2010  U.S.  Drinking Water Innovation
Vendor Outlook
Report on the companies and market trends shaping
innovation the U.S. drinking water sector

                                                       Principal Authors
                                                       Mia Javier
                                                       Analyst, Research &
                                                       Advisory
                                                       +1415 684 1020 x.7173
                                                       mia.javier@cleantech.com
                                                       Greg Neichin
                                                       VP Research & Advisory
                                                       + 1415 684 1020X.6800
                                                       greg.neichin@cleantech.com

                                                       Contributing Authors
                                                       Sheeraz Haji
                                                       President
                                                       sheeraz.haji@cleantech.com

-------
                                                                                2010 U.S. Water Innovation
Key Report Takeaways
Overall Water Market Takeaways:
• Innovation in the water sector is unanimously viewed as critical to meeting water challenges that will emerge in
the 21st century.  However, a large number of open questions remain around the speed at which innovation must
occur, where financing of development will come from, and what types of companies are best positioned to
address these emerging needs.
• Our analysis indicates that the total water equipment market in the U.S. in 2010 is ~$28 billion across drinking
water, wastewater, and industrial water - a massive commercial opportunity for vendors, service providers, and
innovators.
Venture Investment Takeaways
• Despite the size of this opportunity and interest on the part of venture investors, the water sector has
significantly lagged other cleantech sectors in the amount of institutional venture capital devoted to companies in
the industry.
• Venture capital (VC) investment in water has been particularly underrepresented in the United States; the U.S.
typically garners ~60% of all global cleantech venture investment, yet has captured less than 30% of investments in
the water sector in 2010.
• Venture investors have been hesitant to deploy significant capital in the  sector due to perceived obstacles in
penetrating large customers, uncertainty around regulation, long pilot cycles, opaque economics, and large capital
needs to take some projects to scale.
• Venture investors have been attracted to opportunities targeting industrial water use where the sales cycles to
commercial and industrial users is seen as more straightforward, as well as wastewater opportunities where by-
products can be more easily monetized.
• U.S. government support, primarily in the form of stimulus-boosted increases to the State Drinking Water
Revolving Funds, has resulted in positive momentum for infrastructure rehabilitation, but does not necessarily
represent direct investment in next generation technologies.
• By virtue of its overall venture capital (VC) strength, California has garnered the majority of VC devoted to U.S.
water innovators,  but no U.S. region or municipality has seized on the opportunity to establish itself as a leading
water innovation hub. This leaves the playing field open for the greater Cincinnati area to actively fill this void.
Drinking Water Market Dynamics
• Drinking water has been perhaps the most challenging market for new companies to enter. We classify
innovation in the drinking water sector into three key areas: water treatment/disinfection, filtration/membrane
treatment, and system monitoring & metering.
• Our analysis finds that the market opportunity in the U.S. drinking water sector distributed across these three key
areas to be ~$1.2 billion.
• The drinking water value chain is dominated by large equipment vendors and service providers that exert
important influence on the market. Equipment providers such as GE and Siemens have been active acquirers of
technology; integrators such as IBM and service providers such as Veolia are beginning to position themselves as
critical partners to helping new ventures penetrate large municipal and industrial customers.
• Facing competition from well-financed, global competitors, innovators would benefit from test beds and
incubators that allow them to more efficiently "even the playing field". This is yet another area where the EPA and
Cincinnati region may have a significant role to play.

-------
                                                                           2010 U.S. Water Innovation


Background: Total Water Market
Satisfying water demand safely, efficiently, and cost effectively will undoubtedly be one of the great
challenges of this century. While it may not yet be as central to public consciousness in the United
States (U.S.) as energy conservation or materials recycling, access to a reliable water supply at a
reasonable price is a fast growing area of concern across all water use markets - residential,
commercial/industrial, and agricultural. The U.S. continues to lead the world in per capita water
consumption and while the past decade has seen a decline in per capita water withdrawals, new
industrial water use applications may begin to turn that demand curve back up.

