As the digital economy expands with rapid scaling of artificial intelligence (AI), cloud computing, and digital infrastructure, data center operations are increasingly scrutinized for their environmental impacts. Among the most pressing concerns is water consumption, a resource-intensive aspect of data center operations now drawing attention from state lawmakers, regulators, and environmental stakeholders, particularly in water-scarce regions.
This article highlights how technology companies operating data centers face increasing legal exposure related to water use disclosures, community impact, and environmental compliance, and discusses how the evolving regulatory landscape presents both compliance risks and reputational challenges.
Cooling demands and legal exposure
Data centers require enormous amounts of electricity to power their servers, which in turn generate substantial heat. To prevent overheating and ensure reliable operations, these facilities rely heavily on cooling systems,[1] such as evaporative cooling and wet chillers, which consume large volumes of water. While precise volumes vary, some facilities consume millions of gallons of water daily solely from cooling system operations.[2] In addition, water can be used indirectly through the electricity generation process, specifically when power is sourced from thermoelectric plants that require water for cooling.
Legal risks associated with this water use can arise when:
- Water usage is not disclosed transparently to local authorities and communities.
- Permits and zoning approvals do not account for the full impact of water consumption, withdrawals, and use.
- Environmental impact assessments, with specific consideration of water use, are incomplete or outdated.
Companies operating in jurisdictions with water scarcity face heightened scrutiny from both regulators and community stakeholders.
Increasing state regulation of data center water usage
Data center operators have frequently chosen sites in states like Arizona, California, Virginia, and Texas to benefit from low land costs, tax incentives, and renewable energy access. However, these regions often face water scarcity and competing demands for limited natural resources.[3] In response, several states facing water challenges are now leading efforts to regulate the environmental impact of data centers, placing greater emphasis on water conservation, infrastructure planning, and resource allocations.
Some states are also grappling with unknown water impacts from data center use. This is because many companies consider water usage proprietary information, and local utilities often decline to release customer-specific data. Communities and regulators are therefore limited in their ability to assess the true impact on local water supplies. To address water use transparency issues, several states have considered water use disclosure reporting requirements with site permitting applications.
Arizona
Amid ongoing drought conditions, Arizona regulators are reevaluating water allocations for industrial users, including data centers. In some cases, facilities have been asked to identify alternative water sources or to contribute to local conservation programs. For example, Arizona H.B. 2893 (introduced), if passed would provide for certain revenue generated from tax relief programs to go to water conservation efforts and agricultural irrigation efficiency.
California
To address drought conditions and increasing water demands in California, several bills have been introduced before the state legislature, which would regulate data center operations by focusing on conservation measures. For example, S.B. 58 would provide a “tax credit for data centers that adopt sustainable practices, such as utilizing at least 70 percent carbon-free energy, sourcing 50 percent of their energy supply from behind-the-meter sources, avoiding diesel fuel, and employing water-efficient cooling systems.” The State Water Resources Control Board (SWRCB) and the California Public Utilities Commission (CPUC) are also exploring and implementing rules to manage data center water usage, such as potential bans on using potable water for non-essential tasks like cooling or landscape irrigation, and requirements for water conservation measures within data centers.
Colorado
The Colorado Data Center Development and Grid Modernization Act (S.B. 25-280, introduced) would establish a comprehensive incentive program for data center development, with a strong emphasis on environmental stewardship and infrastructure modernization. If enacted, S.B. 25-280 would create a host of incentives for data center developers and operators who receive certification, including sales and use tax exemptions, utility rate incentives, income tax credits, and reputational enhancements associated with the certification’s environmental stewardship components. The bill requires data center operators seeking certification to commit to significant capital investment, job creation, and robust environmental standards, including water stewardship strategies, energy efficiency certifications, and sourcing at least 50% of energy from renewable or clean sources. Notably, the bill would mandate a detailed infrastructure assessment, including a water resource availability and management plan, a water stewardship strategy, and a renewable energy procurement plan. Environmental permitting would be tightly integrated with utility and local government review, requiring operators to demonstrate compliance with clean energy plans and to engage in community benefit programs. The Act’s tiered certification structure provides long-term tax exemptions and utility incentives but also imposes annual compliance reporting and the risk of benefit revocation for noncompliance, underscoring the importance of proactive environmental planning and stakeholder engagement for data center developers operating in Colorado.
Minnesota
As part of recent reforms to data center permitting and taxation, the Minnesota Legislature recently passed HF 16, establishing new requirements for water appropriation permits for data centers expected to use over 100 million gallons annually. Amendments to Minn. Stat. §§ 103G.271 and 103G.265 authorize the Minnesota Department of Natural Resources (MDNR) to require aquifer testing, ensured protection of public health and water resources, and evaluate water conservation measures before issuing permits. The law also creates a preapplication process allowing proposed data centers to seek MDNR input on water source viability, based on project-specific details such as estimated water use and quality requirements.
Texas
Texas’ rapid expansion of data centers has raised emerging legal and regulatory concerns about water usage, especially as projections from the Houston Advanced Research Center (HARC) finding that data centers can consume 793 gallons of water on average for every megawatt per hour (MWh), resulting in estimated use of 49 billion gallons of water by the end of 2025 and up to 399 billion gallons annually by 2030 or approximately 6.6% of the state’s total water use. To tackle this use, the state passed Senate Bill 7 and House Joint Resolution 7, allocating billions toward water infrastructure and conservation. As agencies like the Texas Commission on Environmental Quality (TCEQ) report widespread drought conditions and usage restrictions, policymakers are facing ongoing pressure to expand regulatory oversight of data center water consumption.
