Investing Smart

Smart Investing

Smart water infrastructure is quickly becoming an important urban infrastructure solution in both the United States and around the world. This is because cities and countries are struggling to manage growing water scarcity, which is being compounded by climate change and population growth. All signs indicate that this scarcity will only continue to grow more severe.

Even as countries scramble to build water treatment and desalination plants and impose consumption restrictions, countries globally are still on average losing 28 percent of their water due to leakage, theft and inaccurate metering. This lost water ? or non-revenue water (NRW) ? creates additional needs for costly treatment plants, increases the demand for energy from pumping stations and puts added stress on already strained infrastructure, communities and environments. Meanwhile, lost revenue from this water only increases the need for government subsidies, which already are necessary to cover a significant portion of the costs of water in many countries.

Smart water infrastructure is uniquely placed as a cost-effective solution to these problems. It is defined as smart water meters with communications, smart water networks at the distribution level, and IT/analytics (some definitions also include smart irrigation or other agriculture technologies). Smart water infrastructure enables real-time monitoring and detailed analysis of water usage patterns previously unavailable. This allows utilities to reduce waste and lower costs. Compared with other water conservation solutions ? both large infrastructure projects such as desalination plants and demand-side conservation programs ? smart water infrastructure typically has one of the lowest costs per cubic meter of water saved.

For example, in California, smart metering and networking projects are estimated to cost between $0.25 and $0.75 per cubic meter of water saved. This is calculated based on current elevated rates for water usage, current leakage and waste (i.e. non-revenue water), and current consumption patterns. Meanwhile, larger infrastructure projects in the state cost $2 to $3 per cubic meter saved, and some conservation efforts ? like a rebate for removing lawns ? can be more 10 ten times more expensive.

Smart Investing

Smart Investing

Many water utilities in the United States and throughout the world are taking note. In California, the City of San Francisco has deployed smart water meters to most of its customers using meters from the St. Louis-based vendor Aclara. Other western states have also been active, with much of New Mexico now using smart water meters and a degree of smart water networking. Overall, North American water utilities are expected to invest $7.7 billion in smart water infrastructure from 2015 to 2025. This represents the second largest market (behind Europe) in the world. Globally, utilities will invest $35.9 billion in smart water infrastructure over this period.

Around the world, activity has been primarily focused in the developed regions, with Japan, Germany and France among the leaders. Smart water infrastructure can have high upfront costs that smaller water utilities in emerging market countries may not be prepared to invest in. But in water scarce regions, this will quickly change. Middle Eastern countries are already at the forefront of smart water meter deployments, with large-scale deployments in countries such as Israel, Turkey and the United Arab Emirates among others.

In many of these countries ? particularly in the Gulf region ? the price paid for water is extremely low, or in some cases, practically free. But government-owned utilities are still investing in smart water infrastructure, as they realize the implicit cost of water scarcity. Similar to California, large water infrastructure projects that will be needed to address rising scarcity will cost billions of dollars, implying a much higher ?full cost of water.? For example, in Kuwait, Bahrain and Qatar, Northeast Group has calculated that the full cost of water ? including energy costs for pumping water, labor and capital costs, and most critically, the cost of necessary infrastructure to address scarcity ? is more than $10 per cubic meter. Yet, Bahrain charges just $0.67 per cubic meter, Saudi Arabia charges a token $0.03 per cubic meter and Kuwait offers water free to Kuwaiti citizens.
The disparity between the full cost of water and existing tariffs is most extreme in the Middle East, but plays out throughout the world, where approximately half of the countries globally do not have tariffs that properly account for the costs of producing and treating water. This creates a major hurdle to smart water infrastructure investment.

When using existing tariffs, the ?cost? of leaked, wasted and stolen water may not appear high, and may not be sufficient to justify investment in smart water infrastructure. Yet, eventually someone must pay these costs. In California, water scarcity has led to higher tariffs for residential customers, while in Middle Eastern countries the costs are borne by governments already suffering from low oil prices. In all cases, using a proper metric for the full cost of water more accurately shows the benefits of smart water infrastructure.

In addition to not properly valuing the commodity of water, there are other hurdles to smart water infrastructure investment, with some variation by region. For example, in North America, smart water networks are harder to implement as these often rely on district metering areas (DMAs), which are less common in the United States and Canada. These DMAs allow utilities to measure water demand within neighborhoods or districts in real time, and reduce water pressure during periods of low demand therefore reducing leakage. This can also be accomplished through smart metering, but at much higher cost.

Developing countries such as Chile and Malaysia have drastically reduced water waste through these projects at a much lower cost than through smart metering. Meanwhile, in most regions, but especially in emerging market countries where it can be politically challenging to raise water tariffs, financing for smart water infrastructure is a major hurdle.

Finally, there are few regulatory drivers for water. Water utilities tend to be conservative and less willing to make major new investments without outside impetus. Awareness of the benefits of smart water infrastructure can help overcome this hurdle. Notably, one of the key indicators for predicting which utilities will invest in smart water infrastructure is whether or not another utility nearby has already made these investments.

Within the United States, the publicity of the drought in California and throughout the country is helping to erase many of these challenges. Utilities and the public at large are aware of the enormous costs of water scarcity and that these will likely only increase. Regulators are allowing ? and in some cases requiring ? tariffs that better account for the full costs of water. As utilities assess these challenges, smart water infrastructure will increasingly be a part of a portfolio of necessary solutions.

Ben Gardner?is president and co-founder of Northeast Group, LLC.

Chris Testa is research director at Northeast Group, LLC.

Northeast Group, LLC is a Washington, D.C.-based smart infrastructure market intelligence firm. The full study, Global Smart Water Infrastructure: Market Forecast 2015-2025 referenced in this article, can be purchased at

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