Inside SpaceX's $16.8B Terafab: Why It Runs on Natural Gas, Not the Grid

Once operational, Terafab is expected to produce its own chips for AI and space applications, consolidating logic, memory, and advanced packaging under a single roof .

Power Source: Off the Grid, On Natural Gas

The project's defining feature is its energy independence. "We're bringing our own power," Riley Trettel, SpaceX's director of energy and data center development, said at a public meeting in Grimes County . The company will build natural gas-fired power plants on-site, paired with "very large battery arrays" — likely Tesla Megapacks .

A fully executed tax-abatement agreement with Grimes County states that the facilities "are expected to be powered by electricity generated by on-site power plant(s) and are not expected to use electricity from the grid" .

Why not connect to the grid? Interconnection queues for projects of this scale can stretch for years. Building self-contained power allows SpaceX to move much faster and guarantees reliability independent of grid strain .

Why not Tesla solar panels? Despite Tesla being a co-owner of the project, there is no plan to use Tesla's solar panels in Terafab's power infrastructure . Multiple outlets have characterized this as a pivot away from Musk's earlier public emphasis on solar and battery-only solutions for Earth .

Costs, Incentives, and Local Opposition

Terafab's price tag is enormous, and so are the public incentives:

• Capital investment: $16.8 billion+ for phase one
• Texas Enterprise Fund grant: $30 million from the state
• Grimes County tax abatement: SpaceX secured a tax-reinvestment-zone agreement in June 2026 that includes local property tax breaks . As a condition, SpaceX made a $10 million upfront payment to the county in August 2026
• School district tax breaks: Two rural Texas school districts — Anderson-Shiro CISD and Iola ISD — approved the incentive agreements
• Musk's argument: Musk has said the fab will increase Grimes County's tax revenue by roughly 25% over the long term despite the abatements

The tax incentive package faced "strong local opposition" during approval hearings, with critics arguing the breaks were too generous for a rural county .

Musk's Broader Turn to Natural Gas

Terafab is not an isolated project. It is part of a much larger strategy across Musk's companies:

• xAI's Colossus data centers in Memphis, Tennessee, and along the Tennessee/Mississippi border already rely on dozens of natural gas turbines . In July 2026, xAI received a Clean Air Act permit from Mississippi to install 41 natural gas turbines generating 1.2 GW at a single site
• Gas turbine acquisition: Musk discreetly purchased a ~$1 billion gas turbine company (reportedly through SpaceX) to secure his own supply chain for power infrastructure
• Capacity target: Musk's companies are reportedly targeting 10–15 GW of gas-fired capacity by 2027 to power AI compute clusters
• Solar rhetoric abandoned: Multiple outlets note Musk has moved away from his earlier public emphasis on solar and battery-only solutions for Earth

SpaceX also disclosed that its AI segment, which includes the Colossus data centers, expanded its nameplate compute capacity to 1.4 GW as of Q2 2026, up from 1.0 GW in Q1 . In a regulatory filing, SpaceX noted it "significantly" relies "on natural gas and gas turbine technology to power our data center operations" .

The BYOP Revolution: Why Hyperscalers Are Building Their Own Power Plants

"Bring Your Own Power" (BYOP) — also called behind-the-meter generation — has gone from a niche workaround to a mainstream strategy in under two years .

The core idea: instead of waiting years for utility grid connections, hyperscalers and AI developers build their own dedicated power plants — mostly natural gas — directly on or adjacent to their data center sites .

Scale of the trend: Cleanview's analysis identified 59 behind-the-meter data center projects representing 56 GW of planned capacity . Roughly 30% of all planned U.S. data center capacity is now moving toward self-supplied power, and 90% of that capacity was announced in 2025 alone . At least 82 gas-burning plants are being built or proposed to power data centers nationwide, according to the Environmental Integrity Project .

Why it's happening:

• Grid bottlenecks: Nearly half of all U.S. data centers planned for 2026 have been canceled or delayed, creating a ~7 GW capacity crisis due to interconnection queues
• Speed to market: Building your own gas plant is faster than grid connection in most regions
• Reliability: AI training cannot tolerate interruptions, and self-generation provides full control

Who else is doing it: OpenAI's Stargate project in West Texas is also using gas-fired generation . Amazon, Google, Meta, and Microsoft — despite years of renewable energy commitments — are now betting heavily on natural gas to power their AI ambitions .

Controversies and Risks

The BYOP natural gas boom is not without pushback:

• Emissions backlash: Environmental groups and some local communities oppose gas-fired data centers as a step backward from climate goals. The New York Times described the trend as "A.I. Gas Guzzlers"
• Price volatility risk: A TechCrunch analysis (Aug 2026) warned that hyperscalers "might regret embracing natural gas" if a new forecast of rising gas prices proves correct . Noreva, an energy research firm, projects natural gas prices could triple in some parts of the U.S. as hyperscaler demand collides with declining supply growth and rising LNG exports
• Policy tension: The Trump administration encouraged AI companies to build their own power to avoid straining residential grids — but this has effectively fueled a natural gas plant building boom instead of clean energy
• Regulatory scrutiny: Gas turbine permits (like xAI's 41-unit approval in Mississippi) face growing Clean Air Act scrutiny, though many are being granted . xAI's Colossus data centers in Memphis were ruled by the EPA to have used unpermitted methane gas turbines illegally
• Fast-tracked approvals: Some states, including Texas, Ohio, and Pennsylvania, have created fast lanes for AI-related power projects, allowing approvals in as little as 45 days and bypassing traditional environmental reviews

The Bottom Line

SpaceX's Terafab is a landmark project that crystallizes three major shifts happening simultaneously: the insatiable power demands of AI, the inability of the U.S. grid to keep up, and the fossil-fuel-heavy path hyperscalers are taking to solve the problem. By building its own natural gas plants on a former coal site, SpaceX is not just powering a chip factory — it is building a template for how the next generation of AI infrastructure will be energized.