By RJ Colwell and James Rees
Texas is the epicenter of AI data center development in the U.S. – and water is emerging as a critical variable in project siting, permitting, and long-term operational resilience. This alert examines the scale of data center water demand in Texas, the regulatory developments bringing new transparency to the issue, the legal framework governing water rights and supply, the water stewardship commitments redefining social license for large industrial users, and the technology and investment landscape positioning Texas to lead in water-efficient infrastructure.
The Convergence
Texas has always been where big things get built. The state’s pro-business regulatory environment, abundant land, deep energy expertise, and world-class research institutions made it the capital of the global oil and gas industry. Those same attributes are now making it the default destination for what may be the largest infrastructure buildout of the next decade: artificial intelligence data centers.
But data centers need more than land and power. They need water – large quantities of it – primarily to cool the servers that process AI workloads. A single gigawatt of data center capacity, together with its co-located power generation, requires 10-21 million gallons of water per day. Multi-gigawatt campuses – the scale that hyperscalers like Google, Microsoft, Amazon AWS, and Meta are now planning across Dallas-Fort Worth, San Antonio, and West Texas – multiply that demand. And Texas, for all its advantages, is a state where water has never been taken for granted. The companies and investors who will build most successfully here will treat water not as a constraint to work around but as a strategic asset to plan for from the outset.
The Numbers
The scale of the water question is now well documented. In January 2026, the Houston Advanced Research Center (HARC) published a white paper titled Thirsty Data and the Lone Star State: The Impact of Data Center Growth on Texas’ Water Supply. HARC found that existing data centers in Texas consume an estimated 25 billion gallons of water annually through both direct use (primarily cooling) and indirect use (primarily the water consumed by the power plants that supply their electricity). By 2030, depending on the pace of construction and the cooling technologies adopted, that figure could rise to between 29 billion and 161 billion gallons per year – potentially representing up to 2.7% of total statewide water use.
Those numbers deserve context. At the state level, data center water consumption remains a small fraction of total use. Agriculture, municipal supply, and oil and gas operations are far larger consumers. But data center water use is geographically concentrated – clustered in the Dallas-Fort Worth metroplex, Houston, San Antonio, Austin, and West Texas – and it is growing rapidly in regions that already face competing demands on limited water resources.
Texas faces a projected 290 billion-gallon annual water deficit by 2050, and industrial water demand is expanding roughly three times faster than municipal demand. Against that backdrop, a rapidly growing new category of industrial water user – one that operates around the clock and requires high-reliability supply – demands serious planning.
The Regulatory Landscape
Texas regulators are paying attention, and they are approaching the issue in a pragmatic fashion. In February 2026, the Texas Public Utility Commission (PUC) announced that it would survey data centers and cryptocurrency mining facilities statewide on their water usage this spring. The survey – authorized through a budget rider authored by State Representative Armando Walle – will collect information on direct water use, cooling technology, and indirect water consumption through power generation. Facilities will have six weeks to respond, and the results will be shared with the Texas Water Development Board (TWDB) and the Texas Commission on Environmental Quality (TCEQ) to inform future planning.
Representative Walle described the survey as a “softer approach” – gathering data before legislating. That framing reflects a broader opportunity: Texas can shape how data center water use is managed proactively, rather than reactively. The companies that are already prepared with transparent water data and efficient operations will be best positioned as planning translates into policy.
Separately, TCEQ is drafting permits for commercial-scale produced water treatment and discharge – a regulatory milestone that, if finalized, would unlock one of the largest alternative water supply sources in the state for beneficial reuse in data center cooling, power generation, and agriculture.
For developers and investors, the legal landscape adds complexity that rewards early engagement. Texas water law operates under a bifurcated system. Surface water is governed by the prior appropriation doctrine – essentially, first in time, first in right – and is administered by TCEQ through a permitting process. Groundwater, by contrast, is governed by the Rule of Capture, as modified by local groundwater conservation districts that set their own production limits and permitting requirements.
The specific rules governing groundwater production vary significantly from district to district. Some have adopted regulations that effectively cap large-scale industrial withdrawals; others are more permissive. The landmark Texas Supreme Court decision in Edwards Aquifer Authority v. Day (2012) confirmed that landowners have a constitutionally protected ownership interest in groundwater beneath their property – but also affirmed the state’s authority to regulate production through conservation districts. For a developer evaluating multiple candidate sites, the practical consequence is that water availability is not merely a hydrological question; it is a legal question that turns on the specific rules of the district where the site is located.
Community dynamics matter too. Data centers bring construction jobs, tax revenue, and technology investment. But when a community perceives that a new facility will strain its water supply, support can erode quickly. Proactive engagement and transparent water planning are not just good corporate citizenship; they are a practical component of permitting strategy.