In parallel to the potential for increased demand, the U.S. water infrastructure and supply ecosystem
faces a host of emerging challenges. Among them are new contaminants entering the water supply and
an aging distribution infrastructure that results in significant leakage and non-revenue water. At the
same time, the economics of the water industry continue to be relatively opaque with the cost of
delivered water far higher than actual prices paid by consumers.  Finally, we see water at the center of
various resource trade-off debates with energy, as well as with food/agriculture, resulting in commodity
calculus scenarios that will stymie even the best-intentioned environmental economist.
                            Water At The Nexus Of Trade-Off Debates
Despite these challenges, the U.S. water sector is a huge market opportunity for equipment vendors,
technologists, service providers, and investors. The entire U.S. water equipment market, across
drinking water, wastewater, and industrial applications will total nearly $28 billion in spending in
20101. This total includes traditional pipes, valves, pumps, filtration and treatment equipment, along
with an increasing amount of innovative technology from advanced membranes to water quality
monitoring and management systems. The  magnitude of this market size alone would lead most to
believe that the water sector is a highly attractive market opportunity for innovators.
1 Global Water Intelligence, Cleantech Group Analysis

-------
                                                                                         2010 U.S. Water Innovation
                                    Total U.S. Water Equipment Market
                                 Industrial            Wastewater         Drinking Water

                                   Source: Global Water Intelligence, Cleantech Group Analysis
Analysis of venture capital dollars deployed in the sector, however, tells a very different story about
investors' current faith in the ability of innovators to capitalize on this huge market opportunity.
               Total Water Investments As a % Of Total Global Cleantech Venture Capital
         60.0%
                          49.1% ($1.
                        tionll.9%(<
                -EnergyEfficiency 7.1%($O.S6B)
                -Biofuels6.9% (SO.54M)
                -Smart Grid 5.1% ($0.418)
                -Water 2.1% ($O.167B)
         _>u ir
         ifi fr •
             —>To(al Water-^—Renewable! (Solar, Wind. Hydro/Msiine, Geoihermal)	Transportation— Smart Cud	Energy Efficiency	Biofuels
        Source: Cleantech Group Analysis

-------
                                                                            2010 U.S. Water Innovation
As the Cleantech Group's global venture data illustrates, water technologies have only attracted
between 1-3% of all venture investment; the majority of capital has been devoted to energy generation,
transportation, and energy efficiency.  While 2010 will likely mark a new high for venture investments in
the water sector - companies raised $166 million through the first three quarters of the year, just $15
million short of the 2007 record - the allocation of innovation capital for water technologies has been
anemic in comparison to the water market opportunity and far lags the dollars that have flowed into
other cleantech sectors.

              Total Global Water Venture Investment and U.S. % Share of Investment
        in.
                                                                                     30.CK
                            2006         200?

                              • Global Venture Investment! in Total Water
200$          Join

   U.S.SItjfec>f Total water
                                         Source: Cleantech Group Analysis
This lack of capital is particularly acute in the U.S., which has captured 28% of total investment in 2010
and 37% of total investment in 2009 as opposed to its more typical 60% share of cleantech venture
dollars in other sectors.  Israel has been widely viewed as the global leader in water innovation and has
seen the largest number of deals (by count) and is home to the most active water venture capital firm,
Kinrot Ventures (now owned by AguAgro). There has been significant deal activity in the UK, as well as
throughout the rest of Europe. Activity in Asia has primarily come out of China and Singapore. In
addition to Kinrot, other firms including SAIL Venture Partners, Element Partners,  Emerald Technology
Ventures,  Israel Cleantech Ventures, Virgin Green Fund, Chrysalix Venture Capital, and XPV Capital have
all been amongst the most active firms in the world evaluating and investing in water technology deals.

