Navigating the new demand: Pricing water for data centers

Understanding data center water demands  

Data centers are exceptionally “thirsty” due to their continuous cooling requirements, which dissipate the substantial heat generated by their servers. While some facilities might have relatively uniform water usage, others exhibit significant peaking factors, with water use tending to spike during warmer months as cooling systems work harder. A single data center can consume as much as one to five million gallons of water per day, equivalent to the daily consumption of a town of 10,000 to 50,000 people. The primary water consumption comes from cooling systems, predominantly evaporative cooling, which is water-intensive. While some data centers are exploring alternative cooling methods and water reuse, the overall demand is projected to continue increasing substantially for the foreseeable future.   

Key considerations for water utilities  

Utilities must balance the economic benefits data centers can bring, such as tax revenue and job creation, with the potential strain on water resources and infrastructure. Critical considerations include: 

• Cost Recovery: Ensuring that the costs associated with serving data centers—including infrastructure expansion, treatment, ongoing operations, and maintenance—are adequately recovered. 
• Equity: Preventing the shifting of costs to existing residential and commercial ratepayers. Utilities may inadvertently subsidize data center growth by shifting costs to other ratepayers. 
• Sustainability: Encouraging water conservation and the use of alternative water sources. 
• Capacity Planning: Proactively modeling future water demand based on anticipated data center development. 

Pricing strategies for data centers  

To address these considerations, utilities have several cost-recovery tools at their disposal, such as system development fees, up-front capital contributions, and customized rate structures. 

New customer, new costs: who should cover the startup tab? System development charges (SDCs)  

System development charges, sometimes referred to as capacity or impact fees, are one-time fees paid by new or expanding customers to recover a fair share of the capacity cost in the existing or future facilities. These charges are typically based on a customer’s expected peak demand and are designed to ensure that growth helps pay for the infrastructure needed to support it. 

Data centers often require substantial new infrastructure—transmission mains, storage tanks, pump stations, or treatment plant upgrades—to connect to the system. These costs are frequently site-specific, meaning they wouldn’t arise “but for” the data center project. One cost recovery strategy is to require the data center customer to fund the up-front capital project costs directly or through a reimbursement agreement.  

When this happens, should you still charge an SDC?  

In many cases, a data center’s contribution to this site-specific investment does not eliminate its use of shared system capacity—such as water treatment, wastewater interceptors, or regional storage. Even when customers fund 100% of the infrastructure needed to connect, they often use and benefit from the broader system capacity.  

In these cases, charging an SDC may still be appropriate. The right approach will vary depending on local SDC methodologies and system characteristics, so long as the assessment policies are flexible enough to accommodate the unique situation. 

Setting SDCs to protect against risk from large, changing customers  

Unlike typical residential or commercial customers, data centers can expand rapidly, scale back operations, or change their demand profile significantly over time. This volatility creates a risk for utilities trying to match infrastructure investment with future revenue. 

To manage this risk, utilities may want to assess SDCs for large, unique customers based on engineering estimates of actual peak demand—rather than relying on standardized methods like meter size or equivalent residential units (ERUs). 

Some best practices include: 

• For larger customers, charge SDCs on a price-per-gallon basis, scaled to the estimated peak day or hour usage of the facility. 
• Use a third-party or utility engineer’s estimate of demand during development review. 
• Include language allowing for “true-ups.” If the facility exceeds its estimated peak demand after a set period (e.g., two to three years), the utility may assess additional SDCs to reflect the actual system impact. 

This approach gives utilities a better toolset to match infrastructure investment with actual usage while ensuring fairness across customer classes. 

Rate structure: flat, discounted, or tiered?  

Once a data center connects to the water utility system and becomes operational, how should data centers be charged on an ongoing basis?  

• Some utilities consider lower volumetric rates for large, flat-load customers. These users can help stabilize system demand and may reduce per-unit costs. However, a data center’s water demand may be more variable than that of a typical large-volume commercial customer, so a customized higher volumetric rate may be appropriate. 
• Others adopt seasonal or peaking-based pricing, particularly when customers impose high demands during peak summer months or specific operating hours. 
• Demand charges or fixed minimums are sometimes introduced, based on committed capacity or historical peak usage. 

There’s no one-size-fits-all answer. Utilities should consider factors like infrastructure cost drivers and the broader pricing philosophy used across their customer classes. 

Planning for change: build in reassessment mechanisms  

Data centers are long-term but dynamic customers. Their demand profile can change substantially, especially as new technologies and cooling methods emerge. Utilities can reduce risk and improve fairness by incorporating periodic reassessments into their pricing frameworks. 

 Options include: 

• Reviewing capacity charges or SDC obligations every three to five years based on actual usage. 
• Revisiting demand-based pricing thresholds as new operational data becomes available. 
• Conducting system-wide cost-of-service studies every three to five years to ensure that user rates and rate structures align with cost.

These strategies help utilities adjust course when initial assumptions don’t hold—protecting system integrity and rate equity. 

Put it in writing: how to lock it all in  

The strategies described above can be implemented in a variety of ways: 

• Negotiated service agreements or memoranda of understanding (MOUs) for individual projects. 
• Development agreements tied to capital contributions and phased buildout. 
• Local ordinances that include flexible SDC methodologies or peaking-based charges. 

Formalizing these mechanisms in advance provides predictability for both the utility and the customer, especially for high-profile projects with significant capital implications. 

Final takeaways: keep it fair, keep it flexible  

Serving data centers presents both an opportunity and a challenge. With the right tools—flexible SDC frameworks, thoughtful rate structures, and proactive reassessment—utilities can recover their costs fairly while supporting economic growth. While there’s no universal pricing formula, building pricing structures that reflect actual usage, system impacts, and long-term risk can position utilities for sustainable success.  

Raftelis works with communities nationwide to design pricing frameworks that balance growth, equity, and cost recovery. Contact Delaney Ridgley at dridgley@raftelis.com or John Mastracchio at jmastracchio@raftelis.com to discuss how your utility can prepare for large-scale customers like data centers.