- Data center developers are being told they must wait years to connect to the grid in many parts of the country
- Hyperscalers are expanding AI data centers faster by supplying their own power rather than waiting for grid connections
- The tax law favors behind-the-meter power, but companies have to avoid buying from China to get the tax benefits
The U.S. Department of Energy says data centers and manufacturing are driving U.S. electricity sales to record levels, but projected growth rates have declined since August. The government’s September Short-Term Energy Outlook noted a pause in grid connections for Texas data center projects. Texas Governor Greg Abbott has directed the state’s energy regulators to audit each data center’s plans for electricity and water use before allowing a connection.
The shift in Texas comes as Americans nationwide are weighing the potential benefits of a data center in their region against the possibilities of higher electricity/water bills, and against the chance that AI could threaten their jobs or even their lives.
Communities are concerned, and grid infrastructure is inadequate to support current demand, so a data center’s wait time for a grid interconnection can be several years. Hyperscale cloud providers and the companies that support them are building beyond metro areas and buying or leasing natural gas turbines, reciprocating engines, solid oxide fuel cells, and modular nuclear reactors. Since these don’t connect to the grid, they are called behind-the-meter solutions.
Behind-the-meter power and US data centers
Even before the change in Texas, roughly one quarter (about 90 GW) of the U.S. planned data center capacity was set to use behind-the-meter power, according to analyst Michael Thomas of research firm Cleanview. But Thomas found less than 40% of that capacity was actually permitted, and just 2.2% was online and operating as of mid-2026.
Behind-the-meter or bring-your-own-power solutions were the topic of a keynote panel discussion at Datacloud USA in Austin, Texas this month. Providers of these solutions said they are not simply providing stopgap solutions for data centers waiting for grid connections.
“We know that we can be completely off the gird for the next 15-20 years or whatever it needs to be,” said David Bell, VP of data center and microgrid development at VoltaGrid. VoltaGrid sells natural gas as-a-service to Oracle Cloud Infrastructure, Vantage Data Centers, and other data center operators. Bell said one of its plants is producing/selling power that is “cheaper than the grid now.”
Behind-the-meter plants should strive to donate power to the grid when needed, said Gray Oak Power Management CEO Emilio Vicens. Gray Oak’s solution portfolio includes natural gas, reciprocating engines, solar, and battery storage. “I think these assets provide value, for the mid-to-long term, for more than the data center,” Vicens said. “I’m a big believer that many of these assets could provide value to the grid and vice versa.”
Bring-your-own-power does not make financial sense for all hyperscale data centers, especially in cities. Residents may not want to share power and water with data centers, but they also may not want a microgrid installation in the middle of town.
“The operational complexity of behind-the-meter solutions when you are in metro is much different than other markets,” said panelist Colin McLean, chief revenue officer at Digital Realty. He said his company has many leases with hyperscalers, but is not sourcing behind-the-meter solutions for its metro data centers. “We view the grid as the primary and the future primary for what our go-to-market is going to look like. We have an ecosystem that’s based on metros and scaling to suburbs as well.” McLean added that Digital Realty does have a project in the Midwest that is more appropriate for behind-the-meter power.
In rural West Texas, where natural gas is plentiful, several hyperscalers are building giant data center campuses that will get at least some of their power from off-grid providers. They’re offsetting some of the cost with a tax credit initiated by the Biden administration and continued by the current administration. Purchasers of fuel cells and microgrid controllers can write off 30% of the cost and installation under Section 48E of the Investment Tax Credit. Matt Noll, chief operating officer at tax advisor Alliantgroup, told Fierce “data centers are the perfect candidate” for this tax credit when they bring their own power. His firm advises West Texas data centers on how to maximize credits without running afoul of rules about foreign suppliers.
'Foreign Entities of Concern' and US data centers
Noll said the tax credit will not apply if equipment comes from a Foreign Entity of Concern (China, Russia, North Korea, or Iran). “A lot of batteries, switch gear and photovoltaic cells come from China,” he said.
Data centers that supply their own power are not the only beneficiaries of the tax credit. Many grid-connected data centers use batteries for backup power and can also get the write-off. But the savings may be offset by the cost of buying non-Chinese equipment.
According to a recent blog post by accounting firm BDO, “some foreign manufacturers now affected by the Foreign Entity of Concern rules are seen as reliable sources for components essential to data center operations — including the battery modules and solar panels that feature prominently in distributed energy projects. Given the potential costs and risks of switching manufacturers, many developers are electing to preserve their existing suppliers and forgo some credits and incentives.”
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