The Next Big Thing in Energy Innovation and Investing? Let’s Talk Water

5/20/08Follow @BillAulet

Energy innovation and investing are exploding right now. Technological breakthroughs are seen as perhaps the greatest hope to solving our dire energy challenge. However, what is often overlooked is the link between finding or creating new sources of energy and the effects on food and water.

Indeed, if you think of energy as a coin, the flip side is water and food. The scary thing is that food and water are both lower on Maslow’s hierarchy of human needs—i.e., they are more fundamental to human survival. Yet, the current rush to create new sources of energy—including “clean” energy—may have potentially disastrous tradeoffs on our food and water supplies. Going forward, trading off energy creation for water—meaning creating new sources of energy that depend on heavy use of water, as many do—will be less and less acceptable. That’s why the most exciting opportunities in energy entrepreneurship and investment lie in strategies that create more water or energy without adversely affecting the other.

The Linkage of Energy and Water

At a fundamental level, we can think of the greatest and greenest energy producer in the world—the leaf—and observe through the process of photosynthesis that energy, water, and food are an interrelated system. But let’s also look at some other examples:

  • Biomass—This is the most obvious source of tension between food, water, and energy today. Corn as a feedstock for ethanol has been a contributor to the dramatic rise in prices of this commodity and hence food (although the exact amount of its effect can be debated). The development of cellulosic ethanol will go a long way toward alleviating this tension by eliminating the dependence on corn or other foodstuffs for ethanol production. But there are also other, more subtle elements to the equation that add new sources of tension. Ethanol production from plants requires substantial amounts of water—and it must be clean, fresh water, which is the most precious kind. Biomass has been the poster child for the tension between alternative energy and water/food but it is far from alone.
  • Nuclear—Traditionally, nuclear power plants have been built near large sources of water to promote cost-effective cooling.
  • Enhanced Oil Recovery—After initial production starts to slow down, oil wells traditionally have been flooded with water to boost pressure and improve oil recovery. This made excellent economic sense in the past, and will be even more economically attractive with the new price levels for oil.
  • New Heavy Oil Recovery—Heavy oil is viscous, harder to recover, and less economically attractive than the normal light sweet crude oil that is the standard today because of its costs of extraction and refinement. Driven by attractive new price levels and national security concerns, Canada is developing a large amount of this huge potential energy source in what is known as the “Tar Sands.” The increasingly preferred method to extract heavy oil a process called SAGD (steam assisted gravity drainage), which uses prodigious amounts of water.

These are only a few examples, but they illustrate the tight relationship between energy, food, and, especially, water today—a relationship that often forces painful tradeoffs when we try to produce more energy. But there are no laws of nature I am aware of that make this tradeoff necessary in perpetuity.

Maslow’s Heirarchy of NeedsThe Next Wave for Energy Innovation and the Future Focus for Productive Long-Term Energy Investing

I am often asked by investors and entrepreneurs, “What do you like with regard to the energy space?” My answer is twofold:

1. Water and,

2. Any company that decouples energy and food/water. The company should produce or save energy without adversely affecting the water and/or food supply.

Water has been overlooked as an area for entrepreneurship and investment for good reason: it is a very challenging arena. Water is similar to energy in its diversity and the magnitude of challenges it presents (see What’s Wrong with Energy Investing Part II)—and it has even more conservative ultimate users and buyers. Nonetheless, water’s time in the limelight has come, and many companies built around clean water technology that couldn’t get a second look a year ago now are drawing tremendous interest. Often these companies have been around for over a decade because that is how long it has taken such ventures in the past to get traction. In addition, new companies like NanoPur, a venture involving the use of novel carbon nanotube technology to improve the energy efficiency and cost effectiveness of desalination (and a finalist for the recent MIT Clean Energy Entrepreneurship Prize backed by NSTAR and the U.S. Department of Energy), are springing up with much higher frequency. The new economics of water make companies that increase the supply of clean water a compelling value proposition that will only increase over time. While there may be alternative energy sources and fuels, there really is no substitute for clean water.

