Extracted from Law360
The race to expand artificial intelligence has become a race for power. Connecting a large new project to the electric grid now takes years.
In the territory of PJM Interconnection LLC — the nation's largest regional grid operator, serving 13 Mid-Atlantic and Midwestern states plus Washington, D.C. — the average wait grew from under two years in 2008 to more than eight years in 2025, according to an analysis by think tank RMI.[1]
Faced with these delays, data center developers have stopped waiting, and have started building their own power plants on site, sometimes with no grid connection at all — a model the industry calls "islanded power."
The examples are growing. Hyperscale AI campuses are already running on turbine fleets exceeding a gigawatt, and Mississippi regulators this spring permitted more than 40 permanent on-site turbines at a single xAI data center site.[2]
Meanwhile, major oil companies have entered the business, announcing islanded plants exceeding 1.5 gigawatts and larger built specifically to serve data centers.[3] Industry analysts project that a substantial share of new data centers will run primarily on on-site power by the end of the decade.[4]
Driven by the current administration's push for domestic AI dominance, the regulatory landscape is shifting to meet these developments. With this backdrop in mind, the U.S. Environmental Protection Agency issued two guidance documents related to powering data centers on July 1 and July 27.
Both are part of a broader push under Executive Order No. 14318 to increase the speed of federal permitting of data center sites.
What Each Guidance Clarifies for Data Center Power
The July 1 Offset Guidance
The July 1 guidance overhauls the process by which a developer can obtain permits. In regions that fail federal air quality standards, known as "nonattainment areas," building a significant new source of air emissions requires offset credits — which are emission reductions from other facilities that cancel out the new project's emissions.
A large fleet of turbines or backup generators can easily cross the threshold for obtaining offset credits, which falls as low as 10 tons per year of pollutants in some areas.
For decades, the EPA's position was that a developer had to locate and obtain those credits before a construction permit could issue. The July 1 guidance flips that sequence.
Permitting agencies may now issue the construction permit first, so long as the permit sets forth two conditions: a binding commitment to obtain the credits before the site begins operations, and a prohibition on operations until the credits are secured.
An EPA representative described the process as allowing companies to "construct their facilities at their own risk."
The guidance also approves of phased projects — on a multibuilding site, each phase can obtain its own credits as it comes online rather than having to obtain credits covering the entire facility up front.
The July 27 Islanded Guidance
The second document addresses the EPA's Acid Rain Program. Added to the Clean Air Act in 1990, the Acid Rain Program requires power plants to hold emissions allowances, meet emission limits and run federally certified monitoring equipment with quarterly reports to the EPA.
The newly released guidance concludes that the requirements of the Acid Rain Program apply only to plants selling electricity to the public over the grid.
According to EPA, an islanded plant that serves a single data center customer and has no physical grid connection is outside the Acid Rain Program entirely. Such plants do not need to obtain an acid rain permit, conduct allowance accounting or complete any federally mandated monitoring and reporting.
Because acid rain allowances themselves cost almost nothing at this point, the real savings here are in the monitoring equipment, plus the ongoing testing, reporting and staffing that go with it. And the exemption is limited to the requirements of the Acid Rain Program.
Islanded plants still need to obtain construction permits and offset credits, still need operating permits and still must meet the emission standards that apply to new turbines. Moreover, if the plant is connected to the grid later, it may be pulled back into the Acid Rain Program.
How This Changes Project Timelines and Practical Considerations
The offset guidance's value is sequencing. Under the old process, no credits meant no permits, and no permits meant no construction.
In markets where credits are scarce, that could mean that a project could sit idle for months or years before beginning construction. The new process allows the construction permit to issue and construction to proceed while developers search for credits in parallel.
That reordering matters because offset markets are thin, and the offset credits are expensive. For example, in Southern California's South Coast Air Quality Management District, credits for emissions traded at an average of $418,000 per ton in 2024.
Historically, uncertainty regarding the timing of offset credit acquisition has delayed permitting. When the credit search is no longer an obstacle for construction, many months can come out of the schedule.
However, this procedural shift fundamentally alters the allocation of capital risk, transferring the primary constraint from regulatory review to project financing.
Under the revised sequence, developers may deploy hundreds of millions of dollars to build a facility without a guarantee of final operational clearance. The question for financial markets, debt underwriters and equity partners will be whether they are willing to accept those risks.
Considerations for developers seeking to capture these benefits include:
- Pacing construction spending against the realistic timeline for locating credits, so capital is not stranded;
- On phased sites, matching credit purchases to construction phases so early buildings can operate while later ones await credits;
- For islanded plants, maintaining the conditions on which the islanded exemption depends — power sold solely to the data center, no physical grid connection, and the ownership and contract structure documented to establish that those requirements are met; and
- Treating credit availability and pricing as a site-selection factor on par with power and water, since the guidance moves the credit problem later in the timeline but does not make credits cheaper or more abundant.
Potential Risks to Data Center Developers
State-Level Pushback
Neither guidance document is binding law. These documents are guidance memoranda, and permits are issued by state and local agencies that could choose to keep doing things the old way.
Whether either guidance has practical effect for a given project depends on whether the specific permitting agency adopts the new approach.
Conflicting Local Rules
In many places, the old sequence requiring a developer to obtain credits before it can be issued a construction permit is written into local rules.
Until those rules are formally revised, the new flexibility is likely unavailable in those areas — ironically, in some of the markets where credits cost the most.
The South Coast Air Quality Management District, for example, generally requires offsets and best available control technology before it will issue a permit to construct. It allows a narrow construct-first path today, but only for short-term credits.
And the acid rain exemption helps less than it looks: The district still runs its own program under Title V of the Clean Air Act Amendments, and its monitoring rule requirements apply to plants outside the Acid Rain Program.
Stranded Capital Risk
Building at your own risk means exactly that. If the required credits never materialize, the developer owns a completed facility it cannot switch on.
Securing financing under these circumstances may require development of additional contingency plans.
Litigation and Regulatory Reversals
The guidance documents and permits issued under the new approach may be targets for legal challenges. The islanded exemption tracks language that has been in place for decades, but the offset guidance reverses a 30-year-old EPA position.
Courts are now tasked with interpreting the statutes for themselves, rather than deferring to agency guidance, increasing the risk that any guidance document will be overturned in court.
The Grid-Tie Clawback
An islanded plant that later connects to the grid may find itself back inside the Acid Rain Program.
Outlook
The EPA has moved repeatedly over the past year to clear Clean Air Act friction from data center access to power. These two guidance documents extend that effort to the offset market and the Acid Rain Program.
Where the benefits land will depend on how quickly states and localities update their own rules, and how limited the local credit market is.
But the message to developers is clear: There is more flexibility to build their own power, on their own schedule, than there was a year ago.
[1] https://rmi.org/resources/pjms-speed-to-power-problem-and-how-to-fix-it/.
[2] https://www.datacenterdynamics.com/en/news/musks-xai-gets-go-ahead-for-41-natural-gas-turbines-in-mississippi-to-power-colossus-data-centers/.
[3] https://www.wired.com/story/chevron-williams-driving-data-center-boom/.
[4] https://www.bloomenergy.com/blog/why-data-centers-are-turning-to-onsite-power/.