by Sara Stroud - 2.1.10
While economists, policymakers and media spent much of 2009 discussing theUnited Nations Climate Change Conference in Copenhagen, a different delegation was discussing a threat just as severe to the economy, the environment and human health: water shortages.
The world is on the verge of water bankruptcy, according to the World Economic Forum, which made water the subject of discussion at its 2009 meeting in Davos, Switzerland. Using excessive water to fuel economic growth has created unsustainable regional "water bubbles," which will bring serious political and economic repercussions when they burst, according to the Geneva-based nonprofit.
By 2030, more than one-third of the world’s population will live in severely water-scarce areas if current consumption patterns persist, revealed a 2009 report by McKinsey & Company. But as the threat of water scarcity intensifies, so will the stream of capital flowing to markets and technologies taking on the water challenge—global water sector revenues will total almost $1 trillion by 2020, according to Lux Research.
Utilities, governments and businesses increasingly will need to reduce their water consumption, and in order to do so, they must start measuring their water use. Meeting the world’s future water management needs presents a big opportunity for new and established companies that can help public and private entities do just that.
Skimming the surface
In 2008, water startups received less than 2 percent of total venture funds poured into the cleantech sector, according to research fromCleantech Group. And in 2009, $117 million out of a total of $5.6 billion directed to cleantech companies overall in venture capital was directed to water companies.
Why such low interest in water-saving technologies? One reason is the water sector hasn’t typically rewarded investors, Steve Vassallo, a principal at Menlo Park, Calif.–based Foundation Capital, told Sustainable Industries in mid-2009. This is in part because entrepreneurs with good ideas and business plans often face regulatory hurdles, while the water’s artificially low price dampens investors’ incentive to back water plays.
Trees that once produced avocados now stand bare due to drought.
But despite the slow trickle of venture capital investment into water conservation tools thus far, analysts say the sector will inevitably grow: Increasing pressure caused by water shortages and aging domestic water infrastructure means there’s a solid future for technologies to help conserve the precious liquid.
"Twentieth century water technology can no longer serve 21st century water issues," says David Henderson, managing director of XPV Capital Corp., a Toronto-based venture capital firm focusing solely on water investments. "The only way forward is through technology."
While advanced water treatment technologies have received much of the attention—and investments—thus far, water information technology is a key tool in the effort to cut water consumption. Just as the market for smart grid technologies is expected to continue its sharp upward trajectory, the market for smarter water technologies is also poised to swell, analysts say.
"Managing water-related issues is becoming just as important as managing energy issues," says Laura Shenkar, a principal at The Artemis Project, a San Francisco–based water consultancy.
Water information technology could grow from a $530 million market to a $16..3 billion market over the coming decade, according to a 2009 report by Lux Research.
Tracking water’s path from source to end use, the report examined five segments of the water information technology sector: water mapping, water infrastructure, water quality monitoring, smart meters and smart irrigation. Each segment is essential in providing water utilities with information they need to manage water loss.
Diving in
While this nascent market offers a lot of opportunity for startups with innovative solutions, water information technology’s biggest winners will likely be companies that offer complete water management solutions and systems integrators, the report says.
"It’s an integrated problem and it needs an integrated solution," says Lux Research analyst Heather Landis, who wrote the report.
One such company—and the one making perhaps the biggest splash in water information technology, at least for now—is IBM (NYSE: IBM). The Armonk, N.Y.–based tech giant in 2008 launched its Smarter Water Initiative as part of its $100 million Big Green Innovations program, created to identify and launch new opportunities in the environmental sector.
"Water utilities are transforming … and going the way of the smart grid," says Sharon Nunes, vice president of IBM Big Green Innovations. The water industry is moving toward more data-driven decision-making processes, but someone needs to collect and manage that data, putting it into a format that’s accessible to end users, she says.
IBM’s Strategic Water Information Management system uses sensors to gather and transmit data, and offers modeling, visualizing and analytical tools that aim to help system managers pinpoint trouble spots, ideally maximizing efficiency while minimizing loss.
In November 2009, IBM announced deals with three utilities—one in Australia, one in Japan and the Lower Colorado River Authority. The company has also worked on a water quality management project in Ireland, and its software is being used by the San Francisco Public Utilities Commission to manage 1,000 miles of sewer system and its wastewater treatment facilities.
