When the Well Runs Dry: How Water Scarcity May Limit Data Center Development

Framing the Scale of the Problem 

These facilities require significant volumes of water to cool their processor chips and avoid overheating. Over 97% of water consumed by major data center operators originates from municipal drinking water systems already near capacity. Moreover, approximately 40% of US data centers are located in areas classified as “high” or “extremely high” water scarcity. State and federal regulators are now turning their attention to this issue, creating a rapidly evolving compliance landscape that parallels the energy policy initiatives we previously discussed in our federal policy trends and state-level regulation alerts. 

State-Level Disclosure and Permitting Mandates

States are imposing disclosure, permitting, and conservation requirements on data center water usage. These measures reflect growing concerns that large-scale cooling operations are outpacing available water resources and placing unsustainable demands on municipal systems. 

Some states now require data center developers to demonstrate that local water supplies can accommodate their operations before greenlighting construction projects. Minnesota’s HF-16 imposed new water appropriation permit requirements for facilities expected to consume over 100 million gallons annually. Before issuing permits, developers must coordinate with the state on water supply and closed-loop systems that recycle water for cooling. South Carolina and Kansas have proposed legislation mandating the use of closed-loop systems. As of July 1, Florida will require data centers to obtain permits from the governing board of water management and show that the facility’s proposed use of water is reasonable under the new SB 484 guidelines. Showing a similar concern, Maryland passed SB 116 to require their Department of the Environment to conduct a state-wide data center impact report analyzing environmental and resource impacts, such as water quality.

Taking a different approach, some states are offering tax incentives to data centers that comply with their water conservation regulations. Last year, Kansas enacted SB 98, providing a sales tax exemption to data centers committed to “practices that will conserve, reuse, and replace water.” California introduced a similar bill, SB 58, in January 2025 for data centers that adopt sustainable practices, including employing water-efficient cooling systems. Virginia conditions grant funding to the use of reclaimed wastewater for cooling rather than potable water. See our previous alert for more details. 

Even in the absence of comprehensive state legislation, municipalities in water-scarce regions have taken the initiative to impose their own constraints on data centers. Arizona’s Chandler County has imposed per-square-foot water use caps on data center facilities, and the town of Marana adopted a 2024 ordinance prohibiting the use of municipal potable water for cooling operations. 

The Federal Landscape

While states are at the forefront of data center water regulation, the federal government has also been active. Last year, the White House issued an executive order to balance the economic benefits of rapid data center development against the environmental costs of large-scale water consumption. The order was aimed at accelerating data center permitting, while also directing the US Environmental Protection Agency (EPA) to streamline Clean Water Act and National Environmental Policy Act reviews. As an example, data center facilities near navigable waterways may trigger Clean Water Act Section 404 permitting requirements administered by the Secretary of the Army. However, the EPA reportedly announced last week that it does not plan to set nationwide data center standards, beyond adhering to current regulations, and will instead defer primarily to state regulations. 

More recently, the Congressional Research Service published a report in May examining data center water consumption patterns, identifying regulations, and suggesting potential legislative action. This report may provide a data-driven foundation for future federal legislation on data center water use.

However, the discrepancy between state and federal data center water-use mandates may lead to challenges in enforcement. Data centers located in water-scarce western states, particularly Arizona, California, Colorado, and Nevada may be governed by interstate water distribution services such as the Colorado River Compact. These federal water allocation frameworks may limit the available water supply for industrial users, especially when competing with agricultural, municipal, and environmental claimants for scarce water resources.

Key Takeaways for Data Center Developers and Operators

Considering these state and federal developments, data center developers and operators should consider the following steps to manage water-related regulatory risks. 

Conduct Early-Stage Water Availability Assessments: Before committing to a site, evaluate local water supply constraints, aquifer capacity, and municipal allocation limits to identify potential permitting obstacles.

Consider Water-Saving Technologies: To maximize a data center’s potential to obtain permits and qualify for incentives, and reduce public opposition, data centers should incorporate sustainability features and water-efficient cooling technologies.

Engage Proactively With Local Utilities and Regulators: Initiate pre-application discussions with local water authorities and state environmental agencies to understand disclosure requirements and build cooperative relationships before formal permitting begins.

Operators should evaluate both the origin of the facility’s water supply and the extent to which the cooling arrangement may trigger federal permitting obligations. For example, a data center that directly withdraws surface water for cooling may be subject to Section 316(b) of the Clean Water Act. 

Structure Community Benefit Agreements That Address Water Concerns: Negotiate Community Benefits Agreements (CBAs) that include commitments to local water conservation, infrastructure investment, and transparent usage reporting. Similar to the Ratepayer Protection Pledge’s community investment model, CBAs focus on water resources rather than energy consumption. 

If you have any questions, please reach out to your ArentFox Schiff contact or an author of this alert. For more insights, visit our Data Center Legal Solutions webpage.

Additional research and writing from Isabella Wellinghorst, a 2026 summer associate in ArentFox Schiff’s Washington, DC, office and a law student at American University Washington College of Law.