, Project 58481
On March 12, 2026, the PUCT published proposed 16 Texas Administrative Code section 25.194 under Project 58481. The public comment period ran through April 17, 2026. The final rule is expected to be adopted in mid-2026, though the exact date is not yet confirmed. ERCOT Q1 2026 report, Law firm analysis
The rule as proposed translates SB 6’s financial commitment framework into concrete dollar amounts and a two step process. The numbers below reflect the PUCT Chair Thomas Gleeson’s recommendation published March 16, 2026, which reduced the financial security amount from an original $100,000 per MW to $50,000 per MW. TCCFUI analysis
Step 1, the intermediate agreement
Before an ERCOT interconnection study can begin, a large load customer must sign an intermediate agreement with the TDU. The customer must show site control through a deed, a lease of at least five years, or an option to purchase or lease at the intermediate agreement step. At the interconnection agreement step, the customer must show site control through a deed, a lease of at least five years, or a purchase and sales agreement. Proposed 16 TAC § 25.194
The customer must also post $50,000 per megawatt of requested peak demand as financial security. A 500 MW campus posts $25 million. A 1 GW campus posts $50 million. Proposed 16 TAC § 25.194
Study fees are owed on top of that. For a project between 75 MW and 250 MW, the study fee is $100,000. For a project of 250 MW or more, the study fee is not less than $300,000 and the customer must pay actual costs if they exceed the study fee. Proposed 16 TAC § 25.194 The statute separately requires that commission standards must set a flat study fee of at least $100,000 for initial transmission screening studies. SB 6 § 37.0561(f)
Step 2, the interconnection agreement
Within 30 days after ERCOT finishes its study, the customer must execute a formal interconnection agreement. This is a compressed window. The previous practice allowed up to 180 days. Tax alert
The interconnection agreement requires a non refundable interconnection fee of another $50,000 per MW. The customer must also pay 100 percent of the direct interconnection costs as a CIAC, and post financial security to cover system upgrades. Proposed 16 TAC § 25.194
What happens if a project withdraws
If a customer withdraws or does not meet milestones, after the utility recovers its costs, the remaining security is forfeited on an 80 percent to the utility rate base, 20 percent refund split. Tax alert
To get a full refund of the remaining security, the project must reach its contracted peak demand and sustain operations at that demand for five years. Tax alert This is a heavy long term commitment. A developer who signs an agreement for 1 GW but only builds 400 MW and then sells the site will forfeit a large part of the posted millions.
Co-location with existing generation, the new net metering rule
Many AI data center developers have looked at co-locating a new campus behind an existing power plant, drawing its energy without using the ERCOT transmission system for that part of the supply. SB 6 and the PUCT have now imposed a specific approval process for those arrangements.
The statute applies when a power generation company, a municipally owned utility, or an electric cooperative wants to put a new large load of 75 MW or more behind the meter of an existing stand alone generation resource. Section 39.169(a) requires notice for a net metering arrangement between an operating facility registered with ERCOT as a stand-alone generation resource as of September 1, 2025, and a new large load customer. Tex. Util. Code § 39.169(a) The adopted PUCT rule, 16 TAC section 25.205, fills in the process. 16 TAC § 25.205
The two exemptions
The review requirement does not apply in two situations. First, if the generator’s original registration already included a co-located large load at the time it was first energized. Second, if a majority interest in the generator was owned, directly or indirectly, by the parent company of the large load customer as of January 1, 2025. Tex. Util. Code § 39.169(b)
The ownership exemption is precise. If a data center operator’s parent company already owned a majority of the power plant on January 1, 2025, the co-location can proceed without the 120-day study and PUCT review described next. If the ownership was acquired later, or if the generator is owned by a third party, the full process applies.
The study and approval process
When the review requirement is triggered, the generator owner must notify ERCOT before implementing the net metering arrangement. ERCOT then has 120 days to study it and submit findings and a recommendation to the PUCT. The PUCT has 60 days to approve, deny, or impose reasonable conditions. If the PUCT takes no action within 60 days, the arrangement is deemed approved. Tex. Util. Code § 39.169(e)
There is one mandatory condition. Any dispatchable capacity that the generator previously made available to ERCOT must continue to be available at ERCOT’s direction ahead of anticipated emergency conditions. This condition protects the grid from losing capacity it already relied on.
