Gravel2Gavel Construction & Real Estate Law Blog
As demand for data centers continues to accelerate, water availability is emerging as a critical factor in project development and long-term operations. Although power supply and transmission access have historically dominated siting discussions, increasing water constraints in many regions are placing greater focus on the substantial volumes of water required to support data center cooling systems. As we covered previously, data centers are frequently located in areas already experiencing water stress and require substantial volumes of water to operate—roughly 228 billion gallons in 2023 in the United States alone—with water use projected to increase by up to 170% by 2030.
Alternative cooling options, such as free-air cooling or mechanical chillers, can reduce direct water consumption but introduce their own tradeoffs. Free-air cooling is climate-dependent and often ineffective in hotter regions, while mechanical chillers increase energy demand, potentially shifting water consumption upstream through increased electricity generation.
In response, developers are increasingly turning to water reuse, recycling and infrastructure partnership strategies to secure more reliable and sustainable water supplies for large-scale computing infrastructure. In parallel, many major technology companies have adopted broader water sustainability or “water positive” commitments, further accelerating interest in reuse, recycling and alternative water-sourcing strategies for large-scale facilities.
Cooling Technologies and the Tradeoffs Between Water and Energy Efficiency
As developers increasingly evaluate reuse and alternative water sourcing strategies, cooling technologies are also evolving in pursuit of reduced water losses and greater energy efficiency. Reuse-dependent cooling systems also require treatment processes capable of meeting strict water quality thresholds to prevent corrosion, scaling and degradation of sensitive equipment.
Data centers are increasingly adopting closed-loop and liquid-cooling technologies that recirculate water or other cooling fluids through sealed or semi-sealed systems to reduce freshwater withdrawals and improve thermal performance. Microsoft, for example, has developed a next-generation closed-loop liquid cooling design intended to significantly reduce evaporative water loss. Although these systems can substantially reduce ongoing water demand compared to traditional cooling technologies, they may still require periodic replenishment and water quality management to address issues such as scaling, mineralization, corrosion, leakage and other system losses over time. Advances in chip-level cooling may also allow systems to operate at higher temperatures, further improving efficiency and reducing cooling-related resource demands. These systems, however, generally require higher upfront capital investment and tighter integration between hardware and cooling infrastructure, limiting near-term scalability across portions of the existing data center market.
Operators can further reduce water use by shifting toward dry cooling technologies, but doing so generally increases electricity demand, creating tradeoffs that implicate grid capacity, operating costs and indirect water consumption associated with power generation.
Wastewater Reuse: A Patchwork of State-by-State Regulation
As water constraints intensify in many regions, data center developers are increasingly evaluating the use of treated wastewater, recycled water and other alternative water supplies to reduce reliance on potable water sources. Reuse strategies can offer significant operational and sustainability benefits, particularly in water-stressed regions where freshwater availability, drought conditions or competing municipal demands may limit long-term project viability. However, implementing reuse-dependent cooling systems requires developers to navigate a complex and highly fragmented regulatory landscape.
No uniform federal or state-level regulatory regime governs the reuse of treated wastewater for industrial cooling purposes, including data center operations. Although federal agencies have issued nonbinding reuse guidance, most reuse regulation remains governed primarily at the state level. Instead, developers must navigate a patchwork of permitting pathways, treatment standards, engineering requirements and agency approval processes that vary significantly across jurisdictions. For developers operating across multiple states, this lack of regulatory consistency can materially increase project complexity, cost, permitting timelines and execution risk.
A significant driver of these regulatory distinctions is concern regarding aerosolization and public exposure associated with cooling towers and evaporative systems. Because reused water may contain residual pathogens, dissolved solids or other contaminants, regulators often focus heavily on treatment standards, drift control, monitoring requirements and engineering measures designed to minimize airborne exposure risks to workers and surrounding communities.
Certain states, such as California, Florida and Virginia, have comprehensive regulations and guidance governing the use of recycled wastewater for cooling purposes, including treatment standards and administrative requirements intended to protect public health and environmental quality. California specifically regulates recycled water in industrial or commercial cooling and air-conditioning systems, requiring disinfected tertiary recycled water where cooling towers, evaporative condensers, spraying, or misting mechanisms are involved. California also requires drift eliminators and biological-control measures where workers or the public may be exposed. States with prescriptive frameworks like California’s offer developers a more certain compliance roadmap but also limit flexibility and impose potentially burdensome technological and administrative requirements that can increase project costs.
Other states offer more flexible or permit-driven pathways. Oregon, for example, regulates recycled water for industrial cooling through Clean Water Act permitting frameworks and requires a recycled water use plan reviewed by the Department of Environmental Quality. Rather than imposing highly prescriptive standards, Oregon relies heavily on project-specific review of exposure controls, engineering measures and cooling system design. This approach provides greater flexibility for novel cooling technologies but may also require extensive regulator engagement and longer approval timelines.
