The bad news from the Colorado River system, a vital source of water for millions of Americans across the Southwest, just keeps coming.

Lakes Powell and Mead, massive reservoirs fed by the river, have hit record lows. If reservoir levels drop much more, Glen Canyon Dam could lose the ability to generate power for millions across the West. In response, the federal government mandated steep water usage cuts in California, Arizona, and Nevada, as states struggle to formulate a plan to save the river.

This situation should worry more than just water managers.

It should draw the attention of the investors, companies, power producers, and policymakers who have tied their futures to the AI data centers making waves across the economy.

Their exposure to water risk is bigger than it looks—and sits outside the building. Our newest research highlights that a data center’s largest water demand isn’t for cooling in the facility; it’s at the power plants supplying it with electricity.

The American West is reckoning with a long-forecast reality, as climate change worsens drought and intensifies stress on water resources. Now, the rapid data center buildout is layering on a new threat in areas where water is already under stress.

And that threat extends well beyond the Colorado River basin states. Huge swaths of the U.S. are currently facing moderate or severe drought , ranging from the East Coast to the Midwest to the Great Plains.

This growing risk requires thoughtful strategies from stakeholders across the economy to safeguard water supplies for communities and businesses alike. Demand for AI and data centers isn’t slowing down. What can change is how these facilities are planned and built without compromising local water supplies. That requires seeing the whole picture, beyond what’s happening at the data centers themselves.

Assessing the Risk Behind Data Centers’ Water Use

Ceres’ analysis zooms in on this overlooked demand across seven states that are home to nearly half of U.S. data centers: Virginia, Texas, California, Illinois, Georgia, Ohio, and Arizona.

We found that data centers in those states depend on about 3.4 trillion gallons of freshwater annually for electricity, making up the majority of the data centers’ overall water use. That’s roughly 12 times the annual water use of Los Angeles, Phoenix, and Washington D.C. combined.

Some 78% of the electricity in those states is produced using water-intensive generation, namely fossil fuels, nuclear, and hydropower. While hydropower returns much of the water it withdraws, water scarcity can impact operations and reliability. Two-thirds of the electricity generated from power plants using water is in areas where demand for water is already close to or exceeds what is available.

Arizona and the Colorado River: A Case Study in Strain

The Colorado River basin offers a stark example. Power plant water use that can be attributed to the demand from data centers in Arizona amounts to an estimated 520 billion gallons per year – roughly five times the annual water consumption of Phoenix. In Arizona, three quarters of the power generation our report analyzed was exposed to both water stress and three months or more of moderate drought conditions in the same year.

That exposes the industry to real risks, especially in a world of more intense drought and growing overall energy demand. In California, for example, low water levels due to drought in 2021 reduced hydropower generation across the state by 48% compared to the average of the previous 10 years. This is a material issue for companies when power supplies and their operations are disrupted because of water shortages.

What Companies, Investors, and Policymakers Can Do

There are important steps to help address this risk.

  • Data center companies should account for the full scope of their water use so stakeholders can help shape responsible development. While major tech companies have launched efforts to reduce their direct water use for cooling, few disclose the water used to generate the power they need.
  • On the energy side, our analysis found that while most power producers see data centers as a primary driver of rising electricity demand, few have considered how this growth exposes them financially to water risks.
  • Investors also need more information. They can call for greater transparency and engage with data center companies and power producers , encouraging them to show how they are factoring local water stress and drought conditions into procurement and siting decisions and using other strategies to mitigate water risk.
  • Policymakers, meanwhile, should require standardized reporting that includes indirect water use and incentivize deployment of wind, solar, and batteries – which do not use much water – to meet demand. Permitting and siting decisions should take into account the water used in power generation.

This hidden water use from power generation deserves more attention as the AI buildout accelerates to unprecedented speeds. No single stakeholder can address it alone, but there are concrete steps each can take to ensure responsible AI development in the U.S., while securing financial returns and business continuity.