Water is an object that is self-spawning and cannot be placed. Water appears when a toilet is broken or a shower is active. If water comes into contact with a Power Station then the prison will catch fire.

Water can be found in lakes, however you cannot use them as a water source. It is believed by many people that at some point in the future this will be a possibility. However, it has not been confirmed by the developers. It is useful to note that, at least as of Alpha 33, Prisoners cannot swim on lakes to escape, so they can be used safely as a wall to your prison.