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Desalination: Poised for 'internet scale' growth

First published in Cleantech magazine, Volume 6 Issue 6. Copyright Cleantech Investor Ltd

By Anne McIvor

Desalination is experiencing rapid growth, with a 57% increase in installed capacity over five years according to International Desalination Association (IDA) and Global Water Intelligence (GWI) figures. This growth, to 78.4 million m3/d compared to 47.6 million m3/d at the end of 2008, is being driven in large part by technology improvements. According to a major report published by investment bank GP Bullhound in 2012, the desalination industry delivers 66 million cubic metres of water daily, and this volume is expected to double over the next four years. The report’s author, Andre Shortell, argues that:

“Desalination has become a global industry that is now mainstream and self-sustaining, spawning new opportunities.”

With the water needs of the word doubling and populations tending to move to locations where there is no fresh water, Shortell argues that there is little alternative to desalination. He points out, however, that “desalination is not a sole solution - it's part of a mix: and the mix depends upon where you are in the world".

Desalination patent applications and general water patent applications worldwide

 Source: Marks & Clerk

The use of reverse osmosis (RO) technology in desalination is well established. However, the uses of RO have expanded, according to the report, to “almost all sources and uses of water”. The energy costs of RO desalination technology have fallen by around 80% over ten years in what Shortell describes as a “disruptive change”. He adds that “there’s more to come”: Shortell foresees that desalination could be “the next boom – on a par with internet growth rates especially as costs come in line with acceptable pricing and applications grow”.

“Disruptive technological events” identified in the report include advances in both membrane technology and in energy recovery devices. Shortell concludes that “the race to reduce energy in desalination has largely been run. Best-in-class plants are running at 65% efficiency and there are unlikely to be major leaps ahead but incremental gains.” However, this cost reduction, he argues, is the key to the industry going mainstream.

Further incremental cost reductions for RO could yield another 20% in the next five years, according to GP Bullhound. However, attention in future is expected to focus on “the capital costs, plant efficiency and plant uptime”. Longer term, “potentially greater cost reductions again coming from membrane” are anticipated. As Shortell comments, “membranes allow you to ‘design’ water”. He observes that there is a large replacement market for membranes, which could be interesting for investors. He points out that membranes are “standardised (eight-inch elements) regardless of whether they are installed in large or small plants, and hence offer scalability. They also offer room for constant upgrades in performance.” As GP Bullhound points out, membranes cost “between $300-600 a set” and large plants contain “20,000 to 40,000 membrane sets” – which clearly “represents a fast growing market.”

“With the ageing of the current pool of RO plants and with the doubling of installed capacity in the next four years, the replacement market for membranes represents a significant growth opportunity.” (GP Bullhound Desalination Report)

While SWRO (seawater reverse osmosis) desalination costs have fallen significantly (to an assumed consumer price range in the GP Bullhound report of $2-3/m3), it remains the most expensive form of water. The report questions why more is not being done with cheaper sources of water and forecasts that water re-use will grow significantly. It quotes Earl Jones, Partner at Liberation Capital: “Desal is not Desal is not Desal” – in other words, the market opportunity, which focuses on membranes, is in fact much larger than the traditional seawater desalination market.

“We normally think of desalination as the desalting of seawater. It is much more than this: it is treating brackish water, or frack water and industrial wastewater in addition to seawater.” Earl Jones (quoted in the GP Bullhound Desalination Report)

This point underlines Shortell’s opinion that venture capital (VC) investors need “a different mindset” to invest in water. He claims that “only seven to ten VC investors around the word are actively focusing on the water sector”. However, this concentration of expertise looks set to change: according to Shortell, it is increasingly clear that “an investor can potentially make money right now just rolling out water technology which already exists and can avoid the technology risk”.

Liberation Capital is one of the venture capital investors focused on water. In May 2012 it invested US$6 million in Israeli company, Desalitech.

“RO is the most useful and scalable technology. It ranges from the mega plants that serve one million people to the micro scale. All this is done through the same eight-inch membrane elements.” Rick Stover, Desalitech (quoted in the GP Bullhound Desalination Report)

The report also quotes Jeff Green, CEO of NanoH2O, who observes that, for VCs, “desalination is liked because the application is wide and scalable”. California-based NanoH2O, which develops RO membranes, secured equity financing totaling US$60 million in May 2012, including US$40 million in equity from the corporate venture investment arms of BASF and Total Energy.