A third category of states prohibit or sharply limit certain cooling configurations. For instance, Arizona’s reclaimed-water rules prohibit “direct reuse for evaporative cooling or misting,” which may limit certain water-efficient cooling strategies commonly used by data centers. For developers, this may require shifts toward closed-loop or hybrid cooling systems to comply with applicable reuse restrictions.
Finally, some states may allow reuse in practice but lack clear guidance tailored to large-scale industrial facilities such as data centers. In these jurisdictions, regulators may permit reuse through site-specific approvals, amended discharge permits, recycled-water use plans, or case-by-case engineering and monitoring requirements. In these jurisdictions, regulators often apply existing regimes to novel reuse scenarios, creating uncertainty around permitting requirements and approval timelines. The challenge is compounded by the fact that rules are changing in real time, complicating project siting decisions and limiting the scalability of reuse-dependent designs, particularly for developers pursuing multistate deployment strategies.
For example, Texas has crafted general water quality and discharge permitting frameworks that expressly recognize that reclaimed water can be used for cooling tower makeup; however, these regulations are broad and do not specifically address reclaimed water use for large industrial cooling operations such as hyperscale data centers. As a result, developers must often work directly with state environmental agencies to craft permit conditions that fit within existing regulatory frameworks or rely on discretionary permitting authority and case-specific approvals. This process may require negotiation of site-specific treatment standards, monitoring protocols and engineering controls, potentially adding months to project timelines and increasing development uncertainty.
In practical terms, the same data center reuse strategy cannot simply be replicated from one state to another. Project timelines, capital costs, and even fundamental cooling and infrastructure decisions are often shaped as much by the applicable regulatory framework as by engineering considerations. For developers pursuing multistate deployment strategies, each jurisdiction may require independent legal analysis, distinct permitting approaches and tailored engagement with regulators, utilities and local stakeholders. Failure to account for these differences early in the development process can result in stranded design investments, permit delays or denials, and increased project costs.
As a result, evaluating water reuse feasibility requires more than technical analysis alone. Developers must assess legal authority, regulatory appetite, utility capacity, treatment requirements and community acceptance at the outset of project planning. Direct engagement with regulators is often essential, particularly in jurisdictions where formal reuse frameworks remain underdeveloped. For developers seeking to deploy reuse strategies at scale, early legal and regulatory diligence is increasingly becoming a critical component of project viability.
Federal Initiatives: EPA’s Water Reuse Action Plan
EPA’s National Water Reuse Action Plan (WRAP) has, since 2019, served as a federal coordination platform to advance water reuse and improve the sustainability, security, and resilience of U.S. water resources. EPA’s WRAP 2.0, “Multiplying Water Benefits, Maximizing American Prosperity,” was released on April 16, 2026, and signals federal interest in promoting water reuse to facilitate the rapid deployment of data centers nationwide. Consistent with broader federal policy goals tied to advancing AI, WRAP 2.0 emphasizes the need to align water availability with infrastructure growth, and seeks to “ensure that the microchip fabrication facilities and data centers needed to sustain this vision have reliable, affordable water supplies.”
WRAP 2.0 remains a non-regulatory, coordination-focused initiative that includes dozens of active actions and roughly 200 partner organizations. Key initiatives include revising wastewater rules for oil and gas extraction to allow more flexibility for beneficial reuse (such as industrial cooling), developing tools to help stakeholders navigate state-by-state regulatory requirements, and building out data-center-relevant case studies to guide utilities, regulators, and developers. Collectively, these efforts reflect growing federal recognition that water reuse may become an increasingly important component of long-term data center infrastructure planning.
However, WRAP 2.0 does not establish binding federal standards or provide dedicated infrastructure funding. Instead, it functions primarily as a coordination and information-sharing initiative intended to support technical resources, interagency collaboration, and regulatory flexibility. Its release also coincides with broader federal funding uncertainty, including proposals by the Trump administration to significantly reduce water infrastructure spending.
At the same time, water infrastructure constraints are becoming more pronounced in regions experiencing rapid data center growth. In Columbus, Ohio, for example, the local water utility is investing heavily in expanded water supply and treatment capacity to accommodate industrial demand increasing by a projected 120 percent by 2050 in central Ohio. These infrastructure pressures underscore both the growing importance of reuse strategies and the challenges associated with scaling them absent substantial long-term investment.
Federal Legislative Efforts to Incentivize Water Reuse
Federal lawmakers have also begun exploring targeted incentives to encourage industrial-scale water reuse projects, including those supporting data centers and other high-demand facilities. In May 2026, Senators Ben Ray Luján (D-N.M.) and Katie Britt (R-Ala.) introduced the bipartisan “Advancing Water Reuse Act,” alongside companion legislation in the House (H.R. 2940). The proposal would establish a 30 percent federal investment tax credit for qualifying water recycling and reuse infrastructure projects, including systems installed at data centers, manufacturing facilities and municipal treatment operations.