The second point I raised above is really a necessary condition for building sustainable energy companies in the future. Only a year or so ago, venture capitalists routinely asked each new potential investment company about its India and China strategies. Similarly, for energy companies, the question will be, “What effect will the venture have on food and water?” Those companies that can decouple the tradeoffs between the two will be interesting, and those that do not, will not be attractive investments. Even existing, well-managed energy companies are now closely examining this issue, which will only increase in importance. An example of a potentially exciting new company in this regard is another finalist from the aforementioned MIT Energy Prize competition: Sequesco. This team of three PhDs plans to develop genetically modified non-photosynthetic bacteria (an approach different than photosynthesis-based algae production) to more efficiently convert harmful CO2 into biomass fuel. This is a double play (i.e., it decreases CO2 emissions and increases energy supplies) without negative ramifications on water or food—at least that we know of yet.

In summary, trading off water for energy is a devastatingly bad idea, for as wise old Benjamin Franklin said, “When the well is dry, we learn the value of water.” In the first stage of energy innovation, we began to deplete the well. But in the second stage, beginning now, we must move on from this folly and find more intelligent solutions.

Bill Aulet is the managing director of the Martin Trust Center for MIT Entrepreneurship and a senior lecturer at the MIT Sloan School of Management. He is also the author of “Disciplined Entrepreneurship: 24 Steps to a Successful Startup”, published by Wiley, which was released in August 2013. Follow @BillAulet

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  • http://www.cleantechvc.com Rob

    Great thoughts, Bill.

    I expect to see your next post be “What’s wrong with water investing,” along the lines of your previous great posts on energy investing.

    Every VC I speak with is looking for a scalable water treatment technology to back, but very few have found ones that fit the VC model. What’s the problem? Is it how artificially cheap water remains today? Is it the generally slow-adopting industry? Is the lack of innovation or managerial talent?

    Curious about your thoughts, because there’s a notable gap between intentions and actions in water technology ventures right now.

  • Chad

    This makes total sense, yet gets overlooked often (much like energy efficiency). If you are looking for more material for future articles like this, I urge you to look up the Land Institute (http://www.landinstitute.org/). I saw Wes Jackson (http://en.wikipedia.org/wiki/Wes_Jackson) speak at an Energy Symposium a little over a year ago, and he had some very interesting things to say about agriculture and how quickly we are depleting land to grow corn for biofuels. He predicted that the corn belt will be in northern Canada in 20 years if we do not make changes now. Maybe a little extreme, but still an interesting premise.

  • http://www.xconomy.com/author/baulet/ Bill Aulet

    Rob,

    First of all, it is an honor to have you comment as one of the great bloggers of clean energy space (but no mention of your site — throw it in there!)

    With regard to your point on water, no question you are right. People are trying to find water deals that fit the VC or any rational investment model and the answer is not clear yet (which is why it is so interesing). A few comments and then I would love to hear others’ thoughts:
    1. Water traditionally has taken a long, long time – measured in decades. I am working with a company now that has been at it 20 years and they are just starting to hit the inflection point. Art Goldstein of Ionics fame makes this point very clearly whenever you talk to him about water.
    2. This is because the decision makers on water systems are extremely, extremely risk averse (reminds me of the old utility companies 30 years ago). The most extreme case of “if it ain’t broke, don’t try and fix it.”
    3. The economics and politics of water are very high. As you point out, the price is very artificially low — and it almost must be for political purposes. Until a way can be determined and implemented to do differential pricing, this economic conundrum will continue to haunt things.
    4. I do believe that you are correct about the shortage of management talent in the area — like there is for energy, as has been discussed before here and elsewhere. The skills are very similar.
    5. Like energy, the scaleability problem is present as well but all that being said…
    5. There are smaller niche water opportunities that have been in the market place for a while that now with the new realities and capital can be scaled first in their niche and then to a wider market (see water purification for cooling). They are not the traditional new start ups but rather middle age companies that can be reinvigorated (maybe like John McCain?).
    6. I think the time is right for a patient fund to work with people in places like the MIT Water Group to see if the things they are doing in the developing world are commercializable and ultimately will have big markets. The innovation here (as Clayton Christiansen is talking about now) may well not come in the labs in the US in Corporations or Government but in the remote places where necessity if the mother of economic invention.

