This is a guest blog from Bradley Jones, investor in water and Water Discovery Challenge judge.
The water sector is integral to daily life. It underpins our economy, society and environment, yet is often overlooked by sustainability-focused investors.
Water flows through the sustainability agenda. Rainfall is increasingly unpredictable and differs widely across the country. Drought results in water shortages, intense storms can overwhelm the wastewater network causing sewage discharges.
The sector faces many challenges it is urgently seeking solutions to. While sewage overflows may hit the headlines, the industry must reduce leaks, cut greenhouse gas emissions, support a growing population and look after vulnerable customers – while ensuring customers receive the service they expect.
The majority of England’s water company areas are classified as “water-stressed”. While leakage is at the lowest levels ever, around a fifth of water that enters the 425,000km mains network is lost – a significant waste of water and energy. In fact, across its operations, the water sector consumes 3% of all electricity in the UK, it is also responsible for about a third of the country’s industrial emissions.
The sector must do everything to decarbonise and minimise its impact on greenhouse gas emissions so that it does not exacerbate climate change. The water sector has reduced emissions by 45% since 2011 by taking action in areas such as renewable power, biogas and energy efficiency, but the pace of change needs to increase to reach the sector’s goal of achieving net zero by 2030.
The water sector must therefore transform its environmental impact and innovation is crucial. The water sector needs solutions that continuously improve services for customers, provide value and meet the high standards that the public demands.
These aren’t just challenges in the UK, but around the world. It’s anticipated that demand for fresh water will outstrip supply by 40% by the end of the decade, with the world’s water systems experiencing unprecedented stress.
The government, press, campaign groups and customers are all leaning on big regional water companies to make improvements, and they are now looking further afield for solutions. Such challenges require agile innovators, who in turn require investment.
The investment opportunity comes down to the demand there is from the large water companies for new technologies to transform their environmental impact and operational efficiency. The water sector is ripe for innovation, and demand for it is not going anywhere.
Fixing the disconnect
Investors are looking for steady returns, longevity of services, strong leadership teams, a managed degree of risk – all of which water sector innovators can offer.
However, investors might be deterred by misconceptions about the industry. One is that the only option for investment in the water sector is the big regional water companies – but that’s not the case. There is a host of start-ups and scale-ups busy developing the tools, solutions, and services the water giants need.
There are advantages associated with investing in a sector built on regular, long-term planning, where consumer demand is guaranteed. Innovators who find success in solving the big challenges in the UK will subsequently have a vast global market to explore, which helps derisk the investment opportunity.
This is because the UK’s water sector is so highly regulated. The big water companies must work with the regulator to assess the value of innovations. When approved for the UK market and used by some of the world’s most regulated water entities, it becomes a green light for other jurisdictions. The world’s water landscape is quite insular; once the box is ticked in the UK, others take note.
There is also a growing M&A and IPO market for the innovative start-ups making their mark. When it comes to making an exit, historically, there have not been that many potential acquirers, but now the likes of Siemens and other large multinationals are keeping a closer eye on water sector developments.
One thing that needs addressing is the terminology within the sector. Until an innovator has been supplying a company with millions of pounds of kit for what seems like 10 or 15 years, companies have a habit of referring to the contracts as “pilots” or “projects”. This can be off-putting for investors, as it unintentionally detracts from the important role that innovation is playing in business as usual. Water innovators and water companies must ensure the language fits the sentiment.
Powering the next generation of solutions
Last year, I joined the judging panel for the Ofwat Innovation Fund’s Water Discovery Challenge. It is run by Ofwat – the water regulator in England and Wales – in partnership with Challenge Works, Arup, and Isle Utilities. Through multiple competitions, the £200 million fund has supported collaborative initiatives which see the big water companies working with promising innovators from across industry, academia and civil society to develop and deploy novel solutions.
The Water Discovery Challenge was a departure from this model, rewarding and supporting innovative start-ups from within and from outside the water sector to develop solutions without the need to first partner with a water company.
As a successful VC investor in sustainability-focused companies for many years, I brought my eye for impressive, high-potential businesses to the panel. Ten winners were last year, awarded a share of £4.5 million and expert support to develop their solutions.
The winners include Resimac Ltd, working in partnership with Schur-BPH, to develop a rapid and cost-effective solution for rehabilitating the UK’s rising sewer pipelines. The solution combines spray lining techniques with cured-in-place pipe (CIPP) technology to create a fully structural liner inside the existing pipe, eliminating the need for extensive excavation during the rehabilitation process.
In other words, it is repairing existing sewer pipes from the inside out without the need to dig up roads – considering the sewer network in the UK is 571,800km long (enough to wrap around the equator 13 times) and in constant need of maintenance, it has enormous growth potential.
SenSiteUQ, led by digiLab Solutions Limited, is another of the ten winners. It uses “Uncertainty Quantification and AI optimisation” techniques for sensor deployment and monitoring in the wastewater network. This will expand the opportunities for software companies to get involved with water companies to learn from the data coming out of the sensor, providing key insights on how the water network is currently working and can be developed in the future.
The wastewater network handles 11 billion litres every day and is impacted by increasingly severe weather – the consequence is sewage overflows into waterways. Solving discharges is one of the most urgent challenges facing the sector. Intensive and continued innovation in monitoring, predicting, mitigating and preventing sewage spill is necessary – and those businesses that can provide the solutions are likely to thrive.
The water sector needs urgent solutions to its environmental and operational challenges. It needs innovations that will make it fit for purpose, not for a few years, but for the next century. It must meet the guaranteed demand it will have from every single household and business that relies on it.
This demand paired with the sector’s long-term thinking make water an untapped opportunity for investors – especially those aiming to make a positive impact on the environment. We all need water, and we all need the water sector to become sustainable. The start-ups and scale-ups developing the solutions that make this possible should be at the top of the pack.