A recent fracas in Tucson, Arizona, underscores increasing concerns about the fast-growing data center sector's impact on essential water and power resources.
The Tucson City Council last month
While the development's initial phase was expected to create 180 full-time jobs and generate about $97 million in tax revenue for Tucson over 10 years, residents raised concerns about the demand the project, reportedly for end user Amazon, would impose on water and electricity.
"As mayor, it's my responsibility to weigh the pros, evaluate everyone's opinion, the risks and benefits for our city and our residents," Mayor Regina Romero said at an Aug. 6 meeting. "Tucsonans have spoken out strongly and clearly, and I hear you."
Data centers, which are proliferating — with 5,426 in the U.S. as of March,
Data centers accounted for 1.9% of annual U.S. electricity consumption in 2018, rose to 4.4% by 2023 and their consumption is forecast to reach between 6.7% and 12% by 2028, according to a
The centers' direct water consumption — primarily associated with cooling infrastructure — grew from 21.2 billion liters in 2014 to 66 billion liters in 2023. Hyperscale data centers alone are expected to consume between 60 billion and 124 billion liters in 2028.
Municipalities and states,
Data Center Watch, a research group that tracks opposition to data centers, said in a
Some governments and public utilities are starting to weigh the impact of the centers' future power and water demand and ways to limit the impact on ratepayers. But future demand can be difficult to predict and not all proposed projects materialize, bringing credit risks like budget uncertainty, experts said.
Prospects for load growth from data centers and beneficial electrification mandates have the potential to expose nonprofit electric utilities to negative credit pressures due to the substantial investment requirements to serve load growth, S&P Global Ratings said in a November 2024 report.
"Stable credit quality will also hinge on rate design that perpetuates sound alignment among revenue, expenses, and debt service," the report said. "Adding data center loads can create exposures to extreme customer concentration and vulnerability to customer departures before the costs of infrastructure investments have been fully recovered."
For investors in bond-issuing utilities, more demand from the data centers marks a positive credit trend, at least in the near-term, said Matt Fabian, partner at Municipal Market Analytics.
But "medium- and longer-term is where you see the risks," Fabian said in an email. "It's hard for a public utility to recoup all the costs related to data center construction," he said, and the power demand may raise the cost of building new assets for other purposes.
"Assuming more data centers keep being built, investors should assume electricity rates continue to rise for all ratepayers, and that governmental costs rise as well," he said.
In Arizona, where the Phoenix area ranks second in North American for data center development, the state's Corporation Commission, which regulates utilities,
"It's important that the commission be proactive in reviewing existing policies and potentially forming new policies to continue to safeguard ratepayers and to ensure that large users — like data centers — shoulder the costs of building new electricity generation and infrastructure that solely benefits a particular business or industry," Commission Chair Kevin Thompson said in a statement.
The potential for nuclear energy to power data centers, which could be another flashpoint for opposition, was included in a
The so-called Project Jupiter, which involves $165 billion of industrial revenue bonds as a way to access tax breaks, was advanced by county commissioners last month, with a final hearing and vote expected Friday.
Data centers are among the most "resource-intensive facilities in modern infrastructure," Moody's Ratings said in a March report on the centers' water management challenges. Hyperscale data centers can consume an average of 2.1 million liters of water a day, comparable to a small city, the rating agency said.
Many data center clusters are located in some of the driest regions in the U.S., including Arizona and California, according to Moody's.
As data center water consumption emerges as a credit risk, water management will become increasingly important to municipalities' and utilities' credit quality, it added.
"Effective water management strategies are crucial to balance the needs of all sectors and ensure sustainable water use," the rating agency said.
Back in Tucson, the city council subsequently
"Any user could come into a parcel that was zoned properly inside the city of Tucson limits and essentially use as much water as they wanted to, and the only thing that would restrict how much they could use was the size of their pipes," Council Member Nikki Lee said ahead of the council's unanimous approval of the regulations on Aug. 19.
Other governments are also starting to incorporate the demand for power and water from data centers into their policy decisions in an effort to protect local ratepayers.
Regulatory boards in California, for example, are requiring separate rate schedules for data centers and some states are assessing whether the developer should build their own infrastructure, said Dan Aschenbach, principal consulting partner at AGVP Advisory, a utility financial and credit risk consulting firm.
But future demand can be tough to predict, leading to risks of budget instability or wasted capital costs for utilities or local and state governments.
"In some cases, demand is not stable, so budgets are hard to estimate," Aschenbach said.
If a data center does not build as expected or, alternatively, the demand for water is greater than expected, it could mean "pitting residential or farmers against large customers," he added.
"A major risk is the potential that the [data center] plans don't materialize or get reduced," Aschenbach said. "This is especially so given the time between commitment and actual construction of infrastructure."
He cited the
"Public finance is littered with such stories," Aschenbach said.