Selected Companies with innovations applicable to desalination in four technology categories identified by GP Bullhound

New desalination technologies identified by GP Bullhound Companies Backgound / Investors
Membranes New sub-categories developing; GP Bullhound cite “spiral RO for brackish water as opposed to seawater, nano filtration, ultra filtration, micro filtration, and hollow fiber membranes” as well as ceramic membranes.
NanoH2O (USA) Nanocomposite membranes: received investment of US$60m in may 2012. Investors include BASF; Total Energy Ventures; Keytone Ventures; Khosla Ventures; Oak Investment Partners; CalPERS; PCG Clean Energy & Technology Fund
Desalitech (Israel) Closed-circuit desalination technology developer: received investment of US$6 million from Liberation Partners in May 2012
Cerahelix Inc. (USA) Nanofiltration membrane technology developer; received investment of US$0.3m from Maine Technology Institute; Maine Small Enterprise Growth Fund et. Al.
Aquaporins A manufactured process which mimics the purification process of water in plants and animals - with estimated reduction of 70-80% in energy costs compared to RO. Still some years from commercialisation.
Aquaporin (Denmark) Pursuing a licensing strategy: First generation of the Aquaporin Inside™ technology will enter pilot line production in 2013. Investors include M. Goldschmidt Capital and Syddansk Teknologisk Innovation
AquaZ (Denmark) Adopts Aquaporins into AquaZ Nano Membranes (polymer spheres); Investors include Vaekstfinden; Elsweb; Bankinvest
Forward Osmosis A high saline solution that “draws” the salt out of the water (rather than in RO pushing the water out of the salt water) and hence needs only around three bar of hydraulic pressure vs. 60-80 bar for RO 
Oasys Water (USA) Raised US$10 m in 2009 from Advanced Technology Ventures; Draper Fisher Jurvetson; Flagship Ventures
Modern Water (UK) London Stock Exchange AIM listed
Saltworks Technologies (Canada) Desalination using waste heat: received investment from Innovative Clean Energy Fund, Cenovus Energy Inc. and Teck Resources Limited, totalling US$3.6m in May 2011
Porifera (USA) Based on technology from Lawrence Livermore National Laboratory
De-ionisation Combination of membranes and electrodes; benefits of low pressure and self-cleaning. Identified as appropriate for industrial applciations.
Voltea (Netherlands) Capacitive deionisation technology deveoper; investors include Pentair, Rabo Ventures and Unilever Ventures (most recently raised US$6m in February 2012)
Atlantis Technologies (USA) Radial Deionizatin Super Capacitor developed with US$5m US Defense Department funding

Of over 15,000 desalination plants in production around the world, around half are in the US, according to GP Bullhound, and these are predominantly dedicated not to seawater, but to brackish water or ground water with high salinity (water found close to the ocean or impacted by high levels of salt and impurities in the bottom of depleted aquifers). The treatment of brackish water using RO is typically 40% cheaper than saltwater treatment

RO technology is also used, together with pre- and post-treatments, for a growing range of applications – including hydraulic fracturing for the natural gas industry. Shortell anticipates the emergence of specialist industrial water treatment verticals.

GP Bullhound also points to new business models and routes to market. Pre-treatment technologies are an example. Bluewater Bio’s FilterClear technology, although originally designed for the food and beverage industry, is cited as a “new multi-media filter technology, which can potentially be applied to SWRO pre-treatment”. 

Cleantech Investor has also identified ferrate as an excellent membrane pre-treatment chemical. Ferrate Treatment Technologies has developed a cost effective process for the deployment of ferrate which, although it does not remove salt, disinfects water to prevent biofilm growth without leaving an oxidant to attack membranes. FTT CEO Luke Daly confirms that the company is currently in discussions with several potential customers which deploy RO membranes in desalination applications and are interested in using ferrate to cut costs in the traditional desalination treatment train.

Selected other companies with desalination industry applications

Water Solutions AG (Switzerland) - low temperature distillation (read Cleantech Investor profile)
Ferrate Treatment Technologies (USA) - ferrate, an iron-chemistry technology, has applications in pre-treatment for SWRO (read Cleantech Investor feature)
Bluewater Bio (UK) - multi-media filter technology with potentially SWRO pre-treatment applications (download Cleantech Investor Company Report)
Seven Sea Water (USA) - DBOO model
Dutch Rainmaker - wind powered desalination technology

Other examples of new business models can be found in services such as replacement, leasing, BOP and ushering in new system integrators.

“We are heading towards a period that will usher in the growth of the cutting edge system integrators. They will specialise in areas such as pre-treatment, post-treatment and disinfection. They will have modular approaches that will address specific needs and will offer their solutions as an outsourced service.” Rick Stover, Desalitech (quoted in the GP Bullhound Desalination Report)

Although the report’s author acknowledges that “asset ownership and design, build, own and operate (DBOO) models are not regarded kindly by VC investment committees”, he argues that “in the case of water they do make sense. The DBOO model not only eliminates technology risk but can even out revenues and build strong cash flows from which to expand and offer new technologies as they become proven and available.”

