The data center boom in Texas is colliding with one of the state’s most precious resources: water. Hyperscale and colocation facilities can consume millions of gallons per day for cooling, and as developers race to site new campuses across water-stressed regions, municipalities, groundwater conservation districts, and surface water rights holders are taking a closer look at who holds priority, how much capacity remains, and what new permitting or contractual demands this growth will bring.
With continued population growth in Texas, water supply development has been a critical issue for decades, and Texas has been at the forefront in planning. Planning, however, has not taken into account the rapid rise of data center development and their water needs. A recent study from the University of Texas finds that data center growth could raise water use as much as 9% by 2040. The 90th Texas Legislature, which convenes in January 2027, promises to address a number of water-related issues with respect to data center development – from cooling requirements to reporting requirements.
For landowners, developers, and utilities alike, now is the moment to revisit existing water rights, confirm permit status and priority dates, and assess exposure to future curtailment or regulatory change before the next wave of data center development locks in demand.
Texas is unique in that it has two categories and legal regimes for water – state-owned surface water and privately-owned groundwater.
Surface Water
Surface water is owned by the state, held in trust for the public and is defined to include all “water of the ordinary flow, underflow, and tides of every flowing river, natural stream, and lake, and every bay or arm of the Gulf of Mexico, and storm water, floodwater, and rainwater of ever river, natural stream, canyon, ravine, depression and watershed in the state.” Texas regulates surface water under the prior appropriation doctrine., i.e., whoever obtained the right to use the water first gets priority over those who came later. A permit holder grants the holder a right to use the water (ownership always stays with the State of Texas) for a specific beneficial purpose as a vested property right that can be bought, sold, or leased. Because most surface water in Texas is already allocated to existing right holders, data center developers will more likely need to lease or purchase surface water rights from those holders and should confirm each holder's priority date before relying on that supply.
Groundwater
Groundwater is water percolating beneath the earth’s surface. Texas treats groundwater as real property owned by the landowner and long ago adopted the English common law “rule of capture,” allowing a landowner to pump unlimited groundwater from beneath the land regardless of the impact on a neighbor’s ability to pump water from the neighbor’s land. The rule of capture is limited, however, by Groundwater Conservation Districts (GCD). GCDs are authorized to regulate groundwater production. There are approximately 100 GCDs in Texas, which covers nearly 70% of the state. The areas outside of a GCD allow for mostly unlimited production. Groundwater law has evolved tremendously in Texas in just the last 15 years, in many respects following well-established oil and gas laws. For example, the Texas Supreme Court has ruled that the groundwater estate is the dominant estate so has the implied right to use as much of the surface estate as reasonably necessary to beneficially access, develop and use the groundwater, just like a mineral owner would with the mineral estate. Landowners must be mindful of this if they sell or lease their groundwater rights to a data center developer (or any party for that matter) and should insist on a surface use agreement to limit the groundwater development to certain areas on the surface.
Preparing for What's Coming
As Texas data center development accelerates, both surface water and groundwater rights will face increasing scrutiny and competition. Landowners, developers, and utilities should act now to confirm permit status and priority dates, review existing water rights and surface use agreements, and monitor the 90th Legislature’s anticipated action on cooling and reporting requirements. Early diligence on water availability and regulatory requirements will be critical to securing project viability and avoiding disputes as this next wave of development unfolds.
This is where Gray Reed’s GRIDS capability can help: it brings together Government Relations, Real Estate, Infrastructure, Development and Security to advise data center stakeholders across the full project lifecycle - from early site diligence and water strategy to power, incentives, regulatory engagement and risk management.
About Gray Reed
Gray Reed is a full-service Texas law firm with a comprehensive range of litigation and transactional practices. With more than 160 attorneys, the firm focuses on understanding its clients' businesses and industries to deliver practical, strategic legal solutions for companies and high-net-worth individuals. Through its subsidiary, Gray Reed Advisory Services, the firm also provides strategic business consulting tailored to each client's objectives. Learn more at grayreed.com and grayreedadvisory.com.