This is the 7251st most frequent Russian word.
водяное
A water spirit or mythical creature in Slavic folklore.
In this sentence, "водяное" is used as a noun referring to a mythical water spirit in Russian folklore.
На озере жил водяное, которое всегда сторожило свой дом.
There lived a water spirit by the lake, which always guarded its home.
Here, "водяное" functions as an adjective describing the noun "колесо" (wheel), indicating that it is powered or driven by water.
Старое водяное колесо больше не вращается.
The old water wheel doesn't spin anymore.
In this sentence, "водяное" is an adjective modifying "охлаждение" (cooling), specifying that the cooling is done by means of water.