From The Editor | June 23, 2016

A Game Plan For Water Technology Innovation

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By Kevin Westerling
@KevinOnWater

RiskTournament

The Milken Innovation Center at the Jerusalem Institute has mapped out best practices for water industry innovation and a framework for converting ideas into action.

A project of the California-Israel Global Innovation Partnership, Financial Models for Water Sustainability is a report developed by the Financial Innovations Lab™, a one-day seminar featuring 70 water experts. Researchers from the Lab drew on the experience of Israel — a water-scarce, drought-prone country that has evolved into a world leader in water technology — to create a sustainability game plan for California and others to follow.

The California-Israel connection runs deep. Collaborators from stateside institutions such as NASA and universities such as UC Berkeley, UC Irvine, and UCLA helped ensure that the Lab's methodology suited California from a feasibility standpoint. From a water standpoint, the two regions are quite compatible; both Israel and California have a dry, slowly warming climate and devote the majority of their water resources to agriculture. California has five times Israel's population, but the increased scale only presents greater potential for reward. Even beyond The Golden State, these solutions should be recognized for their proven efficacy — capable of turning a desert nation into a water exporter — and should therefore be considered, at least in part, wherever the opportunities for implementation and benefits can be realized.

Best Practices

Nothing gets done without financing, which is the foundation from which the report is built — innovation, water savings, and sustainability being the byproducts. In the U.S., 90 percent of municipal projects are financed on the state or local level, so waiting on federal aid is not a viable strategy. The federal government can always impose itself, however, and has the ability to help or hinder progress with regard to financial arrangements. According to the Lab, the following would work if enabled and employed.

Environmental Impact Financing (EIF)

Most often, innovation stems from the private sector. EIF is a way to get water-saving technologies or programs implemented, while shifting financial risk and reward from government to private investors. The report explains:

“In an environmental impact bond (EIB), institutional pension funds, insurance funds, philanthropies, and other traditional investors could invest funds in proven environmental “impact projects” that deliver reduced or avoided costs to farmers or to municipal water authorities. The realized savings would support the repayment of the obligation. The savings could be shared, thereby, reducing the overall cost to the payer.”

Source: Milken Innovation Center

Energy Services Companies

An energy service company (ESCO) agreement works in much the same way as the above, but is focused on energy savings rather than water savings. Popular in California, ESCO contracts are performance-based guarantees and thus low-risk by nature. The ESCO is tasked with lowering the total energy spend of the utility through across-the-board technology improvements and process optimization, getting paid only after milestones are reached and savings are garnered. ESCOs are yet another way to leverage private sector innovation to save money and water supplies, since vast amounts of water are required to produce energy.

Technology Efficacy Insurance

More comfort for the risk-averse water manager, whether municipal or industrial, efficacy insurance guarantees that a technology will perform as promised, or that restitution is provided in the event that it doesn’t. Such coverage can include issues related to regulation, production, and delivery. U.S. plants understand that treatment systems will first require regulatory approval, but efficacy insurance can help secure financing from commercial lenders wary of technologies without long track records. Moreover, it is useful for the many systems at the plant not directly tied to treatment but integral to operational efficiency and expenditure. The private/industrial sector, which typically adopts innovation more swiftly, may also be first in line to reap the benefits of efficacy insurance.

Water Policy Innovation

The aforementioned financial mechanisms can help get new technologies in place, but what drives the desire to do so? The Lab cites the innovation of water policy as its final (though multilayered) best practice, which requires an internal and outward commitment to evolving past conventional technologies, processes, and even thought patterns in order to transcend the status quo and surmount difficult challenges such as water scarcity. To get there, as Israel has, the report cites the following “smart practices that differentiate the Israeli water sector from its counterparts elsewhere in the world.”

  • Public responsibility – Whereas U.S. consumers have long looked upon water as a free commodity at the tap while thinking little of how it is managed and cleaned, the report states that in Israel, “The ethos of saving water, the preciousness of water resources, and the personal responsibility of each citizen have been consistent themes in the history of the country.” To be fair, Israel’s perspective has been forged out of necessity and prolonged scarcity, while in the U.S. water has been historically plentiful. To fulfill true water policy innovation, however, the U.S. will have to catch up quickly. This effort has been spearheaded by numerous “value of water” campaigns initiated by disparate water agencies, but the sentiment must be broadcast and accepted throughout the populace.

  • Graduated pricing/shock pricing to change behavior – Although this tactic will no doubt be unpopular with ratepayers, at least initially, it is credited as a key factor in helping Israel gain “water independence” in 2013, five years after pricing measures were instituted. Naturally, the higher cost of promotes conservation, but another advantage is resetting rates and revenues to reflect the “true cost” of water services — including infrastructure requirements. This can be fraught with political peril, but tiered pricing in which “super users” absorb more of the burden can be an alternative to across-the-board increases. Ideally, the “value of water” mindset advances to the point where customers see higher rates as a justifiable and worthy expense.

  • Mobilization of the private sector – The resources of the private sector were heavily relied upon during Israel’s water renaissance and are intrinsic to the Lab’s framework of best practices. Many ‘think tanks’ and innovation centers in the U.S. also promote public-private partnerships, but implementation is spotty at best, and often rejected with prejudice. The talent and ingenuity of the private sector is too profound to ignore, however, despite the underlying profit motive. Contracts and regulations can be written to ensure that public interest always rules the day.

  • Operation of facilities as “laboratories” for managed innovation – Words of wisdom from the Lab: “Coming up with a solution is good. Continuous innovation that improves performance and outcomes is better.” If you’re standing still from a technology and process perspective, you will eventually fall behind. The best-run utilities, like DC Water, create a culture of innovation.

  • Sound risk management – The single greatest impediment to innovation is the aversion to risk; therefore, minimizing or removing risk — by sharing or transferring it to another party (often the private sector) — allows utilities to take advantage of new technologies. Methods of risk management include regulatory reform, alignment of stakeholder interests, and performance guarantees and technology efficacy insurance.

  • IT integration – The Lab does not specify many technologies in its report, but recognizes and recommends IT integration for its transformative capability. Whether labeled the “Internet of Things” or simply “smart,” the future of efficient water management will hinge on collecting data and utilizing the information to optimize… well, everything.

For more details on best practices and how to implement them, including start-up of pilot projects, see the Financial Innovations Lab’s full report. More information on the Milken Innovation Center’s California-Israel Global Innovation Partnership can be found here.

Image credit: "Risk Tournament," Derek Gavey © 2009, used under an Attribution 2.0 Generic license: http://creativecommons.org/licenses/by/2.0/deed.en