In recent weeks, awareness has grown that water is becoming both a major challenge for data center developers and a major opportunity for water technology companies—suggesting the water theme could emerge as a derivative play on AI and further boost our portfolio performance (up 18% YTD, largely outperforming all water funds/ETFs).
A clear example came in Tucson, Arizona, where local authorities rejected the Amazon-backed Project Blue over high water-use concerns. This highlights how, after electricity demand, water intensity is now emerging as the next major bottleneck for data centers.
At the same time, water technology firms are beginning to spotlight AI as a growth driver. For the first time, Ecolab outlined at its investor day a $5B AI-related market opportunity: ~$3 billion in water circularity for chip manufacturing (see our previous report on ultrapure water for semiconductors) and ~$2 billion in cooling solutions for data centers.
The backdrop is clear: AI is driving a shift to power-hungry “monster chips” that are increasingly difficult to maintain at safe operating temperatures (<80°C). Without efficient cooling, servers risk slowing down or malfunctioning. Efficient cooling in data centers has then become critical, and data center operators are increasingly embracing various water and liquid cooling techniques that are less energy-intensive than air cooling (see our previous reports on data center cooling).
The scale of demand is material. Medium to large data centers can consume up to 5 million gallons per day (~19 million liters)—comparable to the needs of a town of 10,000–50,000 people. Globally, data center water consumption could more than double by 2030, surpassing 1.2 trillion liters annually.
Beyond direct usage, data centers also drive substantial indirect water consumption through electricity generation. Coal and gas plants rely heavily on water for cooling and steam. And with nuclear power around the corner, the situation is likely to worsen as illustrated by the heat waves across Europe that have increased the need for nuclear power plants to be taken offline due to elevated temperatures of cooling water. When faced with high water temperatures and low river flows, nuclear operators have limited options, one of them being a closed-cycle cooling system, which relies less on the external environment.
According to Morgan Stanley, AI-driven data center water use for cooling and power is set to surge 11x between 2024 and 2028. While this may not significantly change global water consumption growth (~5%+ CAGR), the addition of a new demand driver to an already stressed demand/supply environment is likely to exacerbate the looming water crisis, specifically in areas where water resources are scarce.
In response, hyperscalers are shifting from freshwater to wastewater: Amazon and Google now use non-potable water at roughly 20% of their sites. This transition effectively positions data centers as mini water utilities—further purifying treated wastewater for reuse, while retaining the ability to switch to potable supply in emergencies and maintain on-site storage and treatment capacity.
A major opportunity is then opening up to water technology companies such as Ecolab and Xylem whose extensive suite of technologies can accommodate the diverse stages of a water treatment and purification process. Such purification systems may rely a single technology, or a combination of multiple technologies to achieve optimal results, including : carbon filtration (to remove organic material), reverse osmosis (in which water is forced through a semi-permeable membrane in the opposite direction of the natural flow with enough force to exceed the osmotic pressure, rejecting dissolved solids), ion exchange (resins remove ionic impurities from water and are regenerated through a reversible chemical process), or ultraviolet light (contaminants such as bacteria and viruses are exposed to UV light, damaging their DNA and rendering them inactive).
Another opportunity is emerging for water technology providers: water-as-a-service, in which the provider takes responsibility for operation and maintenance of the on-site water treatment system, and that could be well suited to data center on-site recycling initiatives should cloud giants decide to move on closed-loop systems for their water. Interestingly, water-as-a-service entails a business model shift from traditional equipment sales to highly recurring and more profitable usage-based revenue.
In conclusion, with water intensity emerging as the next major bottleneck for data centers, water equipment and technology companies could follow the same path as their power equipment counterparts and enjoy a significant rerating based on an accelerating growth outlook. While (liquid) cooling is the most obvious play on this trend with stocks such as Asia Vital and Delta Electronics, water recycling and treatment stocks could be next on the list.
