In short
AI data centers are turning to on-site and behind-the-meter power generation because the electric grid cannot keep up with their demand. Behind the meter means power is produced on the same side of the utility meter as the load, not delivered through the grid. As of early 2026, about 48 GW of proposed AI data center capacity planned to use behind-the-meter generation, up from under 2 GW in late 2024. Distilled / Cleanview This surge raises novel federal and state legal questions, namely who regulates these power arrangements, whether an AI data center can buy power directly from a co located generator, what air permits are required, and what tax credits are available. The Federal Power Act draws a line. The Federal Energy Regulatory Commission (FERC) regulates wholesale sales and transmission, while states regulate retail sales and generation siting. 16 U.S.C. § 824(b) A December 2025 FERC order directed PJM, the nation’s largest grid operator, to rewrite its rules for behind-the-meter generation, and PJM proposed a 50 MW threshold for netting eligibility in early 2026. Law firm analysis, News report, Law firm analysis, PJM compliance filing Meanwhile, Clean Air Act permits for large gas turbines are a frontline issue, and federal clean energy tax credits generally do not apply to natural gas generation.
What is on site and behind-the-meter power generation
On-site generation means power plants built at the same location as the AI data center they serve, rather than relying on electricity delivered from far away over transmission lines. Behind the meter is a narrower term. It describes power delivered on the customer side of the utility meter, so that it never flows out onto the public grid. A project can also be front of the meter but physically on site. That means the generator connects to the grid and the AI data center buys power through a traditional purchase agreement.
The grid interconnection queue is years long in many regions. Transmission buildout is slow, and wholesale power prices are volatile. Developers who need huge blocks of power quickly are increasingly choosing to build their own generation. In early 2025, roughly 33 percent of all planned data center capacity in the United States planned to use behind-the-meter generation, and natural gas fueled 72 percent of those projects. LinkedIn / Cleanview An AlphaStruxure, Schneider Electric, and Data Center Frontier survey of 149 senior data center executives shows that 62 percent of data center operators are exploring on-site power generation, and roughly a third have already started investing in it. Industry survey
How does the Federal Power Act divide authority between FERC and the states
The Federal Power Act splits regulation of the electricity industry into two layers. FERC oversees wholesale sales of electricity in interstate commerce and the transmission grid that moves that power. States, not FERC, regulate retail electricity sales to end users and decide whether a generation plant can be built. This split is in section 201(b) of the Act. 16 U.S.C. § 824
That division is the starting point for any project that generates power on site. Because behind-the-meter power is not sold for resale, it generally falls on the state side of the line, unless the arrangement affects wholesale markets. When it does, FERC may step in under its authority to ensure that wholesale rates and practices are just and reasonable. 16 U.S.C. § 824d The table below shows the basic split.
| FERC regulates | States regulate |
|---|---|
| Wholesale sales of electricity in interstate commerce | Retail sales to end users |
| Transmission of electricity in interstate commerce | Generation siting and construction permits |
| Practices directly affecting wholesale rates, including some behind-the-meter netting rules | Local distribution, metering, and billing |
| Wholesale market design and RTO or ISO rules | Whether a generator can sell directly to a co-located retail customer |
What PURPA adds for on-site generation
The Public Utility Regulatory Policies Act of 1978 (PURPA) created a special category called a qualifying facility, or QF. A small power production QF must be 80 MW or less and must get at least 75 percent of its total energy input from biomass, waste, renewable resources, geothermal resources, or any combination thereof. A cogeneration QF produces electricity and useful thermal energy in sequence. 18 C.F.R. § 292.202
PURPA originally required utilities to buy power from QFs at the utility’s avoided cost. That purchase obligation was largely removed for new QFs in competitive wholesale markets by the Energy Policy Act of 2005. Pub. L. No. 109-58, § 1253 The must-buy obligation remains for QFs 20 MW and smaller unless the utility can show the QF has access to competitive markets.
For a behind-the-meter AI data center, the most important PURPA rule is that a QF cannot make a retail sale of electricity unless the state allows it. FERC is prohibited from authorizing such a sale. 16 U.S.C. § 824a-3 So even if a data center generator qualifies as a QF, selling power directly to the data center requires solving the state-law problem discussed next.