Social License Requires Investment: The Hyperscaler Water Positive Playbook
The world’s largest hyperscalers – Google, Meta, Amazon AWS, and Microsoft – are facing mounting public scrutiny over how much water their data centers and business operations consume. Each has made commitments to become “water positive” by 2030, promising to return more water to local basins than it consumes. Water stewardship is moving quickly from voluntary commitment to operating requirement, and the emerging hyperscaler playbook is likely to set the benchmark against which all large industrial water users in Texas will be measured.
Microsoft has already invested in more than 76 water replenishment projects globally. Google has committed to replenishing 120% of the water it consumes, on average, across its offices and data centers. Amazon AWS prioritizes exhausting on-site efficiency first and then achieving water positivity by returning more water to communities than it uses in direct operations. Meta has committed to restoring 200% of its water consumption in regions where water scarcity is highest.
Each of these programs is designed not just to offset internal consumption, but to build social license – demonstrating to regulators, groundwater conservation districts, and host communities that data center operations will improve, not degrade, local water security.
Those investments are already showing up in Texas watersheds. Google is contributing $2.6 million to Texas Water Trade to create and enhance up to 1,000 acres of wetlands along the Trinity-San Jacinto Estuary, a project expected to return 300 million gallons of freshwater annually to the watershed.
Beyond replenishing water through nature-based projects, the hyperscalers are investing in a parallel portfolio of technology-driven efficiency solutions: data-driven pressure management to reduce non-revenue water losses at utilities (an issue that costs Texas an estimated 88 billion gallons in a single year from aging infrastructure), advanced leak detection, smart irrigation, and real-time pipe network monitoring. Together, these form a replicable blueprint for closing Texas’ water gap at scale.
The common thread is that the investments are not charitable donations. They are strategic, verified, and bankable. Water saved or returned is independently verified against each company’s consumption footprint and credentialed under industry frameworks. Collectively, these commitments are setting a market expectation that any large industrial water user in Texas demonstrate minimal environmental and community impact. Those developers and investors who align early with this expectation will find a smoother path to permitting, financing, and long-term operational stability.
The Solutions Are Here – and They Are Centered in Texas
This is where the story turns from challenge to competitive advantage. Texas is not only consuming water at an industrial scale; it is also home to a growing ecosystem of institutions and companies developing the technologies and strategies to use water more efficiently – and, increasingly, to reduce dependence on freshwater altogether.
Rice University’s WaTER Institute, launched in 2024, leads cutting-edge research at the intersection of water technology, public health, and energy infrastructure. The institute’s work spans destruction of per- and polyfluoroalkyl substances (PFAS, the persistent “forever chemicals” found in many water supplies), advanced membrane technologies for desalination and wastewater reuse, and decentralized water treatment systems that can be deployed at the facility level. These are not theoretical capabilities. They are technologies moving from the laboratory to commercial deployment, with direct applicability to data center and power generation operations.
In September 2025, Rice’s WaTER Institute and Noverram co-hosted the Water Nexus Conference during Houston Energy and Climate Week, bringing together researchers, entrepreneurs, investors, end users, and policymakers. One of the key themes of that gathering was the scale of the infrastructure investment opportunity. McKinsey & Company’s Sarah Brody, who delivered the keynote, pointed to a growing water infrastructure funding gap – projected to reach $195 billion by 2030 – but stressed that nearly half of it could be closed through innovative technologies, capital structuring, and operational efficiency.
The technology options available to data center developers today are real and commercially proven. Closed-loop cooling systems can reduce freshwater consumption by up to 70%. Direct-to-chip cooling – a method that circulates coolant directly across server processors rather than cooling the ambient air – can reduce water use by 20% to 90%, depending on system design and climate, while also lowering facility power requirements. Immersion cooling, which submerges servers in non-conductive fluid, eliminates evaporative water use entirely. And brackish water desalination and treated wastewater reuse can provide alternative supply sources that do not compete with municipal freshwater.
Produced Water: Texas’ Unconventional Competitive Advantage
For oil and gas companies, there is an additional and underappreciated angle: produced water. The Permian Basin alone produces roughly 840 million gallons of water per day – a volume that dwarfs the cooling demand of even the most ambitious data center campuses. That water, historically a waste stream requiring expensive saltwater disposal, is becoming a feedstock. Operators already face rising disposal costs and, in some areas, over-pressured injection capacity that may run out of room entirely by the late 2020s. The economics of treatment and disposal are converging: as disposal costs rise and desalination technology costs decline, the business case for treating produced water to beneficial-reuse specifications is approaching parity – and in some configurations may already pencil out.
