Colorado's rapid growth as an AI hub faces a critical bottleneck: the state lacks sufficient electrical power and competitive incentives to attract major data center projects, even as water concerns dominate public debate. While data centers do consume water for cooling, energy availability is the real limiting factor preventing Colorado from capturing a larger share of the booming AI infrastructure market .

Why Is Energy, Not Water, the Real Constraint for Colorado's AI Future?

Colorado sits in an unusual position. The state is home to eight data center development companies, yet none of them are building projects within Colorado's borders. Instead, they are investing in other states, particularly Texas, where abundant power capacity and favorable regulatory frameworks make development faster and cheaper .

The numbers tell a striking story about the scale of the energy challenge. Data centers could consume up to 20% of Colorado's total electricity supply if the market grows rapidly, according to state officials. By contrast, data centers would use only about 0.1%, or one-tenth of one percent, of the state's consumptive water . This massive disparity explains why energy policy matters far more than water policy for attracting AI infrastructure.

"I think it makes sense to look at the numbers in order of magnitude. The energy use from AI is a meaningful share, and it's going to be a significant share of the overall electric demand in the state. The water use is not," said Will Toor, Director of the Colorado Energy Office.

Will Toor, Director, Colorado Energy Office

To illustrate the water concern in perspective, Western Resource Advocates, a nonprofit environmental law and policy organization, modeled data center water use across the western United States. Their projections suggest that within 10 years, Colorado data centers might consume about 6,000 acre-feet of water annually. An acre-foot equals approximately 326,000 gallons, enough to fill an eight-lane swimming pool. However, Colorado currently uses about 6 million acre-feet per year for all consumptive purposes, making data center water use a negligible fraction of total demand .

What Competitive Advantages Are Other States Offering That Colorado Lacks?

Texas has emerged as the dominant hub for AI data center development, with the Dallas-Fort Worth region alone hosting 141 of the state's 279 operational data centers. In comparison, Denver and the Front Range have between 40 and 50 data centers combined . The difference comes down to incentives and infrastructure readiness.

Thirty-seven states currently offer tax breaks or other incentives to attract data center projects. Colorado is not one of them. This absence of competitive incentives, combined with slower permitting processes and limited available power capacity, makes the state less attractive to developers shopping their projects across multiple locations .

"There's just a huge amount of uncertainty, and this is a lot of what our Public Utilities Commission has been grappling with for the last couple of years in Colorado, trying to understand the scale of build that will actually come from data centers," explained Will Toor.

Will Toor, Director, Colorado Energy Office

Developers typically submit multiple project requests across different states to lock in land and power deals, securing future site amenities wherever conditions prove most favorable. Without competitive tax incentives or a clear path to rapid power connections, Colorado loses out in this competition.

How Can Colorado Compete for AI Data Center Investment?

• Offer Tax Incentives: Pass legislation like House Bill 26-1030, which would provide tax breaks to attract large data center facilities and make Colorado competitive with the 37 states already offering such incentives.
• Streamline Power Access: Develop clear regulatory frameworks that allow data centers to connect to the electrical grid quickly and reliably, reducing the time and uncertainty of project development.
• Balance Environmental Goals: Implement renewable energy requirements, such as those proposed in Senate Bill 26-102, which would mandate that data centers use electricity from new renewable sources like solar, wind, and geothermal power rather than existing grid supply.
• Coordinate Economic and Energy Strategy: Align Colorado's economic development, energy, and water strategies to ensure data center growth supports rather than undermines the state's climate goals and infrastructure capacity.

At the state Capitol, lawmakers are currently weighing two competing proposals. House Bill 26-1030 would offer tax breaks to attract large facilities, while Senate Bill 26-102 would require data centers to use electricity exclusively from new renewable energy sources, including solar, wind, geothermal, biomass, and limited small hydro. A Colorado coalition of data center developers and operators is urging lawmakers to pass the tax incentive bill, calling the renewable energy requirement a major obstacle to investment .

Proponents of the renewable energy bill insist they do not want to ban data centers. Rather, they want to ensure that rapid data center growth does not slow Colorado's progress toward its carbon reduction goals. The tension between economic development and environmental protection reflects a broader challenge facing the state .

What Role Does Water Efficiency Play in Data Center Development?

While water is not the primary constraint, it remains an important consideration, especially in a region facing chronic water scarcity due to climate change. Many companies, including Microsoft, are transitioning toward "zero-water" cooling techniques that use closed-loop systems and engineered fluids, reducing reliance on local water supplies .

"These data center projects present new and complex issues that argue for better alignment between Colorado's economic development, energy, and water strategies, particularly given the obvious impacts of water scarcity in our region driven by climate change," stated Alan Salazar, CEO and Manager of Denver Water.

Alan Salazar, CEO and Manager, Denver Water

Denver Water and other local utilities are working to assess the potential impacts of data centers on water infrastructure and community supply. However, experts emphasize that poor siting of data centers can affect local water supplies even if statewide consumption remains low. The focus should be on efficiency and strategic placement rather than blanket restrictions .

Denver Mayor Mike Johnston has positioned the city as a hub for AI-driven innovation, viewing data center development as a way to generate revenue and fund needed services. However, the City of Denver recently advanced legislation that would halt all new data center construction for up to a year beginning May 21, giving officials time to develop "thoughtful regulations" that address community safety and equity .

The path forward for Colorado requires balancing competing interests. Energy availability and competitive incentives are essential to attracting data center investment and the jobs and tax revenue that come with it. At the same time, the state must ensure that rapid growth does not compromise its climate goals or strain local water and power infrastructure. The decisions lawmakers make in the coming months will determine whether Colorado becomes a major player in the AI infrastructure boom or continues to watch opportunities migrate to more competitive states.