June 2, 2025

By Kennedy Nickerson and Josh Price, Capstone energy analysts

You can’t talk about energy policy these days without talking about artificial intelligence (AI) and data centers. Considering the vast amount of electricity they can consume, the frenzy makes sense. In Texas alone, the grid operator anticipates that data center load will reach 22 gigawatts (GW) in 2030, or roughly 25% of the region’s total demand today—enough capacity to power over 15 million homes for a year. A major part of the data center load growth story is the accelerating deployment and adoption of AI. For example, ChatGPT reached 365 billion annual searches in just two years since its launch, a level of activity that took Google 11 years to achieve. With these megatrends in the headlights—along with fierce geopolitical competition to win the “AI Race”—policymakers are attempting to keep up, deciding what gets built, where, and who stands to benefit.

Roughly a year ago, we published our expectations for policy issues impacting data centers as regulators grappled with the skyrocketing demand forecasts for electricity tied to AI. Since then, we’ve launched a biweekly policy tracker and state legislative tool to help clients keep pace with the rapidly shifting landscape. These tools have surfaced recurring themes: affordability, clean energy, deregulation (and re-regulation), tax breaks, backup power, and behind-the-meter (BTM) policies.

Take Texas, for example. Just this week, the legislature passed SB6, imposing new regulations on data centers that require upfront financial commitments, among other safeguards, and likely puts the state first in line for the development of several multi-billion-dollar projects. Meanwhile, legislators in California have proposed bills that would require data center developers to disclose their energy consumption, and New Jersey legislators have proposed requiring the development of new clean generation to meet the data center’s projected demand to minimize strain on the grid and the climate.

At the federal level, policy progress is more sluggish. The Federal Energy Regulatory Commission (FERC) has deliberated the feasibility of co-locating large BTM loads of existing power plants in PJM. The Trump administration, meanwhile, has issued several executive orders to fast-track nuclear, open federal lands for data center and power development, and expedite permitting reviews, all in the name of AI.

However, as we predicted, many of the federal actions are too slow or piecemeal to satisfy the needs of the private sector. In some cases, federal policy appears to be hindering data center development, such as partisan efforts to gut Inflation Reduction Act (IRA) energy tax credits, defund the Department of Energy’s (DOE) loan office which could finance advanced nuclear projects that the private sector won’t on its own, and the Trump administration’s volatile trade policy.

So, once again, state action takes the lead in determining where abundant energy and data center infrastructure get built.

Emerging State Trends

Over the past year, our original predictions held up: grid reliability, transmission cost allocation, and BTM co-location fights still top the list. Blue states are largely pushing for new, clean generation to meet data center load, while red states are more flexible, creating opportunities for BTM generation like solar + storage, fuel cells, combine cycle gas turbines (CCGTs), and combined heat and power (CHP) systems.

But additional questions have emerged across states:

1. Who is best suited to serve data centers, regulated electric utilities, or independent power producers (IPPs)?
2. Do the economic benefits of data centers justify the generous state tax incentives they get?

Case Study: Ohio Legislators Make a Play for Data Centers

In Ohio, Governor Mike DeWine signed into law H.B. 15 to update the state’s existing electric retail choice law to meet the new age of energy-intensive industries like data centers. The law, which passed with overwhelming bipartisan support, prohibits utilities from owning backup generation, creating a more favorable environment for data centers to collaborate directly with IPPs.

Meanwhile, Public Utilities Commission of Ohio (PUCO) regulators are still weighing AEP Ohio’s hotly debated large load tariff, which would lock data centers into a minimum demand charge for 10 years based on usage forecasts, among other requirements, with utilities. This uncertainty led state policymakers to take matters into their own hands through H.B. 15.

The passage of H.B. 15 provided regulatory certainty for energy developers in the state, giving IPPs a leg up in the race to meet growing data center demand in Ohio.

Case Study: Minnesota’s Mixed Signals on Tax Incentives

Minnesota has long offered generous tax breaks for data centers. While the state still offers a tax break on the purchase of equipment and software for qualified data centers, Minnesota legislators are considering eliminating the sales tax exemption on electricity consumption for data centers. The proposal has resulted in Amazon Web Services (AWS) canceling its proposed project, citing the uncertainty as motivation to redirect its project development to states with more favorable policy treatment.

The Minnesota Democrats’ proposed reversal led to (real or perceived) uncertainty – and therefore divestment – among industry players, even as policymakers continue to weigh the economic benefits of data centers against the previously established incentives.

The Bottom Line: The Fastest States Win

Right now, there’s a competition among state policymakers – and within the energy industry – to win the AI race. States that move quickly to offer clear, reliable, and favorable policies will attract the growing data center investments. Those that don’t (or waffle) risk getting left behind.

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Read more from Capstone’s Energy Team:
Data Centers, Geopolitics, and Other Emerging Trends from CERAWeek
Swinging for the Fences: The EPA’s Gamble on Environmental Policy
Trump, the Endangerment Finding, and the Potential Cascading Chaos for Climate Regulations