IBM and other large companies could also make their influence felt through acquisitions and partnerships. Utilities are inclined to work with large and established players, so smaller companies and specialized startups would benefit from partnering with a large-scale integrator with a global reach, according to the Lux report.
For its part, IBM is pursuing acquisitions that strengthen its analytics portfolio, Nunes says. IBM has been acquiring companies that have an informational component: In 2006, IBM bought Massachusetts-based MRO Software, and now uses MRO’s Maximo asset management software for its water management applications.
Another company focused on water information technology at the utility level is Liberty Lake, Wash.–based Itron (Nasdaq: ITRI), which provides advanced metering and meter data management for electric, gas and water utilities.
In mid-2008 the company rolled out Water SaveSource, an advanced metering and monitoring solution. Itron’s technology pinpoints leaks on both sides of the meter, which can collect information continually to create customer usage profiles and help manage conservation programs.
Itron, which reported $1.2 billion in revenues for the first nine months of 2009, has seen a surge in interest in its advanced water metering technology, says Peter Sanburn, senior product marketing analyst for the company. Some of that has been fueled by the American Recovery and Reinvestment Act, he adds, which set aside about $6 billion for drinking water and wastewater infrastructure projects.
Staying afloat
After the stimulus funds dry up, there’s a question of whether utilities will shell out the money for advanced technology, which can be expensive to implement.
But while adopting water information technology can be costly, not implementing it could be even pricier: The U.S Geological Survey estimates that the country’s water distribution systems lose about 1.7 trillion gallons per year, at a cost of $2.6 billion.
The cause? Aging infrastructure, which will likely not be able to keep pace with the country’s water distribution needs. By 2020, the funding shortage for U.S. water infrastructure operation, maintenance and investment could reach $20 billion, according to U.S Environmental Protection Agency. But the agency also points to new technologies and management practices as a way to partially fill that funding gap.
The growth of the ecosystem services market will inevitably place a higher value on water conservation [see "Banking on biodiversity," Sustainable Industries, September 2009]. Water markets will be worth $500 million in 2010, estimates Washington, D.C–based Ecosystem Marketplace. That’s a drop in the bucket compared with the carbon market, which was estimated to be worth $122 billion at the end of 2009, according to research firm New Energy Finance. Yet, just as the early adopters of energy conservation and carbon footprinting are poised to benefit when a federal cap and trade is implemented, so will the early adopters of conservation.
One question for utilities will be whether it will take a crisis, such as drought or contamination, to drive change, which is likely to be the case, some observers say.
"Utilities are conservative, but they have to be conservative," Lux Research’s Landis says. "But the problem [of aging infrastructure] can’t be ignored. We’ll see [water IT] take off when it becomes more pressing."
While IBM and Itron are primarily focusing on utility and municipal customers, there are also opportunities to be had in the private sector, helping corporations measure and reduce their water use. And since industry is in general more automated, with more sophisticated IT already in place, water IT is a natural fit, XPV Capital’s Henderson says.
"The real opportunity for advanced water companies with an IT-intensive product is with enterprise," Shenkar says. Water utilities, which are less able to make rapid changes, are not characteristic of an innovative market, whereas enterprise can make decisions more quickly and scale up, she adds.
One place where Shenkar predicts fierce competition is among enterprise software systems. Enterprise software companies, such asSAP (NYSE: SAP), are turning their focus to carbon management, but there’s likely to be a need to collect and integrate water data into the bigger environmental management picture.
As for what will drive the private sector’s adoption of water IT, corporations are beginning to take notice of water risks, and how water shortages could impact their manufacturing processes or supply chains. Some obvious examples include food and beverage companies, such as Coca-Cola Co. (NYSE: KO), or semiconductor manufacturers, but water concerns are likely to seep into every corner of the marketplace.
"Corporations are paying attention," Henderson says.. "Think about everything we make and where it’s made, and you can see why people get worried."
Investors are starting to think about water, as well. In December 2009, Goldman Sachs, GE (NYSE:GE) and the World Resources Institute launched an initiative to develop a Water Index to measure companies’ water-related risks and inform investment decisions. The initiative is starting with a pilot project to assess the water-related risks of a power plant in China, but is expected to eventually include other industries and regions.
In the meantime, now is a good time to be a company in development, positioned to ride the rising tide of demand for water management, Shenkar says.
"It’s an excellent time to be an entrepreneur in the water industry. It’s an industry in transition," Henderson says. "The change is happening, and it’s becoming a pull rather than a push."