Arizona is expected to have to sharply cut the amount of water it draws from the Colorado River, a shift likely to add to the burden of semiconductor factory expansions by TSMC and Intel. Water demand is surging as AI chip production and data centre construction rise at the same time, bringing the U.S. "semiconductor revival" into conflict with water shortages.

On Sept. 11, IT outlet The Verge reported that under a new U.S. government water allocation plan, Arizona must cut at least 760,000 acre-feet of water each year from 2027. That amounts to more than a quarter of the water it currently receives from the Colorado River, leaving Arizona with the biggest burden among the regions subject to cuts.

Arizona is a key hub for U.S. semiconductor manufacturing. TSMC and Intel are expanding advanced chip production facilities on a large scale and are continuing related investment in line with rising demand for AI chips.

The problem is that semiconductor manufacturing is a water-intensive industry. A typical semiconductor plant can use up to 10 million gallons of ultrapure water a day. Producing ultrapure water can require up to 16 million gallons of tap water through processes such as deionisation and reverse osmosis.

TSMC's first Arizona plant uses about 4.75 million gallons of water a day. That is similar to the daily use of more than 14,000 households. TSMC plans to build at least six semiconductor plants in Phoenix and has also received up to $6.6 billion in U.S. government support.

Intel is also expanding its investment in Arizona. Backed by $7.86 billion in U.S. government support, it plans to invest a total of $32 billion in two new plants and expansions of existing facilities. Intel's freshwater withdrawals at its Chandler, Arizona, site in 2025 exceeded 2.7 billion gallons.

Agriculture uses far more water overall. Agriculture accounts for more than 70 percent of water use in Arizona, while industrial water use, including semiconductors, is about 6 percent. But the pace of growth in water demand is emerging as a problem as the semiconductor industry and data centres expand rapidly.

Arizona has suffered drought in the Colorado River basin for more than 25 years. Water shortages have worsened due to drying linked to climate change, long-term overuse and population growth. After interstate talks collapsed, the U.S. Interior Department finalised its own water management plan in August, and downstream areas including Arizona, Nevada and California were included in the cuts.

For the semiconductor industry, a stable water supply is key to running production facilities. TSMC recycles about 65 percent of the water it uses in Arizona and plans to raise the recycling rate to at least 90 percent once a water reclamation facility is completed. Phoenix also says it can respond to short-term supply disruptions by using underground stored water and other sources.

Over the long term, additional infrastructure will be needed, including alternative water sources, pipelines and wells. The resulting cost increases could ultimately affect water bills. Phoenix applies the same water rate system to companies and households, making it difficult for large firms such as TSMC to avoid rising water costs.

The spread of AI is making the situation more complicated. That is because not only advanced semiconductor plants but also chip packaging facilities and data centres are entering Arizona in succession, increasing water demand at the same time. Ultimately, Arizona faces the task of solving both "expanded AI chip production" and "securing limited water resources" at once.

Water resources experts point out that as water shortages worsen, conflicts could also grow over which uses should take priority among agriculture, industry and housing. As large-scale investment continues to revive the U.S. semiconductor supply chain, water, as well as power, is increasingly likely to emerge as core infrastructure that determines the pace of growth in the AI and semiconductor industries.