There’s Money in the Water Technology Market

For investors not intimately involved in the water business it may seem that little ever changes when it comes to water, which remains so cheap in the U.S. that it sometimes gets lost in conversations about cleantech investment.

Two deals last year may signal the end of water’s dormancy. First, United Water announced a $150-million deal to run the municipal water system of Bayonne, NJ, for the next 40 years. And on Christmas Eve, Poseidon Resources LP closed on $922 million in financing with San Diego County to build the largest desalination plant in the Americas.

“We reached a tipping point in 2008 or 2009,” Jeff Fulgham, CSO of Banyan Water, a water efficiency contractor, said at last week’s Cleantech Group conference in San Francisco. “The rising price of water and decreasing cost of conservation technology means there absolutely is real, tangible, bottom line savings” to water conservation. The panel discussion was well-timed, coming during the same week as the UN World Water Day on March 22.

Lots of people are talking about water these days. The Cleantech Group’s panel, called “ROI meets H2O: In Search of Real Value in the Water Technology Market,” attracted heavy hitters including Chris Morrison of Ecolab/Nalco and Bertrand Camus, CEO of United Water.  On February 27, the annual ARPA-E Energy Innovation Summit featured a panel focused on water use in the energy and agriculture sectors that included Carlos Riva, CEO of Poseidon Resources, and Dr. David Jessen, CTO at Chromatin, a biotech firm focused on reducing water use in crops.

The panelists agreed that while opportunities for technological advancement are incremental, opportunities for investment innovation are huge.

“Commercial innovation is maybe more important than technological innovation,” Fulgham said. “You can have a really cool thing but if you don’t have a market, then a lot of good it does you.”

New water deals may take many different forms. One is a new variation of public/private partnerships, in which government teams up with water tech companies and investment firms to leverage the strengths of each. In the Bayonne project, the city brings the infrastructure and the capital budget, United Water brings the water conservation expertise, and KKR brings the risk analysis needed to recruit stable financing from pension funds.

“We operate the system, and bring in the financing to be involved in the long-term,” said Camus of United Water. “We needed partners who were very good at determining risk.”

In other deals, private capital plays an important but more hidden role.

“We arrange for the financing, we deal with the construction risk, and we get paid for the water we produce,” said Riva, who emphasized that the county’s investment-grade credit capacity was another key factor in making the project pencil out. “We think there’s a lot of innovation here, and hopefully it’s something we can replicate.”

Another deal structure is between two private companies, in which they share financing risk and payout returns.

“We’ll put our capital in if you don’t have the capital, or you put your capital in, and whoever puts the bigger share of the money in gets the bigger share of the savings,” Fulgham said.

All three types of deals are likely to become more common in coming years as scarcity exacerbated by climate change, population growth and water-heavy industrial processes begins to create a true market price for water.

“There’s plenty of innovation out there right now; we just don’t have the economics to support it,” Chris Morrison, leader of Nalco’s technology scout team, said at the Cleantech Group Forum. “We’re going to see water going from $2 or $3 per thousand [gallons] to $10, $20, $30 per thousand, and that’s going to drive the innovation.”

Which means that soon, water itself will have a price. We may be in the last days when the primary cost of water was the simple cost to pump it out of the ground, Morrison said. The pressure is especially strong in a place like Toluca, Mexico, south of Mexico City, where a thriving industrial sector with many factories worth between $50 to $150 million apiece face the prospect of shutting down if they can’t find new ways to access more water and conserve the water they already have.

“If I go to a plant manager and say, ‘I can cut your water costs by half,’ but he says his pumping costs are $3,000 a year, well there’s no payback,” Morrison said. “But when he’s talking about shutting down his whole factory … there’s a big payback.”

As a tech scout for a $13.5-billion company, Morrison plays a role similar to that of many venture capitalists, searching for new companies in which to invest to keep earnings growing. Rather, he’s looking for startups that can bring incremental improvements to existing technologies.

“Are we going to see a big revolution where someone comes in and says ‘Here is the new solution for water treatment?’ I would not bet my money on it,” Hervé

Buisson, a vice president of Veolia Water, said at the Greentech Forum. “But even if you don’t have the full solution to a problem, technology can be very good for a company like ours that has a lot of the pieces of the puzzle. Technology bundling or integration of new ideas is the Holy Grail.”

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