Governor Abbott’s Environmental Permitting Freeze Expands Pause on Texas Data Center Development to All Texas Data Centers Pending Statewide Audit

On September 21, 2026, Texas Governor Greg Abbott issued an order halting all permits sought by data centers from the Texas Commission on Environmental Quality (TCEQ) until the Public Utility Commission of Texas (PUCT) and Electric Reliability Council of Texas (ERCOT) can complete the comprehensive audit initiated by the governor in early August.[1]

 The September 21 Directive is only the latest in a series of escalating directives affecting data center development in Texas. Entities with planned or in-progress Texas data center projects should assess their exposure across deal documentation, permit applications, timelines, and financing.

Original Interconnection “Pause”

On August 3, 2026, Governor Abbott directed the PUCT and ERCOT to audit all data centers advancing through ERCOT’s interconnection process for compliance with existing ERCOT and PUCT requirements, as well as additional “state and community impact” topics including: the extent to which data centers were paying their own way, dependency on grid power, water usage, nuisance impacts to neighboring properties, and ownership and controlling interests of projects.[2]

On September 14, 2026, the governor issued a follow-up letter further requiring ERCOT to partner with the Texas Water Development Board (TWDB) “to audit water consumption, sources of water supply, and implementation of water-efficient technologies.”[3] Data centers that fail to comply with this verification and audit process may be denied interconnection to the ERCOT grid.

As a result of the August 3 Directive, ERCOT has halted any further approvals to energize Large Load (i.e., loads equal to or greater than 75 MW) data center interconnections or virtual currency mining facilities until the audit process is completed.

Additionally, ERCOT temporarily suspended its transitional interconnection study process for Large Loads—the “Batch Zero” process—while it completes the required verifications and audits.[4] As part of the Batch Zero process, ERCOT was required to verify information provided by applicants seeking classification in Batch Zero. Prior to the August 3 Directive, ERCOT planned to verify such information in parallel with the initiation of the Batch Zero study process. However, ERCOT must now complete this verification process and audit the additional state and community impact information outlined in the August 3 Directive before the Batch Zero interconnection study commences. As a result, ERCOT has delayed commencing the study process until these verification and audit processes are completed.[5]

Environmental Permitting Freeze

The September 21 Directive requires TCEQ to pause the issuance of “all permits related to data centers” until the ERCOT and TWDB audits are complete, on the theory that the information sought by these audits is required to make informed decisions. Pending further clarification from TCEQ, developers should assume that “all permits” will include all air, water, and all other authorizations issued by the TCEQ.

This latest directive gives rise to new uncertainty for data center developers, and not only because its duration is contingent on completion of the audit. It is unclear at this time how all of the information provided in response will be used by regulators to make decisions on data center development projects.

There is also a question as to whether the pause applies to the issuance of permits for data center-adjacent projects, such as an air permit for a gas generation plant built to power a data center. The prior orders were directed at data center approvals for grid interconnection of Large Loads, and as such did not impact projects building their own power generation or requesting interconnection to use less than 75 MW of power. In response to questions from the New York Times, representatives for Governor Abbott “declined to answer questions about how the governor’s [September 21 Directive] would affect projects developing their own power sources.”[6]

Importantly, the September 21 Directive is not limited to ERCOT interconnection-related approvals and extends to all data center projects seeking TCEQ permits. This includes data centers that were not otherwise subject to ERCOT’s pause on Large Load energization approvals stemming from the August 3 Directive, including:

• Data centers with behind-the-meter generation,
• Data centers smaller than 75 MW, and
• Data centers interconnecting in areas of Texas outside ERCOT.

Finally, the September 21 Directive instructs TCEQ to “pause the issuance of all permits related to data center projects.” A broad read suggests that this includes not only the issuance of permits from new applications but also applications for permits currently pending before the TCEQ. Accordingly, without further guidance, all data center developers with pending TCEQ permit applications should anticipate delays.

TCEQ is required to provide an update on its compliance efforts by October 19, 2026.

Where the Audit Stands

ERCOT is currently running the audit on two tracks.[7] On September 9, 2026, Large Loads conditionally included in Batch Zero were issued requests for information (RFIs) concerning Batch Zero eligibility verification, with responses due September 23, 2026 (although recipients may request extension of the response deadline to September 30, 2026). Then, on September 14, 2026, ERCOT separately issued state and community impact RFIs to all data center developers with medium-sized or Large Loads, which includes questions developed by the TWDB. Responses to the state and community impact RFIs are due no later than October 12, 2026.

ERCOT may issue additional RFIs seeking clarification or additional supporting information. ERCOT expects this process to continue through November and culminate in a report to the PUCT in December outlining the results of its RFIs.