While venture dollars have been relatively sparse, government has stepped into provide financing
alternatives in certain areas of the water sector. The American Recovery and Reinvestment Act of 2009
(ARRA) provided stimulus funding that significantly boosted funds available via the State Drinking Water

-------
                                                                            2010 U.S. Water Innovation
Revolving Funds. In fact, 2009 allocations from these funds exceeded the four previous years combined
total.
                              DrinkingWater State RevolvingFunds
                   2005
                                 2006
                                                2007
                                                               2008
                                                                             2009
                                     Source: EPA Data, Cleantech Group Analysis
A portion of these funds, 20%, was specifically earmarked to projects deemed "green" - including those
focused on water conservation and efficiency. The vast majority, however, were awarded to critical
"shovel-ready" infrastructure rehabilitation. There is no doubt that these projects were meritorious and
many likely leveraged the best available technologies, but it would be inaccurate to claim that these
funds directly stimulated new ventures. While somewhat limited, more accurate direct examples of
government support of water innovation can be found in studying SBIR grants that have been made in
the sector.

Taken together, the relative lack of private venture capital and the absence of significant, direct
government support for water innovation, illustrate two large disconnects in the water sector:

        (1) The disconnect between the size of the water market opportunity and breadth of
           fundamental challenges in the sector with the relative lack of venture investment in the
           industry. Typically, large market opportunities with significant technical and business
           problems to solve would quickly attract entrepreneurs and risk capital. As respected Silicon
           Valley venture capitalist Steve Jurveston said recently, "[water represents] probably the
           biggest mismatch between a screaming, enormous market and a lack of technology
           innovation  I have ever seen."
        (2) There is a disconnect between U.S. domestic innovation in the water sector vs. innovation in
           other domains.  The U.S. has led the world in attracting institutional venture capital in nearly
           every sector except water.

-------
                                                                            2010 U.S. Water Innovation


Exploring these disconnects to understand the conditions necessary to catalyze investment in the water
market requires deep sectoral analysis.  It requires breaking down the total water market into its
component parts, understanding the value chain of companies inhabiting each sub-sector, evaluating
individual market sizes, assessing the competitive dynamics of the sub-sector, and diagnosing the
impediments to investment. This report is focused on performing this type of analysis.

Background: Geographic Perspective On U.S. Water Equipment Market

Before diving into the drinking water sector however, it is instructive to provide guidance on the current
geographic diversity of the U.S. water equipment sector. In looking at the water equipment market in
the U.S., we  catalogued over 480 leading equipment vendors involved in the total water market - from
water treatment to distribution and systems monitoring, and finally wastewater treatment.   As our
mapping illustrates, these firms were found in nearly all 50 states.
                            Mapping of U.S. Water Equipment Vendors
                                                                                        | Map  I same | Hvt
                                                                               g   • rwYotk
                                                                              ™          ' I  1
                                                                                    ,.„,„ c-.^clleyl _ Rl
                                                                                     <•  . __      li
                                                                  3     Cotuml Jt     MUryUixt tt'"
                                               o            ->»«»*, t

                                             *? TM*  jv "•        '""b'S
                                                 2   3     • -' •      T'
                                             OUhom.  '"~        -J-Tmneu
                               "•"   oS. A     "*"          01*.
                              ""» .    f *.«.* •„
                                                                       IIP dlli«2010 «Hf. E»(«M T.chnoloans. «oogli, INEOI. UldDog Com
There has been some degree of clustering and a number of states do have a disproportionate number of
water vendors. For purposes of this report and assessing Cincinnati's potential to cultivate water
technology innovation, it worth noting that Ohio ranks toward the top of the list of states ranked by
count of vendors. The greater Cincinnati region is also visible on the map above as one of the yellow
clusters indicating intensity of companies.