    Enough from me for now, I would like to hear yours and other people’s thoughts in the emerging water/food/energy triangle intersection…
    (please excuse typos…)

  • Phillip

    Hey Bill,
    I’m glad you’re talking about water, and I agree with your comments. I want to throw a few additional things out there:

    1. There is no bigger renewables fan out there than me but many of them are “thermal” which means they need a whole bunch of water. I’m thinking of solar thermal in a desert or geothermal in areas that don’t have existing reservoirs.

    2. I would take your concerns about corn ethanol a step further. In addition to effects on food prices there is a broader problem of a lack of what I’ll call “systems thinking.” We are in the Climate Change mess because we didn’t understand the full effects of our burning of fossil fuels. We try corn ethanol, and we see the effect on food prices. Now, even with cellulosic, when we have a price on switch-grass all of a sudden for something as crucial as energy, what are the systems impacts we can’t/don’t anticipate? Fertilizer to grow it faster, competing with food crops for land, etc.

    One other example, carbon storage. Does anyone have any idea what pumping sequestered carbon into the earth will do?

    If we keep narrowing our solutions to very specific problems (like carbon dioxide or costly oil) and don’t look at broader implications, we’ll keep finding ourselves in trouble…i think.

    3. I would suggest that greater water needs for energy could conceivably actually help the water problem. I know that sounds counter-intuitive, but as you mentioned above we need a better market for water and innovation in water. Large energy firms that need clean water and are willing to pay for it could help drive innovation. I understand the tension you point out, but I thought I would bring up this thought as a potential counter-point…

    Thanks Bill

  • http://bznotes.wordpress.com Bilal Zuberi

    Bill-

    I was hoping somebody would write on water. Thanks. While the average were running after nanotech/biotech deals 5-8 years ago, the cunning were starting to see environmental tech on the horizon. Now that the average are running after energy deals, the smart should be thinking about water.

    I don’t mean any offense to those in the industry, but you are dead-on that the decision makers in the water business are slow, relatively non-techie, and risk-averse. Having worked in the next slowest industry, i.e. automotive, I can imagine how hard it is to sell into it. But is there a way to approach the customers directly who would be more willing to pay than the middle-man thinks? I can tell you my family in urban Pakistan would pay a lot more for clean water (and are more used to it) than an average American.

    It is interesting that some of the issues faced by water innovators parallel those in energy: (a) geographical distribution of markets, (b) centralized vs distributed systems, (c) scalability issues, (d) mismatch between rhetoric and action at governmental level, and (e) lack of entrepreneurs/investors who are willing to stick with long-term endeavors.

    I agree with the comment above that the water-energy nexus could be great for both. Energy companies could end up investing in water innovations while water companies would look for cheaper energy sources. I think we need to take energy and water technologies to regions where they are needed most to develop them fast and cost effectively, i.e. developing countries in Asia, Africa etc. And lets find long term investors (maybe the Middle East investors fit the bill) who are less scared of playing with commodities in such markets.

  • http://www.fark.com Fmmodzelewski

    Very nice piece: water water everywhere but none to invest in.

    Water is the classic sector that everyone wants to fix, but has HUGE barriers to actually doing it. Water is a highly consolidated risk adverse industry that has small margins and very little innovation in it. But I will say the energy water nexus might change that….maybe.

    A big reason the water industry is what it is…its because if the systems are run badly and inefficiently, municipalities can solve the problem by simply raising the rates. And raising the rates barely even registers with western consumers. And in the developing world? Lets be indelicate here – where is the money in helping them first (with a business)?

    The water industry is also talked about uniformly but it (pardon the pun) comes in a lot of distinct buckets: Consumer water (which everyone obsesses on when it comes to fresh water) is actually a tiny piece of global water usage (as both municipal and personal use). Industrial is a larger market and agriculture is over 70% of fresh water usage –yet little attention is paid to it and its problems. For instance, it makes me laugh to see signs in Southern California hotels asking me not to flush when they are growing avocados in the desert down the road. This isn’t a technology issue necessarily –it’s a political one.

    To date the big money in water is in better project management savings not technology advances. And to be honest, VCs are ill equipped to bring smart money to the field.

