The Trouble with Water

Previously posted on Inside Greentech.

There was an active discussion around water at the recent Cleantech Forum in San Francisco. As there always is.

Everyone knows the old joke, applied to just about everything at one time or another, that runs: “hydrogen is the fuel of the future… and always will be,” or “Brazil is the superpower of the future, and always will be.”

Well, I wonder if that applies to water.

Will water always remain the “problem of the future,” and not of the present? Despite the maxim that “water is the next oil,” nobody ever seems to put their money where their mouth is in the water sector.

The basic story goes like this:

  • The water industry is huge, mostly public owned by entities that have no money for the (pick your number of) billions in upgrades needed
  • Population is growing every year
  • Population is increasing most rapidly in driest regions
    Water is cheap, so no one conserves it (think about that statement as an economist and ask yourself if we really have a problem yet)
  • Water is even more important than energy as a “basic right,” so no government will let its population run short.

Therefore, investing in water technology (desalination, membranes, remediation, purification, metering, etc.) to create solutions to the coming problem is a good idea.

But it never happens. The investment community just doesn’t walk the walk when it comes to water. Why is that?

Some thoughts on why:

  • Motivation. The water industry, while huge, is not widely privatized and is very fragmented. It’s not been heavily “technology” driven to date, and has proven to be even more cumbersome than the electric utility market to break new technologies into. Investor owned utilities, which are now a very large portion of the electric and gas utility market, are just a few percentage points of the water market. So very few of the potential customers for technology are big enough and profit driven enough to care.
  • Maturity. The technologies these water companies use is relatively old. Membrane technology used in reverse osmosis and more efficient valves and even smart control systems are not new ideas. And a lot of potential “breakthroughs” have been beat out of the industry already. So unless price radically changes – as in several orders of magnitude, it’s likely that the technology we’ve got is “good enough” or at least hard to beat.
  • Price. Water is cheap (see above). Read: nobody’s bearing any real pain today in most of the industrialized world. I’m not. I don’t even get a water bill. I’ll cut my morning Starbucks before I reduce my water usage. It’s a bigger hit on my pocketbook. In pockets of the market, this may be changing (we do read about water crises in Australia from time to time, ultra clean water needed for semiconductor processes and additional water demand for a particular housing development in Southern California), but it is really hard to get a return on R&D when your customer is measured in “pockets” as opposed to “markets.”
  • Solar, ethanol and carbon. Three years ago, water was the buzz of the venture conferences. Money looked like it might flow. Then the solar and ethanol markets took off, carbon trading got traction and climate change grabbed the headlines and the political mindshare (including mandates, rebates, and subsidies). Water – both the problems and the solutions – fell out of vogue.
  • Size and capital intensity. Like energy projects, water projects are often really big and expensive. Scaling up ALWAYS has more risk than one thinks it does. Like in energy, one just doesn’t invest in a pilot for a new technology lightly. And just because one or two projects with a given technology are running does not a successful launch make. When 30 or 40 are running for 5 to 10 years, then you’ve broken through.

So I guess it remains to be seen if water is the problem of the future – or if it really is the next big thing. And it definitely remains to be seen if anyone can make big money investing in new water technologies and solutions.

Neal Dikeman is a founding partner at Jane Capital Partners LLC, a boutique merchant bank advising strategic investors and startups in cleantech. He is founding contributor of Cleantech Blog and a Contributing Editor to Alt Energy Stocks.

4 replies
  1. adam bronson
    adam bronson says:

    Mr. Dikeman is right about no new technologies having been developed. Reverse osmosis is the same as it always has been. With one exception.The other aspect of new technologies is that energy recovery Inc appears to have a key component to the overall process which reduces RO energy consumption; this is the primary roadblock in RO systems. The one exception mentioned above is a new RO technology which is certainly more nergy efficient, has less components and thus less to go wrong, and remarkably obviates the need for de-scaling of membranes. On top of expense and time, the de-scaling is a chemical process which results in the spent chemicals being thrown out with the waste water. The severity of the problem of scarcity of potable water worldwide is difficult for most reading this to apprehend. We have it in our taps. But the bulk of the world and its inherent ability to develop is retarded by this scarcity. When technology permits an inexpensive plug-and-play system to be deployed, and more gain the privilege of a "tap", the money to be made and the good to be done will be enormous. I am looking forward to seeing this happen in the next two years.

  2. Jason
    Jason says:

    This is excellent insight. It's a topic that I've been following for years and, yes, one has to wonder just how long we can collectively push out the reinvestment in existing infrastructure before it truly fails on an epic and widespread level. Or, maybe we have to wonder: will that day really ever come? I think there is evidence that these infrastructure systems are starting to give way. I followed a story in LA all summer where water lines were rupturing at a rate of about 2 per day (http://www.stepwiseadvisors.com/top-10-infrastructure-fails-in-2009). More recently we saw horrible line failures in Dallas and Jackson, MS. Will there be private money involved in solving these pent up issues? Yes, but I agree with your point that serious returns to those investors will be small. I caught this comment today from an industry exec who echoes the thought that quick money in the water industry is not only fleeting, but also unsustainable for communities (http://bit.ly/4NSvbM). Great post! Thanks for this.

  3. Nic Holmes
    Nic Holmes says:

    I totally agree with the content in both the blog and the responding comments, however, there is one other huge contributing factor in the adoption of water technology and that is the time it takes to 'diffuse technology' in the sector.

    We are talking about up 2.5 times longer than the average and often a 7 year cycle to get into market and profitability; this doesn't match the typical investors ROI model and unfortunately leads to management teams being disbanded, technology losing credibility and the trading company at risk of being liquidated.

    When the above is aligned to the vagaries of selling capital equipment to a sector that is awash with JV's, partnerships and complex vested interests and the fact that water is categorised as a 'human right' it is understandable that this sector promises much and delivers little in terms of adopting new technology quickly.

    The good news is that the engineering consultants, technology owners, project owners and end users all want the same thing, a high quality, low price supply of water that supports the business model that they all work too.

    Unfortunately it is going to take a complete re think on the way that the commercial world funds and delivers a 'human right' to the end user and governing bodies manage the corporates through legislation before the miriad of highly innovative water treatment technologies that exist will be fully.

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