-------
                                                                 2010 U.S. Water Innovation
                  Leading States By Count of All Water Equipment Vendors
State
CA
IL
FL
PA
TX
NY
OH
Ml
GA
MN
Wl
Count
76
34
33
26
26
20
19
17
15
15
15
                              Source: Cleantech Group Analysis
                Distribution of Venture-Backed Water Equipment Companies
           Illlliiii
                              Source: Cleantech Group Analysis


This set of companies is predominantly, 78% (376 of 480), non-ventured back private firms many of
whom have been in the business of providing basic equipment to water utilities for years, if not decades.
There is a small set, 44, of larger, public companies, as well as a set of 60 venture-backed firms. For
purposes of this report, we are most concerned with this latter 60, venture-backed innovators. As is
                                                                                8

-------
                                                                            2010 U.S. Water Innovation


demonstrated by the previous chart, the distribution of venture-backed companies is heavily weighted
towards California - the state that has most traditionally garnered the vast majority of venture capital
dollars.  Ohio has two venture-backed companies in our data set.  While California is positioned in its
traditional spot atop this list, there is no secondary region that has distinguished itself, leaving what we
believe is an open opportunity.

While we have seen certain U.S. states and cities mobilize to position themselves as innovation hubs for
other cleantech sectors, for example, Philadelphia's push around building energy efficiency2, we have
yet to see a concerted and sustained effort around water innovation.  Milwaukee began an effort in
2008 around water innovation, but does not yet appear to have gained significant  traction3 and Fresno,
CA has also been cited as a potential regional water innovation center.

Our geographic data on U.S. water technology vendors therefore has two key takeaways in placing
Cincinnati in the context of the total water vendor market:

    (1) When evaluating all vendors in our sample, there is significant geographic  diversity, yet some
       states/regions do stand out.  Ohio ranks toward  the top of this state list indicating a potential
       knowledge base of legacy vendors in the market.

    (2) Venture-backed firms remain highly concentrated in California with no secondary region
       currently vying strongly for second place. This gap is also an opportunity as, to-date, no other
       region has made a successful, concerted effort to attract and cultivate venture-backed water
       innovators.

With this macro, geographic opportunity in mind, we turn the remainder of this report to the
investigation of the drinking water market.

Background: Scope & Methodology
As we outlined earlier, the total water equipment market is broadly comprised of three large sub-
sectors: industrial, wastewater, and drinking water. For purposes of limiting our scope, the remainder
of this report will look exclusively at the market for drinking water innovation. In focusing our lens,
we must also acknowledge that there are not always entirely clean lines between these sub-sectors.
Many technologies are applicable to more than one market area and because the water cycle is by its
nature cyclical, choices made during wastewater treatment may ultimately impact drinking water
treatment.  Nonetheless, we hope to leverage a methodology in this report that could be used to
explore the industrial and wastewater sectors in future analysis.  In performing this analysis in the
drinking water market, we aim to assist the EPA in:

    1.  Identifying new and innovative water treatment, transport, and handling strategies and
       technologies against the outlined drinking water challenge areas
2 http://theenergycollective.com/greenskeptic/44209/philadelphia-innovation-cluster-seen-key-future
3 http://www.jsonline.com/business/29473929.html

-------
                                                                             2010 U.S. Water Innovation
    2.   Understanding the needs and economic strengths of various industry segments and their ability
        to adopt the identified new and innovative drinking water technologies
    3.   Weighing the pros and cons of highly focused drinking water innovation versus total water
        management
    4.   Assessing Cincinnati area market for drinking water technologies
    5.   Assessing the impacts of current regulatory policy and possible policy reform on drinking water
        innovation.

In each  of the following chapters, we will highlight each specific sub-segment of the drinking water
technology market. Our analysis will:

    (1)  Explain some of the basic technology issues and market challenges that are being faced in this
        segment
    (2)  Place that segment in the context of both drinking water and total water management
    (3)  Present the current innovation market size for this segment
    (4)  Identify leading technology innovators mapped against drinking water challenge areas

Our report has been informed by significant secondary and primary market research.  We have used the
Cleantech Group's proprietary venture capital database and market research in the water sector as a
basis for much of the data in this report. We have conducted extensive primary interviews across all
segments of the water value chain to solicit feedback from stakeholders with differing vantage points.