    That said, there are a few cool areas that VCs and other early stage investors might play in:
    • Remetering and water management software
    • Water Sensors: detection, security and analysis
    • Filtration Media/Membranes: HUGE CAVEATS. There may be something in this space, but its tough and the solutions need to be adaptable, and if the idea is the usual venture capital one of disintermediating the major players –that ain’t going to happen in the municipal sector. So anyone playing in this space needs to ask themselves what is working with Nestle, GE, Veolia, etc going to do to the margins down the road? And in the other areas (ag, food process, semi, bottled water, etc), possible, but only if you can work it niche by niche by niche, something that can really run up a development cost bill.

  • http://www.xconomy.com/author/baulet/ Bill Aulet

    Professor John Sterman commented directly to me in an email that I wanted to share more broadly because it brings up some other good points which should generate more discussion. His comments were as follows:

    “quite right, though it’s even worse than you suggest (the water/food/energy triangle). You focus on the entrepreneurial angle, but there will likely be regulatory responses that limit water use or ban some of the ridiculous practices we now allow (bottled water trucked or shipped across thousands of miles). We’ll see as well tighter codes for water-using appliances in homes (toilets, faucets, laundry, irrigation), etc., and their analogs in industrial processes. There will be economic oppty for those who are ready when these regs come in. That’s the decoupling side you mention.

    Also, when carbon -based energy is priced at anything close to its true cost (coming soon after an election near you), processes such as corn-based ethanol and tar sands will almost immediately become uneconomic because of the huge embodied carbon energy in their production. The renewables and efficiency investments that are good now (wind, solar, insulation, etc.) will become spectacular (until entry bids down prices), and some of the now uneconomic renewable carbon neutral sources will become viable.”

    As Phil pointed out above and John illustrates in his comments, there is a need for more systems thinking in approaching the energy/sustainability problem and that is what John is focused on with his colleages in the MIT Sloan Initiative for Sustainable Business and Society.

  • Lisa

    Great piece Bill.

    As you mentioned, agricultural biomass is the poster child for the tension between alternative energy and water/food. And, with increased government mandates, the number of biorefineries lining up to process biomass into biofuel is only increasing (ethanol plant capacity in the US grew over 30% last year), so investment in alternatives is necessary. One of the benefits of using microbes such as algae or bacteria to create biomass and biofuel is that many of these species can be grown in salt water or waste water. Using such species therefore does not compete with fresh water needs. Their growth also does not require arable land and consequently will not compete with food crops if the facilities are properly located.

  • http://www.greenstreetinvestor.com Mark

    Bill – Excellent piece, especially the point about it not fitting the VC model… but I am curious about your point about trading energy for water. Is the underlying assumption is that energy, even renewable, will be to scarce from a cost standpoint too spend on creating fresh water? Certainly there is sufficient renewable energy potential, solar, wave, wind, geothermal, etc. to solve the water issue in a coupled fashion – I assume that the rub must be the capital needed to harness that energy.

    This brings me back to your point about not fitting the VC model – it would appear that the VC model for energy development seems overy focused on large installations that fit our existing energy infrastructure and policy approach – the mainframe approach. Convienently, this approach also consumes large chunks of capital – and is sufficiently risky on a project by project basis to warrant big returns for investors. Not a bad thing for a world with more money than good ideas.

    Taking the the good citizen issue aside, isn’t it safe to assume that successful investments might not necessarily need to decouple those two issues – well two of the three (if you count food separate from water) as both the food and energy markets are rife with companies that profit and are sucessful based on externalizing certain costs of doing business to the commons through things such as pollution, heath costs borne by others or government subsidies – why would this change going forward without regulatory and government policy intervention to start assigning those externalized costs?

  • John

    Hi Bill,

    Thanks for the insightful article. As you mention in the article the looming problems really lie in the linkage of energy and fresh water, not water in general. We have plenty of water, the problem is, it’s mostly salt water, or if its fresh it might be polluted. The inclusion of Maslow’s hierarchy in the article made me consider that we have a hierarchy of human water needs. At the top of the water pyramid is the water needed for drinking and bathing which should be fresh and pure. In addition fresh and pure water is needed for certain chemical and industrial processes. Below this are levels that require decreasing levels of purity and freshness such as water for crops, water for recreation, water for landscape vegetation, for chemical and industrial processes that don’t require pure water, sewage and waste disposal, steam production, coolant, mining and so on. Do we apply fresh water in too many instances where it is not really needed? I suspect the answer is yes.