Seven Seas Water is cited by Jones as a company which has developed “a very successful business model and is technology agnostic”. Seven Seas, which operates through the Caribbean and the Americas from a base in Florida, USA, is backed by investors including Virgin Green Fund, Element Partners, Advent Morro Equity Partners and T. Row Price.

In addition to new membrane technologies, the GP Bullhound report points to other new technologies emerging in the broad desalination space, including aquaporins, forward osmosis and de-ionisation.  Cleantech Investor has also identified low temperature distillation technology.

Despite the growth in investment interest in desalination, GP Bullhound points out that average deal sizes are getting smaller. It quotes Nityen Lal, Partner at ICOS Capital:

“One of the most important trends in the desalination market is large growth in small scale (10,000m3/day) plants.”

The reason cited by Lal is a combination of a lack of political consensus, weak financial markets and the absence of long term stability. ICOS Capital is an investor in BiAqua, a spinout from Delft University of Technology, which has developed ferritin, another iron chemistry-based contamination solution being produced in partnership with DSM.

Since it increasingly “costs more to move water than to make it” (depending upon the location), Shortell believes that “small distributed water desalination is where the industry is going to go”. Extreme examples include areas of water stress, island communities, isolated and remote industrial needs – such as mining.

“Achieving scalability for applications below 50,000m3 is one of the major successes for the industry. This means that off-grid, remote locations and mid-sized industrials can become part of the market, expanding it dramatically.” (GP Bullhound Desalination Report)

Links between desalination and renewable energy can contribute to making the economic case for isolated applications. The technology developed by Dutch Rainmaker, another ICOS Capital investment, is a case in point. Dutch Rainmaker deploys a direct drive wind turbine technology for both water generation and water purification/desalination. Developed with the Wetsus Water Centre in Leuuwarden in the Netherlands, the technology is now being commercialised in the Middle East, in oil and gas, military, tourism and agriculture markets.

Renewable energy is also increasingly playing a role in larger scale desalination projects. The GP Bullhound report points to examples which include (in Australia) the Kwinana RO plant in Perth, which is powered by 24MW of wind, and a 100% wind-powered plant which can supply up to 30% of Sydney’s water; and (in Saudi Arabia) the Al Khafi facility powered by concentrated solar photovoltaic technology. The Al Khafi plant, backed by IBM and King Abdulaziz City for Science and Technology (KACST), uses a new nano-membrane developed by IBM in the desalination process.

The Middle East is, unsurprisingly, a hot spot for desalination investment. The first desalination plants in the Middle East were mega installations, based on multi stage flash (MSF), a thermal distillation technology – but RO technology is increasingly becoming viable even there. Consequently it is perhaps not surprising to see investment in new technology from regions such as Saudi Arabia. Other regions seeing significant new capacity being installed include India and China – followed by Spain, Turkey, the US, Australia and Chile.

Within the membrane replacement market, GP Bullhound points to the challenges around volume production and observes that new entrants into the market will have to compete with the majors such as Dow and Toray. It also observes that challenges are already appearing in the form of cheaper replacements from China. This observation fits with the evidence in terms of patent applications in the desalination sector: mirroring a more general trend in the water industry. China is dominant in terms of new patents being applied for in desalination. Although statistics for membrane specific patent applications are not available, it is reasonable to assume that membrane related technology is an important component within the patent applications relating to desalination – where China has come to dominate in recent years (see chart).

Chinese patent applications have clearly contributed to the global overall growth in the volumes of patents being applied for in the desalination space – which are displaying significantly faster growth than the water sector generally and are a clear indicator of the pace of technological innovation in this sector (see table and chart below and see also feature on Chinese water patents).


Global desalination patent and general water patent applications

Patent applications filed 2006 2007 2008 2009 2010 2011 2012
CO2F  14046 14012 14426 15248 18008 19876 20026
 % change  -9.1 -0.2 3 5.7 18.1 10.4 0.8
Desalination  93 133 153 171 302 450 467
 % change  121.4 43 15 11.8 76.6 49 3.8
Source: Marks & Clerk

Desalination patents


For all the interest in desalination technology – and indeed water technology more generally – there are, to date, few success stories in terms of value creation for VC investors. Shortell points out that the US$50 billion of merger and acquisition (M&A) activity in the water sector has almost entirely involved company-to-company deals: he observes that “there have been no exits yet in the water industry”. However, Shortell expects substantial volumes of M&A activity in the water industry over coming years, which he believes will target local service and solution providers: “Single-product companies will be bought by the players with the balance sheets looking to add to their solution offering.” So perhaps the exits for VCs from their desalination and other water sector investments are more likely to be in the form of corporate sales than internet style IPOs.  Hopefully that will mean that the desalination sector can avoid an internet style bubble to accompany its internet style growth rates. 

 

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