Can a data center buy power directly from a co-located generator
In most states, the local electric utility holds an exclusive franchise to sell electricity at retail within its service area. A co-located generator cannot sell power directly to the data center unless a state-law exception applies or the state changes the rules. Common exceptions include a landlord tenant arrangement where the property owner provides power as part of the lease, or a private wire that is not classified as a public utility. Several states are now considering so-called bring your own generation legislation that would let large customers self supply. As of mid-2026, no BYOG law has taken effect in Pennsylvania, New Jersey, Maryland, or Virginia, though their governors have jointly proposed a BYOG framework to PJM. Law firm analysis of BYOG models across states, Energy regulation analysis of BYOG legal framework, Energy regulation analysis of BYOG legal framework, Analysis of governors’ BYOG proposal to PJM
This is a key threshold question for any behind-the-meter project. A developer who builds a gas plant next to a data center and wires it directly without state permission risks violating state utility law. The project must be structured so that either the utility delivers the power (even if physically on site) or the relationship fits within a recognized exception.
How the December 2025 FERC order reshaped behind-the-meter rules
On December 18, 2025, FERC issued a unanimous order finding that PJM’s existing rules for behind-the-meter generation were unjust and unreasonable. The rules allowed large loads to net their own generation against their measured load and avoid many transmission and capacity charges. The order required PJM to propose new rules within 60 days. Law firm analysis, Law firm analysis, Law firm analysis
PJM filed its proposal on February 23, 2026. The centerpiece is a 50-MW threshold. New loads larger than 50 MW would be ineligible for behind-the-meter netting, which reduces the transmission and capacity charges they pay. Existing behind-the-meter arrangements are grandfathered through the life of the contracts, and a three year transition period applies for putting the threshold in place. Backup generation is excluded from the 50-MW cap. Utility Dive
The order also found PJM’s behind-the-meter generation rules no longer just and reasonable, required their revision, and required PJM to create three new transmission service options, Firm Contract Demand, Non-Firm Contract Demand, and Interim Network Integration Transmission Service. Law firm analysis, Law firm analysis
The order drew sharp reactions. Exelon and American Electric Power argued that colocation arrangements could shift up to $140 million in annual transmission costs to other PJM ratepayers. Introl blog Industrial customers, including large combined heat and power users, objected that the reforms could make hundreds of megawatts of existing behind-the-meter generation uneconomic. Utility Dive
The Amazon-Talen Susquehanna case shows how the regulatory environment changed. Amazon originally paid $650 million to Talen Energy for a 960-MW data center campus adjacent to the 2.5-GW Susquehanna nuclear plant in Pennsylvania, planning a behind-the-meter arrangement. FERC denied the proposed colocation in November 2024. In June 2025, the parties restructured the deal into a front-of-the-meter 17-year, $18 billion power purchase agreement for up to 1,920 MW, flowing through the PJM grid. Power Magazine
Clean Air Act permitting for on-site gas turbines
When an AI data center builds its own combustion turbine or engine generator, it triggers the Clean Air Act’s preconstruction permitting program, New Source Review, or NSR. Title V of the Act also requires a comprehensive operating permit for major sources. A major source is generally one that has the potential to emit 100 tons per year of a regulated air pollutant, or 50 tons per year of nitrogen oxides (NOx) in areas with serious ozone pollution. EPA Title V major source thresholds
A large gas turbine can easily cross those thresholds. That means the project must go through Prevention of Significant Deterioration, or PSD, review if it is in an attainment area. PSD requires the owner to install Best Available Control Technology, or BACT, and to model the air quality impact. In nonattainment areas, the project must meet tighter emission offset requirements.