    Looking at the four examples you give for the linkage of energy and water, do any of these energy technologies really require fresh water? As Lisa mentions in her post biomass can be produced from salt water or non-potable water if bacteria, algae, or some other form of tolerant organism is used. I believe nuclear power plants can use salt water as coolant and I wonder if enhanced and heavy oil recovery could use salt water as well.

    I realize that there are increased difficulties in working with salt water over fresh water such as with corrosion and mineral deposits. Also in some cases the water need may lie at a large distance from any body of salt water making transport a problem. But I wonder if more can be done to adapt our industrial, energy, and mining activities to the use of sea water.

  • http://www.benshartley.com Mark H

    I love John’s concept of the “Hierarchy of Human Water Needs.” A ton of “high level” water could be saved simply by using “low level” waters that will still solve the problem at hand.

    And while I’ve always had the sense that buying bottled water is usually unnecessary, I’d never thought about the fossil fuels burned in the process of getting that water to me. (Actually, the only time I’ve seen that issue addressed in the news was in this hilarious advertisement for “Aqua Colbert” from the Colbert Report.)

    On a more serious note, this is an interesting article on the water cooling needs of nuclear power plants.

    Are there any technologies for capturing waste heat from nuclear power plants?

  • http://www.benshartley.com Mark

    It’s also interesting to note that the energy crisis can be mapped out pretty simply using the Maslow pyramid.

    If we only used the energy we needed for basic needs like food and shelter, we’d be fine. It’s in the interest of building esteem and respect where we start to consume at exponentially higher rates than subsistence requires.

    But that trend is tough to reverse, because it’s hard to impress your neighbors by consuming less.

    Bill, you should start a “carbon negative” luxury brand, where consumers pay a huge premium on goods to have a net positive effect on the environment. You could probably get Angelina Jolie to star in your ads for free.

  • Gaetan

    Interesting debate, to invest or not to invest.

    My two cents:
    If one puts water in the physiological category of Maslow hierarchy of needs, it can only mean potable water. However I happen to believe that the “Water” opportunity, if it can be classified as one category, is going to be in non-potable water. Think grey water, better re-use cycles, water efficiency uses etc.
    One example: process water. Any company that wants to control an industrial process of a decent size has to use cooling. It usually comes down to a decently sized water-based cooling system. If you look at the technologies involved and the industry structure, it is pretty stunning. Technologies are old (20 to 50 years of more), and it is a very regional and very fragmented market of small private companies.
    This should be an opportunity for Start-ups as well as Private Equity (given the fragmentation of the market, a roll-up strategy would do wonders here).
    Not as sexy as potable water, but effective given the potential impact on water usage.

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  • http://www.xconomy.com/author/bbuderi/ Robert Buderi

    Bill, you definitely are on target with this post. But is water the new oil? Should it be something we invest in and businesses develop as a commodity, or is it a human right that should be provided at the lowest possible cost?

    Interesting points raised in this article from the Christian Science Monitor a few weeks ago.

  • http://www.xconomy.com/author/baulet/ Bill Aulet

    The Christian Science Monitor article is an excellent article. It was sent to me as well and has in it the “water as a right” dimension that makes this subject even more emotionally charged than energy (again, it is lower on Maslow’s hierarchy). Make the challenge all the higher, and the reward all the more significant when the code is cracked. It will have to be done with small incremental plays to start.

  • http://www.gnosiscommunity.com William J. Connerty

    Interesting post. I am currently developing a sustainable development plan for 50,000 acres south of San Fransisco. Our key technology will be a hydrocyclone centrifuge to manage the hydrology of the 24 oil wells, the 15,000 acres of high density olive trees, 5,000 acres of grape vineyards, a small hydroponics, olive mill facility and 1.3 gpy biofuels plant. Developing the proformas has been a challange. I need to quantify various business elements together with the water management plan as the key fiscal “pivot point”. It’s possible to “close the loop” and control the cash flows for maximize debt structure. I’ve got a centrifuge technology up to 1500 mesh. Three passes through the system and I have clean oil and drinkable water. Not bad for a simple mechanical process. Providing clean water for the ag side is crucial.I can also blend in bio based oils for mixed finished products.

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