The Crusoe Goodnight wind co-location, first approval
On April 24, 2026, the PUCT voted 5 to 0 to approve Crusoe Energy Systems’ net metering arrangement for its Goodnight AI data center campus in Armstrong County. The campus draws power directly from the existing 265.5 MW Goodnight Wind Farm. It was the first such co-location approved under SB 6 for a renewable generator. E&E News The PUCT imposed a condition that service could be interrupted with 30 minutes notice during grid emergencies. Latitude Media The full written order was not yet available as of this writing.
Transmission cost recovery, the 4CP review
One of the largest open items for any large load in ERCOT is how it will pay for transmission. SB 6 section 6 directed the PUCT to review the current four coincident peak, or 4CP, methodology and to amend its rules by December 31, 2026. SB 6 § 6
Under the current 4CP method, a customer’s share of transmission costs is set by its average load during the four 15-minute intervals of highest system-wide demand in the months of June through September. A flexible load that can ramp down during those few intervals can avoid a large portion of its transmission cost responsibility, even if it imposes real system costs at other times.
The PUCT staff’s draft report, issued March 16, 2026, found three problems. First, the summer-only 4CP window does not capture winter scarcity events. Second, a 15-minute interval provides too narrow a price signal. Third, certain flexible large loads, including crypto mines and some data centers, can avoid transmission costs without reducing the system costs they cause. K&L Gates alert
Staff is considering a new approach. One option under review is a minimum demand charge based on contracted peak demand, locked in for 10 to 15 years, applied specifically to large load customers. K&L Gates alert The final rule will not arrive until the end of 2026, but the direction of travel is toward making large loads pay a larger and more fixed share of transmission costs.
ERCOT interconnection, the process beneath the rules
While the PUCT sets the requirements, ERCOT runs the physical interconnection process. The current practice is to study each large project individually. That is changing.
ERCOT is moving toward a batch study process, called Batch Zero, that would study clusters of large loads together roughly every six months. Capacity would be reserved in the study to prevent constant restudies. The goal had been board consideration by June 1, 2026, though final disposition is not yet confirmed. ERCOT NPRR1325, ERCOT market notice
For a developer, the batch process means a project must be ready to submit a complete application when a study window opens. A half-finished application that misses the window may wait months for the next batch.
Separately, ERCOT has flagged a reliability concern specific to AI data centers. Large electronic loads, including server farms, sometimes fail to ride through voltage disturbances. A July 2024 fault on a 230-kV line in the Eastern Interconnection caused a 1,500 MW load loss, mostly from AI data centers that failed to return after the fault cleared because their uninterruptible power supplies or UPS systems tripped on three strikes protection policies. Zero-Emission Grid ERCOT issued a market notice on June 23, 2025 requiring voltage ride-through surveys from large electronic loads. ERCOT Market Notice M-B062325-01 An AI data center that cannot meet ride-through requirements may face additional study or mitigation commitments.
The large load forecasting rule, a parallel gate
The PUCT adopted 16 TAC section 25.370, the large load forecasting rule, effective March 1, 2026. After 2026, only large loads that have executed an interconnection agreement that satisfies the Project 58481 requirements will be included in the ERCOT large load forecast. ERCOT April 2026 update
This has a real consequence. An interested developer who has not yet met the new interconnection standards simply does not appear in the official planning forecast. The forecast is what drives transmission planning decisions. Staying outside the forecast can delay the very upgrades the project would need.
Becoming a retail electric provider
An AI data center that wants to buy power directly from the wholesale market, rather than from a licensed REP, must consider whether it needs its own REP certificate. The general rule is that a person must hold a REP certificate from the PUCT before purchasing, taking title to, or reselling electricity in order to provide retail electric service. 16 TAC § 25.107(a)
For an AI data center that is the sole end user on its own private network, the question is whether it is providing retail electric service at all. The Davis Graham alert notes that for a single-entity self-supplied data center behind a Private Use Network the REP certification question does not arise because no retail sale occurs, and that for third-party arrangements the regulatory analysis is fact-specific and no clear industry-wide answer is settled. Davis Graham alert
If a developer chooses to form a REP, the process matters. The PUCT certification process generally takes 60 to 90 days. ERCOT runs three electronic interface testing windows per year, and a REP must pass testing before it can serve customers. PUCT REP page The timeline means that a REP launch should be planned a quarter or more in advance of when the AI data center needs to take service.