                              Select List of Executives Providing Input
       Utilities & Facilities Management
         Water Technology Vendors
             Engineering Firms
             Venture Investors
Veolia Environnement:
Bill Wescott, VP of North America Innovation
American Water
Paul Gagliardo, Director of Innovation
Global Water
Trevor Hill, Director of Innovation
LADWP
Tom Erb, Director of Water Resources
IBM

Drew Clark, Partner - Water Technologies
Siemens TTB

Lee Ng, Director Water Technologies,
GE Water

Steve Kloos, Director Advanced Water Technologies
Kennedy/Jenks Consultants
Jean Debroux, Director Advanced Technologies Group
SAIL Venture Partners
Hank Habicht, Partner
XPV Capital
David Henderson, Principal
Kin rot Ventures
                                                                                              10

-------
                                                                            2010 U.S. Water Innovation
                                            Assaf Barnea, Partner
Background: Focus on Drinking Water
Water travels a complex path from extraction through treatment to distribution, use and re-use, and
ultimately wastewater treatment, before being returned into the environment where this natural cycle
begins again. Technology innovation influences every step of this water activity cycle and will play an
increasingly important role in meeting the water challenges of the 21st century.

                                       Total Water Cycle
                                             Water
                                            Treatment
                                                       Distribution
                                Wastewater
                                Treatment/
                                  Reuse
Our analysis has led us to situate the drinking water innovation space within the water treatment and
distribution portion of the water cycle.
Total Water Industry Activity Chain
AT ~T ~T ~T ~T A
\ ... . \ \ \ \ Wastewater \
/ T t t / Di5tribution / / / Treatmen >
^ reamer, / / / / Re-Use /
Drinking Water
Technologies

Water Treatment Distribution
AT AT A
Water \ Filtration/ \ System \
Treatment/ / Membrane / Monitoring & \
Disinfection / Treatment / Metering /
/ / /

                                      Source: Cleantech Group Analysis
Within these two macro-activity areas, we have specifically identified three key segments that
collectively make up what we define as the drinking water innovation landscape: Water
Treatment/Disinfection, Filtration/ Membrane Treatment, and System Monitoring & Control. The
remainder of this report will focus on dissecting the market opportunity, venture investments, and
market dynamics that are shaping these three innovation areas.
                                                                                             11

-------
                                                                             2010 U.S. Water Innovation
     (1)  Water Treatment/
         Disinfection
    (2) Filtration/ Membrane
       Treatment
    (3) System Monitoring &
       Control
   Disinfection
•  Point-of-use
•  Other
• Membrane Treatment
• Filtration
• Membrane Desalination
• Automated Metering
• Network and Process
  Management
• Water Quality Management
It is important to note that our analysis of innovation is also specifically centered on the opportunity for
new products and technologies (i.e. equipment). These technologies fit into a regulated, layered market
landscape that has a variety of other key influencers and market participants.  We will use the next
section of our introduction to address some over-arching value chain and regulatory issues.

Focus on Drinking Water: Value Chain Drivers
As illustrated by the framework below, engineering, design, and construction firms, as well as asset
owners and operators all play a role in the drinking water market value chain.  These firms, and
municipalities, can act to promote innovation or can be major obstacles to deployment of new
technologies.  Engineering firms play a critical role in evaluating the viability of technology choices for
new build facilities and wield significant influence in supplier selection. Asset owners and private asset
operators such as Veolia Water and United Water (Suez) can also play  a lead role as service providers in
vetting and deploying new technologies. While we will not cover these layers - engineering firms, asset
operators, and asset owners - of the value chain directly, our analysis will attempt to call out how these
firms can stimulate, or hinder, innovation.
                 Drinking Water Market Value Chain: Focus on Equipment Vendors
                        U.S. Water Market
           Asset
          Owners
           Asset
         Operators


        Engineering
        Services (&  _J
          System
        Integrators)
         Equipment
          Vendors  —
     Greater Cincinnati Water
     Works

     Dayton Department of
     Water
      perc water

              United Water

    CH2MHILL
                          ExtractionX.  Treatment  Distribution
                          Use      Collection   Wastewater
                                            Treatment/
                                              Reuse
                                            Source: Cleantech Group Analysis
                                                                                              12

-------
                                                                             2010 U.S. Water Innovation