| Air pollutant | Attainment area major source threshold | Serious ozone nonattainment area |
|---|---|---|
| Criteria pollutant, for example NOx or SO2 | 100 tons per year | 50 tons per year for NOx |
| Single hazardous air pollutant, or HAP | 10 tons per year | 10 tons per year |
| Combined HAPs | 25 tons per year | 25 tons per year |
In December 2025, the EPA launched a Clean Air Act Resource Hub for AI data centers. It collects guidance on how to calculate potential to emit, how to use synthetic minor limits to stay below major source thresholds, and how to interpret the rules for when construction has actually begun. Clean Air Act Resources for Data Centers hub
Some developers are exploring whether smaller, truck mounted turbines can be classified as nonroad engines rather than stationary sources, which would alter the permitting path. The EPA was reportedly considering guidance on this question in early 2026. AWMA
The scale of emissions from these projects is enormous. A WIRED review of air permits for 11 AI data center campuses tied to OpenAI, Meta, Microsoft, and xAI found combined potential emissions exceeding 129 million tons of greenhouse gases per year. WIRED, Pacifico Energy, WIRED, WIRED A single project, the Pacifico Energy GW Ranch in West Texas, received an air permit in January 2026 for up to 7.65 GW of gas turbines and could emit over 33 million tons of greenhouse gases per year. WIRED
Federal investment tax credits for on-site power
A clean electricity investment credit under Internal Revenue Code section 48E can cover up to 30 percent of the qualified cost of a zero-emission generating facility placed in service after December 31, 2024. The 30 percent rate requires satisfying prevailing wage and apprenticeship requirements, unless the facility is under 1 megawatt or its construction began before the date 60 days after the Secretary published guidance on those requirements. Without meeting one of those conditions, the base rate is 6 percent. 26 U.S.C. § 48E Bonus credits of up to 10 percent each are available for meeting domestic content thresholds and for locating in an energy community. IRA Tracker, 26 U.S.C. § 48E, IRS Domestic Content Bonus
Natural gas combustion turbines do not qualify because they emit greenhouse gases. The credit requires zero emissions, unless the facility includes carbon capture and sequestration that meets the statutory standard. Solar arrays, wind turbines, fuel cells, battery storage, and nuclear reactors can qualify.
The One Big Beautiful Bill Act, enacted in July 2025, accelerated deadlines for solar and wind projects. A solar or wind project must begin construction by July 4, 2026 or be placed in service by December 31, 2027 to use section 48E. Energy storage remains eligible through 2033. The Act also added new restrictions tied to foreign entities of concern, or FEOC, and tightened domestic content thresholds, 40 percent before June 16, 2025, 45 percent through 2025, 50 percent in 2026, and 55 percent after 2026. Tax alert, Law firm analysis
How fast the buildout is happening and what real projects look like
Behind-the-meter power for AI data centers is moving from a niche idea to a mainstream build strategy. Global Energy Monitor reported nearly 100 GW of behind-the-meter natural gas power for data centers in the US development pipeline at the start of 2026, up from 4 GW in early 2024. WIRED Planned non-renewable generation additions surged 71 percent from 2025 to 2026, while renewable growth flattened to 2 percent. American Action Forum
Large gas turbines are in short supply. Lead times for new orders from major manufacturers can be 5 to 7 years. Smaller aeroderivative and trailer-mounted units, however, can deploy in months. IEEFA, GE Vernova That reality is pushing some developers toward modular gas engines and staged buildouts.
The table below lists a few representative projects.
| Project | Location | Generation capacity | Fuel | Status |
|---|---|---|---|---|
| Williams / Meta, Socrates Power Generation | New Albany, OH | 400 MW (two 200 MW sites) | Natural gas | Construction since June 2025 |
| IEP Greene County | PA | 944 MW | Natural gas | Turbines secured, target 2029 |
| Pacifico Energy GW Ranch | Fort Stockton, TX | 7.65 GW | Natural gas | Air permit granted Jan 2026 |
| Stargate (OpenAI, Oracle) | TX, NM, OH, WI | 7 GW planned | Gas, engines | Multiple sites under development |
| BorderPlex Project Jupiter | Doña Ana, NM | 2,880 MW | Natural gas | Proposed, facing opposition |
| Crusoe / Microsoft AI factory | Abilene, TX | 900 MW (data center) | Natural gas | Announced March 2026 |
Several large financial commitments show the trend. Williams Companies committed $5.1 billion since 2025 to build modular behind-the-meter gas plants for data centers. Enki AI Brookfield committed up to $5 billion to Bloom Energy to deploy its advanced fuel cell technology for AI data centers. Bloom Energy press release, Bloom Energy announcement
Key takeaways
- The Federal Power Act gives FERC authority over wholesale sales and transmission, and reserves retail sales and generation siting to the states. Every behind-the-meter project must address this split.
- Most states give the incumbent utility an exclusive right to serve retail load within its territory. A direct sale from a co-located generator to a data center usually requires a state-law exception.
- A qualifying facility under PURPA can be a helpful status for renewable on-site generators, but PURPA does not preempt state law restrictions on retail sales.
- FERC’s December 2025 PJM order is reshaping behind-the-meter netting. In PJM, new loads over 50 MW cannot net their own generation to reduce transmission and capacity charges. Existing arrangements are grandfathered only until December 18, 2028.