Although the legislation remains pending, it reflects growing bipartisan recognition that water availability may become a material constraint on AI-driven infrastructure growth and advanced manufacturing expansion. If enacted, the legislation could improve the economics of reuse-dependent cooling systems and municipal partnership arrangements by offsetting a portion of the substantial upfront capital costs associated with water treatment, recycling and distribution infrastructure.
Alternative Water Sourcing: Municipal Partnerships and the Expansion of Reclaimed Water Use
One of the most viable and increasingly common water reuse strategies emerging in the data center industry is partnerships with municipal wastewater treatment plants. For instance, Amazon has announced plans to expand its use of recycled water across its U.S. data center portfolio—expanding from 24 locations to more than 120 by 2030—by partnering with wastewater treatment facilities. In these arrangements, treated wastewater that would otherwise be discharged is redirected for use in cooling systems.
Developers are also partnering with municipalities to construct reuse infrastructure tailored to site-specific water quality constraints. In Quincy, Wash., Microsoft and the City of Quincy developed the Quincy Water Reuse Utility after high mineral concentrations in local groundwater increased equipment degradation risks and exceeded the treatment capacity of the municipal facility. The closed-loop system removes dissolved solids from blowdown water, enabling treated wastewater reuse for cooling and reducing potable groundwater consumption by approximately 138 million gallons annually. Municipal wastewater partnerships like these generally benefit from more consistent influent quality and existing treatment infrastructure, making them among the more straightforward reuse arrangements to structure and permit.
While municipal wastewater partnerships represent the most accessible form of water reuse, developers are also exploring arrangements with industrial wastewater treatment plants and remediation-derived water sources. These alternatives, however, are considerably more difficult to structure and permit given the variability and complexity of the underlying waste streams.
Industrial co876location is an emerging reuse strategy in which data centers are located adjacent to industrial facilities, such as manufacturing plants or power stations, and enter into long-term agreements for treated process water. However, variability in wastewater composition often makes these arrangements highly site-specific and may require customized treatment systems tailored to the underlying waste stream. For instance, wastewater from the food and beverage industry typically requires significant biological treatment, whereas semiconductor manufacturing wastewater may present lower total dissolved solids but elevated concentrations of specific minerals requiring targeted treatment processes. Similarly, water derived from environmental remediation efforts—such as groundwater pump-and-treat systems—introduces additional uncertainty due to variable contaminant profiles, including heavy metals, volatile organic compounds, or per- and polyfluoroalkyl substances (PFAS), and differing treatment requirements. These arrangements further raise complex legal and commercial issues, including shared infrastructure agreements, water supply reliability, allocation of environmental liabilities, and long-term operational risk.
In some regions, even more unconventional sources—such as treated produced water from oil and gas operations—are moving from theory toward active engineering and policy evaluation. For instance, as part of a $1 billion investment into data center development, Five Point Infrastructure announced that it is exploring ways to desalinate produced wastewater from Permian Basin oil wells for use as cooling water. If viable at scale, produced water reuse could partially decouple data center development from traditional freshwater constraints, while converting a historically waste byproduct into a usable industrial input.
However, both industrial and produced water reuse models remain highly dependent on site-specific regulatory approval, treatment economics, and long-term supply reliability—factors that must be evaluated early in project structuring. In addition, the use of industrial wastewater and produced water raises complex and unsettled regulatory issues, including treatment standards, discharge permitting under the Clean Water Act, and state-level restrictions on beneficial reuse. The absence of standardized regulatory frameworks creates uncertainty as to whether and how these sources can be reliably permitted for reuse, particularly at the scale required for hyperscale data center operations.
Conclusion
As data center demand continues to expand, water availability is increasingly becoming a defining factor in project siting, infrastructure planning, and long-term operations. Water reuse, recycling and infrastructure colocation strategies are emerging as important tools to address growing supply constraints, reduce reliance on potable water systems and support broader corporate sustainability objectives.
At the same time, the legal and regulatory landscape governing water reuse remains highly fragmented and continues to evolve rapidly across jurisdictions. Differences in permitting frameworks, treatment standards, public-health requirements and agency discretion can materially affect project timelines, capital costs, operational flexibility, and even the feasibility of particular cooling technologies or reuse strategies. As a result, water reuse is no longer solely an engineering or sustainability issue; it is increasingly a core regulatory, infrastructure and project development consideration for large-scale data center projects.
Developers that evaluate water sourcing, reuse feasibility, permitting pathways, infrastructure partnerships and regulatory strategy early in the project lifecycle will be better positioned to manage risk, maintain development timelines and adapt to changing regulatory expectations.
Pillsbury’s Environmental and Data Center teams regularly advise clients on the complex regulatory, permitting, water supply, infrastructure and sustainability issues associated with hyperscale and AI-driven data center development. Our team assists clients in evaluating reuse and alternative water sourcing strategies, negotiating infrastructure and utility arrangements, navigating state and federal permitting requirements, engaging with regulators and policymakers, and structuring development approaches tailored to rapidly evolving water and energy regulatory frameworks. We will continue to monitor developments related to water reuse, cooling technologies and infrastructure regulation affecting data center development nationwide.
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