Water Desalination

Industry Outlook and Investment Opportunities

Introduction Commercial desalination plants fall into one of two categories: thermal and reverse osmosis (RO). The latter, in which seawater is forced through a membrane to separate water from salts, now dominates the market. In the last three decades, desalination costs have gone down by more than half, creating an expensive, but decent sized market. The global market is projected to reach $26.81 billion by 2025, fueled by rapid industrialization, growing population and depletion of freshwater bodies. Desalination is most economical in areas like the Middle East and North Africa (known as MENA), where there is high pressure on existing water resources combined with low energy costs. While desalination, in conjunction with water conservation efforts, may be able to reduce pressure on freshwater bodies, there remains concern over its energy intensity, impact on marine ecosystems and cost.

Highlights Considering megatrends like worldwide population growth, industrialization and climate change, water scarcity is a leading impediment to sustainable development.

• 70% of freshwater is used for agriculture globally, up to 95% in some developing countries. • By 2025, half the world’s population will be living in water stressed areas. • 785 million people lack even a basic drinking water service.

Thermal desalination is the oldest method, dating back to the 1960s, and remains a significant player; however, RO desalination now dominates the market as it’s cheaper and more efficient. • RO facilities produce 69% of desalinated water worldwide. • RO plants operate at approximately 50% efficiency, meaning for every 10 liters of seawater they take in, they produce 5 liters of freshwater and 5 liters of hypersaline brine (water that contains high concentrations of dissolved salts and whose saline levels are higher than ocean water). • Thermal desalination plants operate at around 25% efficiency.

2 • The primary reason for elevated operating costs in RO is what is called membrane fouling, an area which requires a high level of technological expertise.

Advances in technology have lowered RO costs significantly.

• Desalination prices today are one-third what they were in the 1990s. • According to a 2013 study from the California Department of Water Resources, desalinated water costs roughly $2,000 per acre-foot, double the cost of water obtained from building a new reservoir or from recycling wastewater. • Proponents of desalination argue that most imported water is from systems that have already paid themselves off (due to their age), so the extra cost is worth their reliability, especially when it comes to arid regions. • Compared to seawater, desalinating brackish water, which is less salty, is about one-tenth the cost, ranging between around $1,200 to $2,000 per acre-foot.

MENA countries currently lead the world in desalination, but arid regions worldwide are increasingly turning towards desalting resolutions.

• Saudi Arabia produces the most freshwater of any country, one-fifth of the world’s total. • Israel, a country that once faced a water shortage, now experiences a water surplus. Desalination provides 55% of its domestic water, at a production cost of 58¢ per 1,000 liters. • Between 2019 and 2023, 71% of the growth in the desalination pumps industry is expected to come from Europe, the Middle East and Asia. • According to the International Desalination Association, desalting provides water for more than 300 million people globally.

3 Environmental Concerns and Potential Solutions Environmental concerns center on the industry’s energy use and its impact on marine life. Desalination is 25 times more energy intensive compared to other freshwater approaches, which partly accounts for its high cost. If the process relies on fossil fuels, it contributes to climate change, which only magnifies the arid conditions that make desalting necessary to begin with. One potential solution is to power desalination plants with clean energy. Hitachi Ltd. was contracted to design and construct 15 solar powered desalination plants located in desert regions of Abu Dhabi. • The abundant sunshine allowed the company to overcome the otherwise high cost of plant operations. • Each plant has a desalination capacity of 4,000 liters per hour, and the solar panels generate 45 kWh. • The freshwater is used for wildlife like the endangered Arabian oryx, and to irrigate vegetation.

Desalination can create environmental issues. It can harm marine life when organisms are sucked into the pipes along with seawater, or when brine produced by desalination gets emptied back into the ocean without proper treatment.

• The process produces roughly 141.5 billion liters of brine daily (which may also contain heavy metals and chemicals) and is mostly emptied into the ocean. Properly diluting and disposing requires costly systems. • An alternative, evaporation ponds, involves harvesting and repurposing salts (using road salt for example). • Massachusetts Institute of Technology researchers recently found a way to convert brine into sodium hydroxide and hydrochloric acid, which are used in desalination plants and other industrial processes. They believe a potential market lies there.

Claude “Bud” Lewis Carlsbad Desalination Plant The Carlsbad desalination plant opened in December 2015 and is the largest in the Western hemisphere. It’s one of 11 desalination plants in California. The plant cost $922 million to build and is a public-private partnership between the San Diego County Water Authority (SDCWA) and Poseidon Water. It’s operated by the Israel-based Desalination Enterprises on a contracted basis. The SDCWA pays $2,200 per acre-foot for water from the plant, compared to a total of $1,200 for water from the Colorado River and Sacramento-San Joaquin River Delta. • The plant claims to provide 10% of the drinking water in San Diego County and serves 400,000 people. • Its operators assert that the price per gallon is only half a penny. • The plant claims that it’s the first water infrastructure project in California to have a net carbon of zero. • It’s the only water supply in San Diego County that is not dependent on snowpack and rainfall.

Environmental nonprofit San Diego Coastkeeper filed a lawsuit in 2014 against the SDCWA, claiming it hadn’t done enough to account for environmental impacts of its water supply projects nor had it focused

4 enough attention on conservation. A state superior court judge denied the claim in 2015. To mitigate its environmental impact, Poseidon Water pledged to restore 125 coastal wetlands as well as associated uploads through the Otay River Estuary Restoration Project.

Impact Measurement When coupled with water conservation, recycling efforts and clean energy, desalination can reduce pressure on freshwater systems and bridge the gap between supply and demand of water resources.