- Clean Air Act NSR and Title V permits are frontline issues for any on-site gas turbine. A single turbine can trigger major source thresholds, requiring PSD review and BACT.
- Federal tax credits under section 48E offer 30 percent for zero-emission generation placed in service after 2024. Natural gas generation does not qualify. Solar and wind projects face accelerated deadlines under the OBBBA.
- The US pipeline for behind-the-meter gas generation for data centers has exploded to roughly 100 GW, but turbine supply constraints and regulatory uncertainty will determine how much gets built.
Frequently asked questions
Q:What does behind the meter mean in simple terms?
A:It means the generator sits on the same side of the utility meter as the load. The power goes directly to the data center without flowing through the grid. No electricity is sold to the utility.
Q:Can I sell power directly to my AI data center without involving the utility?
A:In most states, the local utility has an exclusive right to sell at retail. Unless a state-law exception applies, such as a private use exception or a landlord exception, a co-located generator generally cannot supply power directly to the co-located load without the franchised utility’s cooperation. Law firm analysis
Q:What is the PJM 50-MW threshold and why does it matter?
A:It is the proposed limit on behind-the-meter netting eligibility filed by PJM in February 2026. A new load larger than 50 MW would not be allowed to net its own generation against the amount of electricity it draws from the grid for purposes of paying transmission and capacity charges. That makes behind-the-meter projects above the threshold more expensive to operate in PJM. Utility Dive
Q:Do I need an air permit for a backup generator at an AI data center?
A:A backup generator that runs only for testing and during outages may have limited annual hours and may not need a major source permit. But a generator that runs as a primary power source most of the year will almost certainly trigger New Source Review and Title V if its potential to emit crosses the major source thresholds. EPA NSR, EPA Title V
Q:What federal tax credits apply to on-site solar or battery storage?
A:Solar arrays and battery storage placed in service after 2024 can qualify for the section 48E investment tax credit. The credit is 30 percent of the qualified cost if prevailing wage and apprenticeship requirements are met. Bonus credits are available for domestic content and energy community location. 26 U.S.C. § 48E
Q:How long does it take to get a large gas turbine right now?
A:Lead times for new orders of large advanced class gas turbines from major manufacturers can be 5 to 7 years. Trailer-mounted gas turbine packages can be onsite within a few months of order in many cases, and small and mid sized turbines are also available. Gas Turbine World
Q:Does FERC regulate a fully islanded AI data center that never connects to the grid?
A:If the data center has no connection to the interstate transmission grid and makes no wholesale sales, FERC’s jurisdiction does not attach. The project would be entirely under state law for permitting and retail sale questions. 16 U.S.C. § 824
Q:What is the difference between a QF and a non-QF behind-the-meter generator?
A:A qualifying facility under PURPA is either a small power production facility (80 MW or less) or a cogenerator. QFs have certain rights to sell power to the utility at avoided cost. Non-QF generators do not have those rights. Both are still subject to state retail-sale restrictions. 16 U.S.C. § 824a-3(a), Law firm analysis
Q:What happens to an existing behind-the-meter project in PJM after the FERC order?
A:Entities with existing behind-the-meter generation contracts in PJM are grandfathered for the remaining term of those contracts. All other current network customers using behind-the-meter generation are allowed a three-year transition period ending December 18, 2028, after which they must comply with the new PJM rules, including the proposed 50 MW netting eligibility limit. Law firm analysis, Law firm analysis
Q:Can an AI data center use on-site nuclear power behind the meter?
A:Yes, in principle. Several companies are developing small modular reactors for data center use, often planned as behind-the-meter or islanded systems. The reactor itself must be licensed by the Nuclear Regulatory Commission, and the arrangement must still comply with state law on retail sales unless the generation is structured as self-supply for the AI data center’s own consumption. Law firm analysis, Law firm analysis
Subscribe to The Compute Law Brief
The Compute Law Brief is a free weekday newsletter on the law of AI infrastructure across tax, real estate, construction, power, and deals. The big US build markets and federal law. Three minutes a morning. No paywall, and no email gate to read the blog. Subscribe if you want it in your inbox.
Junde Liu, JD, LL.M. (Taxation) candidate at UF Law. Originally published on Compute Law Blog. This article is general information and does not constitute legal advice. Reading it does not create an attorney client relationship. The reader should not act on the basis of any content here without first consulting a licensed attorney in the relevant state. Last reviewed for accuracy May 23, 2026.