EPA rule change complicates xAI data centre expansion plans

Elon Musk’s artificial intelligence startup xAI faces tighter regulatory hurdles in building future data centres after the U.S. Environmental Protection Agency moved to close a loophole that previously allowed the company to bypass air-pollution permitting requirements.

Under an updated rule issued this week, companies must now obtain Clean Air Act permits to operate natural gas-fired turbines used to power large facilities. The EPA clarified that such turbines can no longer be classified as temporary “non-road engines,” a designation that had enabled xAI to rapidly power up its first major data centre in Memphis, Tennessee.

At its Colossus facility, which opened in 2024, xAI relied on a cluster of trailer-mounted gas turbines to create a dedicated power source for AI training and inference. The approach allowed the company to begin operations without the public consultation and environmental review typically required for stationary power installations.

The new EPA guidance states that companies must assess cumulative emissions from turbines and secure permits if pollution levels exceed federally defined thresholds for major sources.

Local authorities in Shelby County had previously allowed xAI to treat the turbines as non-road engines, clearing the way for their use without a standard permitting process. Representatives from the county health department and xAI did not respond to requests for comment.

The regulatory shift could slow xAI’s expansion in the Memphis region as the company builds out energy-intensive facilities packed with advanced graphics processing units from Nvidia to support its Grok artificial intelligence models, which compete with systems developed by OpenAI and Google.

Environmental concerns have already drawn scrutiny. Researchers at the University of Tennessee found that emissions from xAI’s turbines contributed to local air-quality deterioration. Residents of Boxtown, a predominantly Black neighbourhood in South Memphis, reported increased smog and health concerns linked to the facility.

xAI had previously told regulators that its turbines would be fitted with advanced pollution-control systems. However, its energy supplier later said such controls were not installed on the units classified as temporary.

Environmental groups, including the NAACP, have criticised the permitting process and said they are closely monitoring xAI’s operations to ensure compliance with federal rules, particularly as the company considers additional facilities in nearby states.

The EPA rule update comes as data-centre power demand surges nationwide, prompting closer scrutiny of how fast-growing AI firms source electricity and manage environmental impacts.