Liquid data: digitalising the water sector
Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation.
Executive summary: Over a third of the world’s population currently lives under some form of water stress. This figure is only likely to rise given increasing waterdemand. Usage has already expanded sixfold in the last century and could grow by at least 20% more over the next 30 years. The best way to address this supply-demand conundrum is to improve the efficiency of current water supply through more intelligent investment. The digitalisation of the water sector is as inevitable as it is logical. With every Dollar of water investment yielding a return of at least $4 and the industry already achieving around $70bn of annual savings from implementing digital solutions, the direction of travel is clear. Utility spending on digital water solutions is growing at a pace three times faster than average industry expenditure levels. Real world case studies abound and innovation is continuing apace. Consider businesses such as Mueller Water Products, Pentair, Tetra Tech and Xylem for direct exposure to this important theme.
Earth is often referred to as ‘the blue planet.’ Sure, water and ice account for around 80% of the world’s surface area, but 97.5% of this liquid is salty and a further 1.8% of it is frozen at the poles, glaciers or in the form of perma-frost. All life and economic activity therefore relies on less than 1% of the planet’s available water (typically in the form of either surface water or groundwater). There is, arguably, no future trend more important than how to distribute scarce water resources.
Thought of from the perspective of classic economics, water is an externality; it is under-priced relative to its value. As a consequence, it is over-used and under-invested. Similarly, since the social cost of water pollution is rarely paid for by the polluter, this only worsens water scarcity. Solutions are clearly needed. Attempting to reduce water consumption is a lost cause. Decreasing consumption may sound like an appealing idea in principle, but it is hard to enforce, would take time and, most significantly, runs contrary to the deeply entrenched secular trends of population growth, industrialisation and the associated westernisation of diets.
Current global water use is around six times greater than it was a century ago – and is expected to increase by a range of 20-50% by 2050
Current global water use is around six times greater than it was a century ago – and is expected to increase by a range of 20-50% by 2050. During this period, the world’s population is forecast to expand by around 2bn people. Furthermore, with 1.5m people moving on a weekly basis, within this timeframe, 70% of humanity will be living in cities. Urban dwellers consume considerably more water per capita than rural populations (all data from the United Nations).
The above problem is compounded by the fact that, currently, 35% of the world’s population lives under some form of water stress; a function of both increasing water scarcity and global warming (the two are interlinked). By 2025, two-thirds of the people on this planet may find themselves facing water shortages, according to the World Water Federation. If you want to see what water scarcity looks like, then view this alarming visualisation.
By 2035, 2/3 of people on this planet may find themselves facing water shortages
From all the above, it should be evident that the solution lies in improving the efficiency of current water supply. Even today, the total cost of water insecurity to the global economy is estimated at an annual $500bn, including environmental impacts (per the United Nations). The problem is not just a developing world issue. Consider that in the US, a water main breaks every two minutes, totalling 250,000 to 300,000 broken mains per year. The country’s drinking water systems currently lose at least 6bn gallons of treated water per day, equivalent to 2.1tr gallons annually (per the American Society of Civil Engineers). One final crucial statistic: every Dollar invested in water could lead to over a $4 return, improving global GDP by 1.5% by 2030 due to reduced healthcare costs and increased productivity (per the World Health Organisation).
The case for increasing investment in water infrastructure is not new. The OECD forecasts that global water infrastructure financing needs could total $6.7tr by 2030 and $22.6tr by 2050. The term ‘infrastructure’ is, of course, a broad one, encompassing everything from construction, engineering and consulting through to irrigation systems, via pipes, plumbing, pumps and fluid control. What’s new, however, relative to when we first wrote on water over a decade ago is the growing case for digitalising water services and solutions.
Every Dollar invested in water could lead to over a >$4 return, improving global GDP by 1.5% by 2030
Similar to almost every other area of the economy, the digital revolution is opening up new opportunities to make an impact. As we have said elsewhere, technology is an enabler. Think of water-tech as being the tools and systems that can improve the quality and efficiency with which we use water. These applications can sit (not mutually exclusively) within the spaces of consumer technology, industrial technology, monitoring, municipal infrastructure and/or agriculture. Within the water value chain, water technology can impact everything from water supply to environmental services.
The water industry has historically been slow in adopting digital solutions. Purchasing decisions are often characterised by risk aversion. Ultimately, what you do as a utility operator is to treat and clean water and avoid controversy. The pandemic has, however, helped accelerate a change in purchasing behaviour, effectively forcing people to think differently and to make better usage of limited resources, both human capital and actual Dollars. Anecdotally, only when water businesses start implementing technological solutions do the benefits become truly visible, thereby accelerating the process of digital transformation. In numerical terms, Global Water Intelligence (or GWI, a consultancy) estimates that the industry achieves around $70bn of annual savings from implementing digital solutions. It is perhaps no surprise then that over the next five years, water utility spending on digital solutions is forecast to grow at three times the rate of all other areas of industry expenditure, per the same source as above.