Looking Ahead to January

The September 21 Directive reiterates the governor’s pledge from an earlier letter, dated June 10, 2026, to work with the Texas legislature in the next session to, among other things, ensure data centers pay for their own electric infrastructure costs, ensure data centers add to Texas’ electric capacity, not just its electric demand, require that all new data centers be built with water-efficient technologies such as closed-loop cooling systems, require data centers to reduce impacts on local communities by implementing practices such as setbacks and noise-reduction technology, and repeal sales tax exemptions and otherwise eliminate any financial incentives for data centers.[8]

Market participants should closely monitor these proceedings, as the results of the ERCOT and TWDB audits are likely to shape the upcoming legislative session. The scope of the governor’s pledge promises more changes to come.

Immediate Implications for Market Participants

The September 21 Directive makes clear that the scope of data center projects on the governor’s radar is beyond just those connecting to the grid. Accordingly, both Large Load projects subject to ERCOT’s Batch Zero process, as well as all other data center and cryptocurrency mining projects in Texas, should be evaluated case-by-case to determine any potential impacts of the various directives coming from the governor’s office.

• Construction loans, tax equity agreements, and other project financing documents should be reviewed for permit and approval conditions to funding or draw requests, material adverse change definitions that may be triggered by a regulatory halt (and any linked mandatory prepayment, cash sweep, or reserve funding obligations), milestone and completion covenant default risks, and reporting obligations to financing parties regarding the directive.
• Development, construction, equipment supply, and offtake agreements commonly contain Force Majeure provisions excusing performance upon governmental action, regulatory action, and other events beyond a party’s reasonable control. Change in law provisions and other express conditions and excuses tied to permitting may also be implicated.
• Parties to or negotiating site acquisition and purchase and sale arrangements for data center development should assess closing conditions tied to receipt of environmental permits, representations, and warranties on the status of permits and regulatory approvals (which may need to be qualified for the current regulatory environment). M&A insurance underwriters may scrutinize coverage for permit-related risks tied to the September 21 Directive and prior orders.

The September 21 Directive and preceding orders will introduce new considerations for parties negotiating development, financing, or offtake agreements for Texas data center projects. Stakeholders should be prepared to consider and negotiate: (i) express regulatory freeze provisions defining the current orders as a qualifying delay event; (ii) provisions for automatic milestone extensions tied to the duration of the TCEQ permit freeze; (iii) termination pathways should the freeze extend beyond a specified period without resolution; (iv) scope of representations as to outstanding permit applications and known regulatory exposure; and (v) for M&A deals, escrow or earnout structures that account for permit-related contingencies rather than relying solely on closing condition mechanics.

[1] Governor Greg Abbott, Letter to the Texas Commission on Environmental Quality (Sept. 21, 2026), https://gov.texas.gov/uploads/files/press/TCEQ_Data_Center.pdf (September 21 Directive).

[2] Governor Greg Abbott, Letter to the PUCT and ERCOT (Aug. 3, 2026), https://gov.texas.gov/uploads/files/press/Thomas_Gleeson_Pablo_Vegas_Data_Centers_Directive_Letter_to_PUCT_ERCOT_August_2026_.pdf (August 3 Directive).

[3] Governor Greg Abbott, Letter to the Texas Water Development Board (Sept. 14, 2026), https://gov.texas.gov/uploads/files/press/TWDB_Letter.pdf.

[4] Batch Zero is a new study process under which ERCOT will transition from its legacy project-by-project study approach to a “batch” study process that evaluates the impacts of all Large Loads that meet certain qualification criteria. Updates to ERCOT’s Planning Guide implementing the Batch Zero process were approved by the PUCT on June 18, 2026. See PUCT Report, PGGR No. 145 (June 18, 2026).

[5] ERCOT Requests for Good Cause Exceptions Relating to Batch Zero Deadlines and Status Update on Additional Matters Including the Long-Term Load Forecast, PUCT Project No. 59142 (Aug. 10, 2026).

[6] Scott Dance, Texas Halts Data Center Permits, Expanding Environmental Scrutiny, N.Y. Times (Sept. 22, 2026), https://www.nytimes.com/2026/09/22/climate/texas-halts-data-center-permits.html.

[7] ERCOT, ERCOT Updates: Batch Zero Eligibility Verification and Audit Process and State and

Community Impact RFI Process, PUC Project No. 59142 (Review of ERCOT’s Interconnection Processes for Large Loads) (Sept. 21, 2026), https://interchange.puc.texas.gov/Documents/59142_73_1685171.PDF.

[8] See Governor Greg Abbott, Letter to PUCT and ERCOT (June 10, 2026), https://gov.texas.gov/uploads/files/press/Thomas_Gleeson_Pablo_Vegas_Data_Centers_Directive_Letter_to_PUC_ERCOT_FINAL.pdf.

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.