State Regulation of Data Centers in 2026 – A Shifting Landscape

This alert provides an overview of the key trends emerging at the state level and highlights recent regulatory shifts that data center operators, developers, and investors should monitor closely.

1. State Responses to Cost and Reliability Concerns

Rising electricity costs and grid reliability concerns are driving legislative activity targeting data centers. States are adopting a variety of mechanisms to address these challenges, including special tariffs, cost-shifting requirements, and regulatory frameworks designed to ensure that data centers bear the costs of their energy demands instead of residential consumers and other ratepayers. 

Comprehensive State Regulation: Illinois’ Proposed POWER Act

Illinois ratepayers are confronting increasing costs, largely driven by the state’s booming data center industry, leading to affordability and reliability concerns that we discussed in a previous alert. 

The Protecting Our Water, Energy, and Ratepayers (POWER) Act (IL S.B. 4016 / H.B. 5513) was introduced in February in response to these concerns. The POWER Act is currently before the Illinois Senate’s Artificial Intelligence (AI) and Social Media Subcommittee. This billtargets hyperscale data centers with peak energy demand exceeding 50 megawatts (MW) and addresses affordability and environmental concerns by the following.

1. Requiring data centers to pay for their own energy generation, sourced from new renewable energy and energy storage facilities, and distribution and transmission infrastructure with fast-track grid interconnection incentives for those that secure clean energy commitments by certain deadlines. 
2. Mandating transparency and permitting requirements for water usage and consumption, including more efficient cooling standards.
3. Requiring cumulative environmental impact assessments before siting facilities near environmental justice communities and mandating legally binding, publicly disclosed community benefits agreements.

The bill has attracted bipartisan interest and support from environmental groups such as the Illinois Clean Jobs Coalition, Natural Resources Defense Council, and the Union of Concerned Scientists. The POWER Act remains in committee as of April.

Alternative Regulatory Frameworks for Large-Load Customers: Texas, Oregon, and California Case Studies

Several states have already enacted or are actively developing similar regulatory frameworks to manage the grid impacts of data centers.

Texas established an early model in June 2025 with TX S.B. 6, which regulates large-load customers — those with demand of 75 MW or more — in the Electric Reliability Council of Texas region. TX S.B. 6 requires developers to pay for interconnection studies and infrastructure upgrades, demonstrate financial assurance and site control, and disclose duplicate interconnection requests. The law also establishes protocols for utilities to disconnect large loads during grid-stress events and imposes new requirements on co-location arrangements.

Oregon’s POWER Act, signed into law in August 2025, directs the Oregon Public Utility Commission to create a separate rate class for large energy use facilities (using 20 MW or more), such as data centers, to ensure that grid infrastructure costs driven by such facilities are allocated to their developers. The POWER Act also requires new large energy users to enter into power-purchase agreements for at least 10 years, committing to pay for projected energy use and any new transmission infrastructure. 

California’s legislature is considering CA S.B. 886, introduced in January, which would require the California Public Utility Commission to establish a tariff regime for data centers with estimated peak demands of at least 25 MW. These data center customers would be required to pay for transmission and distribution infrastructure costs, including grid improvements necessitated by their interconnection. The bill would also impose an early termination fee on any such customers that depart within 15 years of interconnection. Each such tariffed customer would also be required to install onsite zero-carbon energy storage and participate in demand response programs. A companion bill, CA S.B. 887, offers a corresponding incentive by making data centers that meet specified clean energy, water efficiency, and community benefit conditions eligible for accelerated environmental review under the California Environmental Quality Act.

Other State Approaches: Cost-Shifting Requirements and Demand Response Programs 

Several states are also addressing the cost implications of serving large energy use facilities. Alabama’s S.B. 270 would require the Alabama Public Service Commission to ensure that contracts between utilities and large-load data centers (those with contracts for at least 150 MW) provide for recovery of incremental service costs and promote positive benefits to ratepayers. Similarly, Arizona’s H.B. 2756 would direct the Arizona Corporation Commission to adopt rules for “extra high load factor customers,” including pre-execution contract review to ensure agreements are in the best interest of other ratepayers, and would require utilities to file cost-of-service studies and interconnection reports with the Corporation Commission. 