Four states, including California, divert water from the Colorado River, but it often runs dry by the time it reaches the Gulf of California. This has led to salinization of the estuary, which impedes its ability to perform ecosystem services. By 2050, climate change (in the form of less snowfall), is projected to diminish the river’s annual flow by up to 30%.

Desalination plants can help cities increase their resilience when dealing with issues like increases in volatile weather, and longer, more severe droughts.

For years, the Israeli Water Authority ran public service announcements about saving water and built treatment systems able to recapture 86% of water used. The Sea of Galilee, the country’s largest source of freshwater, was drying out, but Israel stated that recycling, combined with desalination, allowed it to recover.

Investment Outlook As freshwater bodies face mounting pressure from things like climate change, overuse, and population booms, regions will need to promote better water conservation, more effective recycling, and expanded desalination efforts.

Saudi Arabia, Australia and Israel are the biggest players in the desalination market. Due to draught and a lack of freshwater these countries all had serious water issues but have invested billions to virtually erase water concerns.

The North America desalination market is expected to grow at an 8.6% CAGR through 2025. Southwestern states in particular present emerging markets, especially where there is regulatory support. Poseidon Water LLC. is building a new plant in Huntington Beach, CA, scheduled to be operational by 2023. In 2018, California water officials approved $34.4 million in grants for eight desalination projects, six of which will process brackish water. Brackish water desalination presents another area of investment, especially in landlocked states, given its low cost relative to seawater desalination. Currently Texas has 49 municipal desalination plants processing brackish water. In California, ten more desalination plants are proposed.

Key challenges for the industry remain its relatively high cost, plus waste disposal issues. A significant driver of the market will be the widening need for energy-efficient pumps. From 2019 to 2023 the global water desalination pumps market is expected to have grown by $516.67 million, progressing at a CAGR of over 6%. Investment in energy efficiency technologies and alternative energy forms (such as on-site solar generation) would help plants cut operational costs. Private capital may spur the emergence of innovative technologies as well as companies that can recycle or dispose of brine on scale.

5 Public Companies

• Brookfield Infrastructure Partners – Brookfield Infrastructure Partners is a global leader in alternative asset management with $29.5 billion in assets (2017) and a market capital of $12.149 billion. Its businesses include real estate, infrastructure, renewable power, private equity, and Oaktree. Poseidon Water is a portfolio company of Brookfield Infrastructure Partners. • Delek Group – The Delek Group is an Israeli conglomerate and one of Israel’s largest companies. It owns Israel Desalination Enterprises (IDE), a leading innovator in water treatment and desalination. IDE’s track record includes 400+ plants in 40 countries with customers across all industries, including oil & gas, municipalities and power stations. The Delek Group has a market capital of 239.133M USD (not sure how to write this amount, or the dollar figures above). • ACCIONA Agua – ACCIONA is a leading desalination and water treatment company. In 2019, the water business of ACCIONA revenue came to $856 million. In 2020, it won the WEX Global Prize in the “Innovation for Desalination” category. It also works on water purification, renewable energy, and construction projects. ACCIONA has a market capital of $5.65 billion. • ACWA Power – ACWA is an Oman-based developer, investor, co-owner, and operator of a portfolio of power generation and desalination plants. ACWA has 59 assets in operation, construction or advanced development across 12 countries. ACWA Power’s portfolio has an investment value of more than $48.8 billion and can generate 34 GW of power and produce 5.9 million m3/day of desalinated water.

Emerging Technologies

• Medad Technologies – Medad has developed an adsorption gel, which uses multiple beds of powerful adsorbents to achieve a continuous evaporative desalination process. It generates increased efficiency and thus more freshwater in desalination plants. • Tethys Solar Desalination – Tethys offers an off-grid, modular, sustainable technology that requires relatively little energy. Their program is fairly easy to deploy and scale, and the decentralized system it uses can serve either households, factories or towns (though it may be better suited for more remote areas). • Atlantis Technologies – Atlantis specializes in cleaning salty wastewater. Its patented RDITM technology offers lower cost of ownership and maintenance than state-of-the-art desalination technologies, and clean water recovery of up to 95%. • Oasys Water – Oasys’ newly released ClearFlo MBC x platform combines advancements in membrane performance, system architecture and controls for an exponential improvement in brine management capabilities and performance.

Funds Investing in Water Desalination

• CalCEF o CalCEF Ventures is a subsidiary of New Energy Nexus which engages in financing companies interested in clean energy solutions. o The group is currently in a partnership with incubator fund MyOZFund which specializes in building, education and facilitation of clean energy projects in disadvantaged communities is the USA.

6 • Lightspeed Venture Partners o Lightspeed Ventures is an American VC fund focused on early-stage investments in enterprise and consumer technologies. o The firm has expressed significant interest in backing water desalination ventures through outlets such as “Green Tech Media.” • Foundation Capital o Foundation was founded in 1995 as an early-stage VC firm consisting of investments in the consumer, enterprise and fintech spaces. • Unilever Venture o Unilever is a VC and PE firm that seeks to invest in early-stage companies and currently has over 450 million pounds of AUM. th o The group was ranked the “#1 Corporate Sustainability Leader” for the 5 year in a row with an interest in water desalination. • Khosla Ventures o Khosla Ventures is a US-based VC firm that invests in early-stage technology companies that boast proprietary technology, unique partnerships and top-notch teams. o Khosla portfolio company, NanoH2O, develops, manufactures and markets reverse osmosis processes that lower the cost of desalination. • Aquaventure Holdings o Aquaventure is a US-based holding company with stakes in the water purification, disinfection and desalination industries. o Aquaventure operating platform Seven Seas Water is a multinational provider of desalination and wastewater treatment solutions.