The treatment pathway is well understood. Multistage processes – pre-treatment to remove oils, greases, iron, and suspended solids; membrane-based desalination (including osmotically assisted reverse osmosis and vacuum membrane distillation); and post-treatment polishing for residual contaminants like ammonia and boron – can take raw produced water from salinity levels of 130,000 to 150,000 milligrams per liter down to less than 200 milligrams per liter, a specification clean enough for data center cooling, power generation, and agricultural irrigation.
The infrastructure to aggregate that water already exists. Midstream companies have built thousands of miles of gathering pipelines across the Delaware and Midland basins to collect produced water from multiple operators and deliver it to centralized locations – infrastructure originally built for disposal that can be repurposed to feed commercial-scale treatment plants.
If several gigawatts of data center capacity are sited in the Permian, the combined cooling and power generation demand could reach 42 million to 84 million gallons per day – a meaningful fraction of the basin’s produced water output, but well within the available supply. For operators, this transforms a disposal liability into a revenue-generating resource. For data center developers, it provides a non-freshwater supply source with the volume and reliability that large-scale operations require. For the communities and agricultural users that share these basins, it reduces the pressure on limited freshwater aquifers.
Pilot projects are already underway, and early results from agricultural growth studies using treated produced water show that soils and crops respond favorably – opening a pathway to beneficial reuse that extends beyond data centers to food production and environmental restoration. The companies and investors positioned at this intersection of oil and gas water management, desalination technology, and data center infrastructure are sitting on the most compelling convergence opportunity in Texas today.
For developers evaluating alternative water sources – whether produced water, treated municipal wastewater, or brackish groundwater – the regulatory pathway involves additional permitting considerations. The use of reclaimed water for industrial cooling is generally permissible under Texas law, but it requires coordination with the wastewater treatment provider, compliance with TCEQ’s reclaimed water quality standards, and, in some cases, additional discharge permits for blowdown water or other process streams. These requirements are well understood and manageable, but they must be incorporated into the project timeline from the outset rather than addressed as an afterthought.
What Smart Capital Is Doing Now
Understanding the technology is important, but technology alone does not make a project water-resilient. The developers and investors who are getting this right treat water as a planning discipline – integrated into project design, legal structuring, and due diligence from the earliest stages. The goal is not to check an environmental, social, and governance (ESG) box. It is to manage an operational and financial variable that affects site selection, construction timeline, operating cost, and community relations.
In practice, that means conducting water availability and stress assessments as part of site due diligence and structuring water supply agreements with long-term security provisions that account for competing demands. It means evaluating cooling technology choices through a total-cost-of-ownership lens that includes water, not just energy efficiency; engaging with groundwater conservation districts and local water authorities before announcing a project; and building water efficiency commitments into project finance documents and tenant agreements. It also means evaluating produced water supply agreements and desalination partnerships in site selection in basins where that option is available – particularly in West Texas, where the convergence of natural gas supply, produced water volume, land availability, and workforce creates a uniquely favorable development profile.
For investors evaluating data center projects or portfolios, water risk is increasingly a factor in both asset-level underwriting and portfolio-level risk assessment. Projects sited in water-stressed regions without robust supply agreements or efficient cooling technology may face operational constraints, higher long-term costs, or community opposition that delays development. Conversely, projects that demonstrate water resilience – through technology selection, supply diversification, water positive commitments, and proactive community engagement – may command a premium in an increasingly risk-aware capital market.
Scaling water technology solutions comes down to three interdependent factors: the strength of the team, the viability of the technology, and a clear understanding of the market need. All three are present in Texas today – in Houston’s energy corridor, in Rice’s research labs, in the Permian Basin’s produced water infrastructure, and in the growing ecosystem of water technology startups and the investors backing them.
Texas built the modern energy economy. It is now building the AI infrastructure economy. The companies and investors who ensure it also leads in water resilience hold the most durable competitive position – and the legal, strategic, and technological tools to achieve that are available right now. The window to build that advantage is open. It will not stay open indefinitely.
This alert is intended to provide a general overview of the legal, regulatory, and strategic considerations relevant to water management in Texas data center and energy infrastructure projects. It does not constitute legal advice, and the appropriate approach will depend on the specific facts, jurisdiction, and circumstances applicable to each project.
RJ Colwell is a senior associate at Davis Graham & Stubbs LLP in the Energy & Mining Group. He advises energy companies, data center developers, and investors on transactions, regulatory compliance, and project structuring across Texas and beyond. His practice spans energy and water infrastructure transactions, produced and recycled water, and the regulatory pathway for alternative water sources in large-scale energy and data center projects. RJ can be reached at rj.colwell@davisgraham.com.
James Rees is a Director of Noverram, a consulting firm providing strategy and capital advice for water and sustainability-focused companies, and a collaborator with Rice University’s WaTER Institute. Bridging management consulting and financial markets, he advises corporations, investors, and technology companies on strategy, impact projects, and capital structures that turn water resilience into competitive advantage. James can be reached at james@noverram.com.