The rapid growth of global data center infrastructure amid widespread AI adoption is driving huge amounts of drinking water to cool equipment, creating financial, operational, and reputational risks, according to Datacenter Knowledge. Water shortages are growing in key data center markets, according to a Moody’s report.
The consultancy warns of growing risks for AI data centre operators, especially hyperscalers. The report highlights that the cloud giants’ desire to lease new data centres in general could lead to capacity constraints in some markets. Most new large data centres use water-based cooling systems, which are more suitable for larger workloads but require more water. Data centres that fail to install water-efficient cooling systems could face increased scrutiny from regulators and investors.
Groundwater shortages pose a significant risk to hyperscalers’ fast-growing data center locations in the southeastern United States, Chile, and India, Moody’s said. Local regulations, infrastructure constraints, and public discontent could cause hyperscalers to delay projects or move them to other, more business-friendly locations, especially if the barriers drive up prices in existing locations.
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Depending on the climate and infrastructure type, a single hyperscale facility can consume millions of liters of water per day, on par with small cities. While companies have successfully increased their water use efficiency (WUE) to 0.2–0.5 L/kWh, the overall demand for clean water from the data center industry continues to grow due to the rapid growth of hyperscalers and AI infrastructure. IT giants may put their efforts to become water positive on hold.
According to JLL analysts, the most prominent data center players are taking proactive measures to address potential future water and power shortages by choosing suitable sites for construction and using a phased approach to project implementation. The main challenge is maintaining a balance between stated goals and requirements for uptime and profitability.
LCS and adiabatic cooling systems can provide low water consumption, but they carry their own risks and challenges – reliability cannot be sacrificed for sustainability. Experienced operators are looking for compromises, such as hybrid cooling approaches. Others are exploring the use of treated wastewater, modular cooling or closed-loop systems, but these options are often expensive, especially when retrofitting existing facilities with new solutions. However, modern “waterless” technologies are quite risky, as there are no statistics on their use.
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Moreover, in arid regions, data centers increasingly compete for resources with local residents and agricultural businesses. Such competition can lead to stricter regulations, public protests, and project delays. As environmental pressures increase, regulatory scrutiny and reputational risks will increase, which will impact prices.
Investors are increasingly paying attention to such issues, with companies being forced to buy “green bonds,” for example. And municipalities are now requiring water impact assessments before granting building permits. Such measures could become more common as sustainability and reporting criteria become more stringent.
From a credit risk perspective, early upgrades to data center infrastructure are seen as positive and in line with the growing demand from tenants for sustainable solutions. On the contrary, delays in upgrades may signal a lack of investment in adaptation to environmental requirements, which could potentially reduce the operator’s competitiveness.