Other states are emphasizing demand response measures. Maryland’s S.B. 596 would incentivize large-load customers (those with demand of at least 25 MW) to participate in demand response and onsite power storage programs. Maryland’s legislature is also considering an emergency bill, H.B. 120, which would impose a moratorium on future data center development until the legislature enacts more rigorous co-location regulations. Washington’s H.B. 2515 also imposes demand response standards within the context of a comprehensive regulatory framework that mandates clean energy procurement targets, cost-shifting by large-load customers, and restrictions on utilities’ use of cap-and-invest allowance allocations to benefit data center customers.

2. Moratoria on Data Center Development

States and local governments are taking more aggressive action by proposing moratoria on data center construction while regulators study their impacts.

• New York: Legislation has been introduced (NY A.B. 10141 / S.B. 9144) to halt all data center construction for a minimum of three years while the state regulators adopt rules designed to minimize the impact data centers will have on utility rates. 
• South Dakota: SD S.B. 232 proposed a one-year moratorium on the expansion or new construction of hyperscale data centers, effectively allowing construction of data centers with smaller energy needs to continue. This bill stalled in committee, but the South Dakota Legislature passed a separate bill, SD S.B. 135, which safeguards local governments’ ability to regulate or prohibit data center development.
• Oklahoma: OK S.B. 1488 would place a moratorium on data center development with an electrical load greater than 100 MW until November 1, 2029, to allow the Oklahoma Corporation Commission to study data center impacts on the water supply, utility rates, and property values. Presently, OK S.B. 1488 appears unlikely to pass during this legislative session. 
• Vermont: State legislators recently proposed VT S.B. 205 to place a moratorium on AI data center construction until July 2030. Proponents contend that this moratorium will give state regulators time to perform studies on the environmental and economic impacts of data center development. 

3. Tax Incentives Under Scrutiny

The long-standing model of offering tax incentives to attract data center development is also facing significant headwinds in 2026.

• Georgia: GA S.B. 476, which passed the State Senate on February 12, would fund a reduction of Georgia’s state income tax by eliminating nearly all state-sponsored tax credits, effectively precluding the issuance of any new tax credits for data centers. 
• Oklahoma: Legislation has been introduced (OK H.B. 4424) that would end certain tax incentives for data centers not in operation by January 1, 2027. House Speaker Kyle Hilbert has also stated that data centers will be a main focus of the Oklahoma Legislature this year. 
• Indiana: Indiana Governor Mike Braun signed IN H.B. 1210 into law on March 12. This legislation requires data centers receiving state sales tax exemptions to share 1% of those tax savings with local governments. By channeling state tax breaks received by data centers back into local communities, these requirements may alleviate concerns that data center development does not sufficiently benefit local stakeholders.
• Virginia: Virginia’s State Senate has proposed phasing out the state’s data center Sales and Use Tax Exemption beginning January 1, 2027 — eight years ahead of its scheduled expiration — while an alternative State Assembly proposal would preserve the exemption but impose heightened environmental eligibility criteria for data center recipients. The legislature is expected to resolve this dispute in a special budget session beginning April 23.

Key Takeaways

The legal landscape for data centers is rapidly evolving across the United States. Data center operators, developers, and investors should consider the following steps to respond to this increasingly complex regulatory environment.

• Prepare for Cost-Shifting and Special Tariff Requirements: At least 18 states have introduced bills creating special rate classes or infrastructure cost-sharing mandates for large energy users, and operators should assess their exposure accordingly.
• Track Comprehensive Regulatory Proposals: Illinois’ proposed POWER Act, Texas’ S.B. 6, California’s S.B. 886 and S.B. 887, and Oregon’s POWER Act offer potential templates for state regulators interested in addressing affordability and reliability concerns with which developers should become familiar.
• Assess Moratoria and Siting Risks: Proposed construction moratoria in states like New York, South Dakota, Oklahoma, and Vermont could delay projects and warrant early stakeholder engagement.
• Re-Evaluate Tax Incentive Assumptions: Efforts to roll back or restructure tax credits for data centers in states, including recent legislation in Georgia, Oklahoma, Indiana, and Virginia, mean operators should stress-test financial models against incentive loss. ArentFox Schiff has extensive experience advising clients on various states’ tax incentive frameworks.
• Monitor Federal Regulatory Developments: Recent federal regulatory shifts, including the White House Ratepayer Protection Pledge and the Federal Energy Regulatory Commission’s co-location framework, will also shape the data center regulatory landscape. For more information on these shifts, see our recent alert, The Future of Data Center Power: Federal Policy Trends.

If you have any questions, please reach out to your ArentFox Schiff contact or an author of this alert. For more insights, visit our Data Center Legal Solutions webpage.