REP categories and financial requirements
There are three REP options. Option 1 REPs serve the open market and carry full financial requirements. Option 2 and Option 3 REPs serve only specific, identified customers and are not required to meet the same technical, managerial, and financial standards as Option 1 REPs. Tax alert
For an Option 1 REP serving fewer than 50,000 electric service identifier, or ESI ID, accounts, the minimum letter of credit is $750,000. For 50,000 or more ESI IDs, it is $1.5 million. An Option 1 REP must also maintain an irrevocable guaranty from an investment-grade-rated or $100 million tangible net worth guarantor or an irrevocable stand-by letter of credit, which also requires at least $1 million in shareholders’ equity for the first 24 months of serving load. EnergyChoiceMatters.com An AI data center REP that serves only its own sites will almost certainly fall under Option 2 or Option 3, avoiding most of these requirements, but the precise eligibility must be confirmed with counsel and the PUCT.
A sales tax note
Texas offers a sales tax exemption for qualifying AI data centers under Tax Code section 151.317. Eligible property includes electricity, electrical and cooling systems, emergency generators, hardware, servers, data storage, network equipment, racks, software, and MEP systems. The exemption runs for 10 years for a total investment of $200 million but less than $250 million, or 15 years for $250 million or more. The facility must create at least 20 qualifying jobs. Sales Tax Institute
For a project spending hundreds of millions on power infrastructure, the sales tax exemption on equipment and electricity is a material part of the capital stack and operating model. It is best secured early in the development timeline.
The on-the-ground reality, what is actually being built
The numbers in the queue are not abstract. A set of real projects, at every scale, illustrate what the new rules will govern.
- Crusoe Abilene Campus (Stargate), Taylor County. Phase 1 delivered 200 plus MW and was operational by September 2025, hosting OpenAI workloads. Phase 2 adds six buildings for a total 1.2 GW by end of 2026. A new adjacent 900 MW Microsoft campus brings the total Abilene footprint to roughly 2.1 GW. Crusoe press release, Crusoe press release, Crusoe press release
- Crusoe Goodnight Campus, Armstrong County. Gigawatt-scale campus developed with Google, drawing 265.5 MW from the Goodnight Wind Farm via the first SB 6 co-location test case. Additional off-grid gas turbines are planned. Latitude Media
- Meta El Paso Campus, El Paso County. Broke ground October 2025, initially $1.5 billion. By March 2026, Meta increased its commitment to $10 billion and a 1 GW target by 2028 using liquid cooling. Texas Land Agent
- DataBank Red Oak, Ellis County. Secured a $2 billion construction loan in April 2026 for its AI data center campus. A TDLR filing shows one 425,170 square foot two-story facility at a $256 million initial project cost. Texas Land Agent
- GW Ranch, Pecos County. At 7,650 MW, the largest single planned site in the Texas pipeline. Texas Land Agent
- Nexus Hubbard, Hill County. 7,200 MW planned. Texas Land Agent
- Fermi America HyperGrid, Carson County. Planned $300 billion AI campus, up to 11 GW IT capacity, powered by natural gas, solar, wind, and nuclear. ConstructConnect
- Data City Texas, near Laredo. 50,000 acre hyperscale hub announced March 2025, first phase 300 MW launching 2026, could scale to 5 GW fully self-powering with green hydrogen. ConstructConnect
- CyrusOne/Calpine co-location, Freestone County. CyrusOne seeks PUCT approval for a 760 MW AI data center campus behind-the-meter with existing gas generation. Latitude Media
- Hut 8 Silver Basin, TNMP territory. 180 MW large load with co-located generation, net metering application pending. PUCT Interchange
These projects span from a few hundred megawatts to multiple gigawatts. All of them, once over 75 MW, step into the SB 6 framework described above. Some, like the Crusoe Abilene Phase 1, were largely permitted under the prior rules. New phases and new projects now face the proposed 50,000 dollar per megawatt security, the 30 day agreement deadline, and the curtailment obligations.
Key takeaways
- An AI data center over 75 MW in ERCOT must follow SB 6 rules, including site control, backup generation disclosure, and heavy financial security.
- The proposed Project 58481 interconnection rule requires $50,000 per MW in security twice, once at the intermediate agreement and again as a non-refundable interconnection fee. A 1 GW project needs $100 million in combined capital outlay just for those steps, plus study fees and CIAC.
- Withdrawal costs are steep. The rule proposes an 80 percent forfeiture of posted security, with full refund of the remaining security only after five years of sustained operations at contracted demand.
