Big Tech will only partly dissolve AI water risk

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MELBOURNE, Feb 24 (Reuters Breakingviews) - Barely two weeks into 2026, Nvidia (NVDA.O), opens new tab boss Jensen Huang and Microsoft (MSFT.O), opens new tab President Brad Smith seemed to have jointly defanged one of the biggest threats to the growth of artificial intelligence: water security. The Big Tech heavyweights laid out real and important progress in reducing the amount of H2O that data centres need. Yet they’re only offering a fix for part of the problem.

Powering data centres is thirsty work. AI-driven growth alone could gulp down as much extra H2O a year by 2030 as Americans currently drink, estimates, opens new tab $85 billion hygiene and water treatment specialist Ecolab (ECL.N), opens new tab. Fears over whether that’s sustainable have helped fuel a data centre backlash.

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At the early January Consumer Electronics Show in Las Vegas, Nvidia’s Huang revealed “the miracle” that the company’s new Vera Rubin chip system could be cooled by water at 45 degrees Celsius, rather than the current industry norm of 6 degrees Celsius. The difference is significant because cooling water often means evaporating and therefore wasting much of it.

Investors quickly wiped out $15 billion in market value from five major heating, ventilation and air conditioning companies, including Johnson Controls International (JCI.N), opens new tab and Modine Manufacturing (MOD.N), opens new tab. Huang also said that the water in the newer systems would be inside the compartments holding the chips, rather than being used to cool the air.

That’s where Microsoft’s president picked up a few days later. Smith wrote in a blog post, opens new tab that the $3 trillion behemoth has started constructing data centres that use these same “closed-loop” cooling systems. The liquid runs locally around the semiconductor housing, rather than being used more extensively to cool the ambient air. It can cut water consumption by 90%.

It’s part of wider industry improvement. Take AirTrunk, the Asia-focused Australian operator that Blackstone (BX.N), opens new tab bought from Macquarie (MQG.AX), opens new tab for $16 billion in 2024. One of its Tokyo compounds uses air, instead of water, for cooling. More broadly, the company founded and run by Robin Khuda taps into recycled H2O for 55% of its data centre intake and is building a wastewater treatment facility in Malaysia.

Microsoft also financed a similar plant in Washington state, allowing it to reuse data centre water. And Elon Musk’s xAI paid $80 million to treat and sell water that was contaminated by an old coal-fired power station used by its Memphis AI data centre. Many AI operators also fund projects to bolster regional water availability, from restoring wetlands to helping utilities find and fix leaking pipes.

However, the industry also has a tendency to shoot itself in the foot on this topic. Disclosure is messy, making comparisons hard. A few companies give site-specific water use, while others only aggregate information for their whole portfolio of data centres. Some do neither. They’re also laser-focused on improving water use efficiency of the equipment’s power needs; that’s fine, but lacks context, obscuring the overall impact the rapid growth of data centres brings.

Often, the disclosures are misleading. AirTrunk acknowledges in its sustainability report that 85% of the water that it uses evaporates as it cools. That’s a big problem, as the water effectively disappears from the local ecosystem. Yet Khuda’s firm describes it as being “returned to the environment”. When Breakingviews pointed out the problem, AirTrunk acknowledged the wording needed to change.

In any event, on-site water needs don’t paint the whole picture. First, data centres consume a lot of electricity. That’s still mostly provided by gas and coal, which chug even more water. The Lawrence Berkeley National Laboratory, for example, estimated, opens new tab that U.S. data centres directly consumed around 66 billion litres in 2023, whereas the indirect effect through energy consumption was 800 billion litres. That puts Nvidia’s Vera Rubin claims in context. Huang stated that the new system would cut power needs by 6% – a useful fillip to the bottom line, but not so much for reservoirs.

Second, data centres tend to flock to clusters, like in Arizona, Virginia and Singapore. It just so happens, though, that many of these hubs are also places with chronic water issues. Almost half of data centres are in areas of high or very high water stress, per S&P Global, whether because they’re in arid regions or because the liquid has already been allocated to other users. Some 80% of those sites deal with older cloud-computing workloads, which predate the AI boom, and therefore probably won’t ever be upgraded to the cutting edge closed-loop systems that Huang and Smith talked about.

Some clusters are also home to the plants that make data centre chips. Taiwan’s TSMC (2330.TW), opens new tab, for example, is expanding in Arizona, where Intel (INTC.O), opens new tab also operates. These semiconductor factories require ultra-pure water to clean the chips. Only a small percentage is typically recycled. These so-called fabs can use as much water in a week as a food processing plant gets through in a year, estimates one industry insider.

Meanwhile, climate is making water availability even more unpredictable. Phoenix is heavily dependent on the Colorado River. Its flow has been receding for 20 years and its two main reservoirs are 30% full. One water utility in Melbourne, which experienced a decade-long drought at the start of the century, is assessing applications for 19 data centres that between them would want permits for 20 billion litres a year.

That doesn’t negate the progress that AirTrunk, Amazon.com (AMZN.O), opens new tab, Digital Realty Trust (DLR.N), opens new tab, Alphabet (GOOGL.O), opens new tab, Meta Platforms (META.O), opens new tab, Microsoft, Nvidia and others are making. But solving AI water security requires greater cooperation with authorities and, most importantly, running data centres on water-efficient renewable energy instead of fossil fuels or nuclear energy. Granted, some are already taking steps in the right direction, but there’s a long way to go.

Investors in ventilation companies who were so quickly spooked by Jensen Huang’s CES revelations appear to have worked that out. All five are now trading well above their January nadir. Modine, a more than 100-year-old company once known for making tractor radiators, has soared 83%. That’s as clear a sign as any that Big Tech’s water risks have not yet evaporated.

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Editing by Liam Proud; Production by Aditya Srivastav

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Antony Currie

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Antony Currie joined Breakingviews when it opened its New York bureau in 2005, working there until moving to Melbourne, Australia in late 2020. He has covered everything from the car industry to investment banking, more recently adding sustainable finance and water security to his beats.

He holds a bachelor’s degree in German language and literature and a master’s degree in international relations, both from the University of Bristol.

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