Water utility spending on digital solutions is expected to grow 3 times faster than average industry spend over the next five years
So where are these Dollars being spent? The holy grail is a full suite of systems intelligence. Metering and monitoring services can clearly encourage more efficient usage. Such solutions have been available for some time and are now increasingly commoditised. The value-add lies in the analytics. Data analytics can allow for better decision-making. A digital water future would combine artificial intelligence and blockchain: think of immutable, transparent and decentralised records of water usage that permit for the creation of smart contracts and substantially reduce the need for human monitoring. Machine-learning solutions could also allow utilities to better manage extreme weather events such as excess rainfall that leads to floods, as well as wastewater and water leaks.
Even if we are not quite at this vision yet, there are numerous examples available of where businesses/ utilities have begun to deploy digital water solutions with positive benefits. London’s Heathrow Airport estimates that its wastewater pumping energy has been reduced by over 50% annually since it adopted an intelligent monitoring and analytics solution. In Australia, Melbourne Water has started to use artificial intelligence to calibrate the optimal usage of its pumps without the need for human intervention or oversight. The pilot project indicates that savings of more than 20% are achievable. In the US, the Eastern Municipal Water District has said that digital solutions helped boost its workforce efficiency by more than 75% during the pandemic. We were also impressed to learn about the digital platform being pioneered by a US start-up called Aquasight. Via the monitoring of real-time data from sensors, process equipment and water meters, it claims to be able to detect water impurities with a 96% accuracy level.
Case studies show businesses can generate 20%+ cost savings and 75% efficiency improvement from implementing water tech solutions
Even with the large addressable market opportunity – over $830bn is spent each year globally on water opex and capex, per GWI – and even if digital spend in the water space is currently outpacing all other areas, the path to increasing digital adoption is unlikely to be either smooth or linear. Beyond the intransigence of water businesses and utilities (many of the latter, anecdotally, have yet to recruit Chief Technology Officers), changing perceptions also matters. Some in the private sector remain of the opinion that solving water crises is partially the government’s responsibility and that investment should correspondingly be state led. Other concerns cited relate to interoperability issues between different digital systems and the potential for cyberattacks in a highly sensitive space, especially for smaller, less well-resourced utilities. On the positive side, regulation can clearly play an important role. In the US particularly, regulators are increasingly influencing utilities to adopt digital solutions as a way of reducing costs (for both companies and customers) and decreasing water loss.
However, water-tech should not be thought of as a panacea. Indeed, it is one solution amidst many. There is also a compelling logic in recycling wastewater, improving irrigation and agriculture products, developing energy-efficient desalination plants and investing in new water conservation technologies (to name just some of the current leading initiatives). Taking each in turn, many East Asian countries have already begun experimenting with advanced technologies that cleanse wastewater for other uses. This was also a major discussion topic at last year’s World Water Day. Next, with some 70% of the world’s freshwater used for agriculture, improving irrigation would clearly help narrow the gap between water supply and demand. Turning to desalination (the process that takes salts and mineral components away from saline water), while popular in large parts of the Middle East, its main drawback has historically been its high levels of energy intensity. The good news in this respect is that costs are falling and solar may represent part of the solution. It is also encouraging to see research initiatives underway in the area of developing conservation technologies to help manage the drying up of aquifers, particularly in areas with unpredictable rainfall levels.
Water tech adoption will not be linear and represents one solution to water shortage problems amidst many
From an investment perspective, water remains a hot topic. There has been increasing recent M&A activity within the segment, particularly from infrastructure funds and specialist groups looking to consolidate the space. While there are many promising ways of gaining exposure to the theme of water in general or water-tech more specifically, one key challenge relates to the identification of listed pure-play businesses. Many companies operate in dedicated niches (such as Kurita Water Industries or Evoqua Water Technologies) or offer only indirect exposure (Thermo Fisher, for example, is a leader in water analysis instruments such as meters, electrodes and solutions for the measurements of pH, ions, dissolved oxygen and other important elements). From a more digital pure-play perspective, a handful of businesses stand out as potential leaders and/or early movers. These would include Mueller Water Products, Pentair, Tetra Tech and Xylem, listed alphabetically. The latter is the largest (capitalised at ~$20bn) and has, arguably, been pioneering digital solutions earlier than its peers. As Patrick Decker, the company’s Chief Executive, recently said, “the value from advanced analytics continues to grow.” We concur.
Alex Gunz, Fund Manager, Heptagon Capital
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