- Co-locating behind an existing generator triggers a 120 day ERCOT study and a 60 day PUCT review if the generator was registered as a stand-alone resource as of September 1, 2025. The arrangement is deemed approved if the PUCT does not act. The ownership exemption may save time if the parent company owned a majority of the generator by January 1, 2025.
- Transmission cost recovery rules will change by December 31, 2026. A minimum demand charge based on contracted peak, locked in for 10 to 15 years, is under serious consideration. New projects should model that cost.
- An AI data center that wants to self-supply should get early advice on whether it needs a REP certificate. Option 2 or Option 3 REP status is likely available but must be confirmed.
- The ERCOT queue is enormous and mostly speculative. The new financial and disclosure requirements are designed to filter out projects that cannot commit real capital. A developer that is ready to post the security and meet the milestones will likely find a faster and more certain path than in the current clogged queue.
- Temper your expectations on operational flexibility. Mandatory curtailment protocols apply to loads interconnected after December 31, 2025. Backup generation above 50 percent of demand gives ERCOT an emergency call right. These are real operational constraints that must be built into the site plan and the power contract.
Frequently asked questions
Q:What is the large load threshold in ERCOT under SB 6?
A:75 megawatts at a single site, by default. The PUCT may lower it but has not yet done so.
Q:How much financial security does a 500 MW AI data center need under the proposed rule?
A:$25 million at the intermediate agreement step, plus another $25 million non-refundable interconnection fee at the interconnection agreement step, plus study fees. Security for system upgrades is additional.
Q:Can an AI data center co-locate with an existing power plant without a regulatory review?
A:Only if the generator’s original registration included a co-located load from the start, or if the data center’s parent company owned a majority interest in the generator by January 1, 2025. In addition, the SB 6 net metering review process applies only if the generator was registered as a stand-alone generation resource as of September 1, 2025. If the generator was registered after that date, the review may not be required, but other requirements could apply.
Q:How long does the co-location approval process take?
A:ERCOT has 120 days to study the arrangement. The PUCT then has 60 days to act. If the PUCT takes no action in that window, the arrangement is deemed approved. In total, expect roughly six months if no delays.
Q:Does an AI data center that generates its own power and stays off the grid need a REP certificate?
A:The answer is not settled for every case. The law says a person needs a REP certificate to purchase or resell electricity for retail service. A self-supplied data center behind a Private Use Network may not be doing either. But the question requires project-specific analysis. Law firm analysis
Q:What happens if my project withdraws after posting security under the proposed 25.194 rule?
A:The posted security is split, 80 percent forfeited to the utility and 20 percent refunded. To recover the remaining security in full, the project must reach its contracted peak and operate for five years.
Q:When do the new transmission cost recovery rules take effect?
A:The PUCT must amend its rules by December 31, 2026, under SB 6. The current 4CP method is likely to be replaced or supplemented with measures that make large loads pay a larger share.
Q:Is there a sales tax break for AI data centers in Texas?
A:Yes. Under Tax Code section 151.317, qualifying data centers can receive a sales tax exemption on equipment and electricity for 10 or 15 years depending on investment level, provided they meet a job threshold.
Q:Are there voltage ride-through requirements specific to data centers in ERCOT?
A:ERCOT has issued a market notice requiring a voltage ride-through survey for large electronic loads. AI data center UPS systems that trip offline during voltage dips create a reliability risk, and ERCOT may require mitigation.
Q:Where can I track the PUCT rulemakings for SB 6?
A:The main dockets are Project 58481 (interconnection), Project 58479 (net metering), Project 58480 (forecasting), and Project 58484 (transmission cost recovery). The PUCT’s Interchange site has all filings.
Q:How long does it take to get a REP certificate in Texas?
A:About 60 to 90 days from the PUCT, plus passing an ERCOT electronic interface test in one of three annual testing windows. Plan on a quarter or more.
Subscribe to The Compute Law Brief
The Compute Law Brief is a free weekday newsletter on the law of AI infrastructure across tax, real estate, construction, power, and deals. The big US build markets and federal law. Three minutes a morning. No paywall, and no email gate to read the blog. Subscribe if you want it in your inbox.
Junde Liu, JD, LL.M. (Taxation) candidate at UF Law. Originally published on Compute Law Blog. This article is general information and does not constitute legal advice. Reading it does not create an attorney client relationship. The reader should not act on the basis of any content here without first consulting a licensed attorney in the relevant state. Last reviewed for accuracy May 23, 2026.