Virginia
Virginia legislators have considered numerous ways to manage data center environmental impacts, including a potential requirement for data centers to disclose projected water usage with their permitting applications, reflecting concerns over water consumption. While the specific bill didn't pass statewide, earlier this year, Virginia’s legislature passed S.B. 1449, which requires companies wanting to build a data center in Virginia to get additional approval from the locality they want to build in, and may necessitate investigation of the effects the proposed data center will have on the water, agriculture, parks, registered historic sites, and the land on which the site would be. Virginia legislators are also continuing to consider whether additional regulation of data centers is needed, with multiple bills pending before the General Assembly. The state is also continuing to consider avenues for increasing transparency on water use and withdrawals.
As regulators address data center water use, a key challenge lies in the trade-off between water and energy consumption across different cooling technologies. For example, air-cooled systems with reduced water use often require significantly more electricity and increase energy consumption, potentially straining local power grids and indirectly increasing water use at power plants. This interdependence complicates efforts to optimize both energy and water efficiency, especially in resource-constrained regions. A narrow regulatory focus on water use alone may unintentionally encourage riskier or less sustainable cooling options. In response, many states are pursuing a more balanced, site-specific approach that considers the full environmental impact of data centers without hindering development.
Municipal, county, and community level oversight
Municipal, county, and community responses to data center developments have grown increasingly critical, particularly in water-scarce regions. Local governments are expanding their oversight by requiring more rigorous scrutiny during the permitting process, often mandating detailed water usage projections, long-term water management plans, and environmental mitigation commitments like water recycling systems or heat reuse strategies. In these regions, public opposition can be strong, driven by concerns over resource depletion and long-term environmental impacts. Data center developers that fail to proactively engage with local permitting processes and community stakeholders risk significant delays, legal challenges, and reputational damage. A poorly executed community engagement strategy—or a lack of one—can derail projects through litigation, permit denials, or costly retroactive compliance measures, making early, transparent coordination with local authorities and stakeholders essential to successful development.
Minimizing legal and reputational risks with stewardship and technological innovations
To navigate increasing legal, regulatory, and stakeholder pressures around water use, the data center industry is adopting a range of innovative strategies to reduce environmental impact while maintaining operational efficiency. Many major tech companies have set ambitious targets to become “water positive” by 2030, committing to replenish more water than they consume, and are actively pursuing practical measures to achieve these goals. While such commitments carry potential legal and reputational risks, especially if perceived as greenwashing, they also provide a valuable opportunity to demonstrate responsible water stewardship. Transparent communication, backed by credible action, is becoming an essential tool for engaging stakeholders and building trust in an era of heightened scrutiny over water use.
Key strategies also include investing in advanced cooling technologies such as closed-loop, immersion, and direct-to-chip systems, which significantly reduce water loss and, in some cases, improve energy efficiency. Companies are also leveraging AI-driven monitoring systems to optimize cooling in real time, helping to balance both water and energy demands. At the same time, developers are incorporating alternative water sources, including recycled, non-potable, or rainwater, into cooling operations where infrastructure and existing water-rights regimes so allow. Siting new facilities in regions with more sustainable water supplies and participating in local water replenishment and conservation projects are increasingly common practices aimed at meeting evolving permitting requirements and community expectations. As legal frameworks become more stringent and stakeholder scrutiny intensifies, early adoption of these technologies, combined with proactive local engagement, is essential to reduce risk, prevent costly delays, and support long-term project success.
Key takeaways for data center operators
Data center operators face increasing regulatory, environmental, and community scrutiny, particularly regarding water use—and should adopt a proactive, informed approach to managing these challenges. To ensure compliance, reduce risk, and maintain stakeholder trust, operators should consider the following:
- Monitor regulatory trends: Stay current on evolving regulatory frameworks and water use policies in all jurisdictions where operations are located, with particular attention to permitting and reporting requirements at the local, county, and state levels.
- Implement risk mitigation strategies: Develop and maintain robust water stewardship plans, incorporating technologies and practices that reduce water consumption and promote sustainable use. These strategies can help minimize environmental impacts and support long-term operational resilience.
- Ensure responsible public messaging: Carefully craft public communications related to site operations to avoid misleading claims and accusations of greenwashing. Clear, transparent messaging is critical to building credibility and minimizing community resistance.
- Engage proactively with regulators and stakeholders: Foster early and ongoing engagement with local, county, municipal, and state regulators, as well as community stakeholders. Proactive collaboration can help address environmental concerns, streamline permitting, and build lasting community support for data center projects.
Through integrating these practices into their planning and operations, data center operators can better navigate legal and reputational risks while positioning themselves as responsible environmental stewards and community partners.
By leveraging a deep understanding of the legal and regulatory landscape governing water use, conservation, and risk management, Nixon Peabody helps clients achieve operational efficiency while minimizing legal and reputational risks. We help secure key permits and negotiate with regulators, utilities, zoning authorities, and community stakeholders to streamline approvals, proactively resolve concerns, and keep your project moving on schedule. Contact us to explore how we can assist your business with responding confidently and effectively to these developments.
- As of 2020, cooling systems were estimated to make up to 43% of total data center electricity usage. Case Study: Water-guzzling data centres, University of Oxford Department of Engineering and Science, 2020.
[back to reference ] - As an example, a mid-sized data center can use about 300,000 gallons of water per day, which is roughly equivalent to the daily water use of 1,000 homes. Data Centers and Groundwater Usage, The Joyce Foundation, August 6, 2024.
[back to reference ] - According to recent analyses, over 40% of planned and existing US data centers are located in areas classified as having “high” or “extremely high” water scarcity. How Data Centers Are Deepening the Water Crisis, Business Insider, June 24, 2025.
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