In particular when examining how vendors approach asset owners as potential customers, it is critical to
consider the size of drinking water facilities and the dynamics of serving these facilities.  The EPA
categorizes drinking water systems into five categories by size from very small to very large.  The
following chart illustrates the markedly inverse relationship between population served  and size of
system for community drinking water systems (these systems cover 90%+ of America's population).  As
the EPA's 2009 data demonstrates, 82% of the population is covered by only 8% of the country's water
systems (approximately 4,100 of 52,000 systems).4

  Vendor Dynamics By Community Drinking Water Systems: By Size, % of Systems, %  of Population
            GO".
            SOU
            40W
            30",,
                        Difficult To Profitably
                           Serve At Scale
  Vendors Target for Early
    Adopters & Pilots
            20%
            10"',
                   Very Sma
                   (500 or less)
  Medium
3,301-10,000
   Large
10,001-100,000
Very Large
>100.000
                        Source: 2009 EPA Factoids, Cleantech Group Analysis

Innovative new water companies are looking for customers that will have sufficient scale to drive
revenue with a reasonable cost of sales and service. Consequently, it is very difficult for these firms to
consider small or very small systems a potential market as the landscape is far too fragmented.  Most
innovators will look to larger systems to pilot technologies.  Mid-size to large facilities are an ideal early
adopter as they have sufficient scale for vendors to serve profitably, but may be able to move somewhat
more nimbly than the largest of systems to adopt new technologies - though this is not uniformly the
case.  In general, for first adopters and pilots, early stage vendors will look for systems that meet a size
threshold  and that have the lowest sales friction. Finally, the ~400 very large systems that cover 46% of
the population are key accounts for any vendor.  They are the long term target market for any vendor
hoping to  become a major force in the drinking water market.
1 http://water.epa.gov/scitech/datait/databases/drink/sdwisfed/upload/data_factoids_2009.pdf
                                                                                             13

-------
                                                                            2010 U.S. Water Innovation


Focus on Drinking Water: Regulation
Regulation has played a critical role in the protection of U.S. drinking water sources dating back to the
enactment of the Clean Water Act of 1972 and the Safe Drinking Water Act of 1974. Because the public
sector dominates ownership of U.S. water utilities, regulation and markets are closely intertwined.
Regulatory policy drives drinking water markets in two key ways:

       (1) Regulation, coupled with enforcement, can drive markets. Water systems tend to adopt
           innovation in direct response to new requirements. In many cases, there is little incentive
           for systems to act in the absence of both regulation and active enforcement. As a result of
           subsidies and a fixed tariff structure, municipal water utilities have a difficult time
           completing true cost benefit analyses of adopting new technologies. Instead, regulatory
           drivers dictate their adoption of new technologies in combination with available funding
           provided by the state and federal governments. For example, the best available technology
           standards put forth by the EPA, played a critical role in the creation and growth of the UV
           disinfection market in the U.S., where, previously, one  did not exist. Market participants
           mentioned nutrient removal and real-time monitoring  as areas where requirements could
           directly stimulate innovation and  purchasing.

       (2) Regulation can influence the competitive landscape and available solutions.  Certification
           processes can directly determine which companies are viable or not.  For example, one
           vendor, developing a monitoring technology capable of detecting metals in water sources in
           the parts per billion, described cost as its biggest challenge in attaining EPA certification as a
           best  available technology (BAT). The company told us that the process would have  required
           an allocation of $350,000 worth of staff hours to complete the certification. Consequently,
           the vendor has refocused its efforts on the process control markets for the chemicals and
           Pharmaceuticals markets where there will be more  predictable return on investment for the
           customer. This is an area where regional, EPA-supported test beds and incubators  may be
           able  to speed up the innovation process and may offer faster, more cost effective paths to
           market for new companies. The Cincinnati region seems well positioned to be a central
           location for this type of testing.

Despite the undeniable, successful impact that regulation has had in the U.S. in cleaning up and
protecting water resources since the enactment of both the CWA and SDWA, challenges still exist.
According to the  2004 EPA National Water Quality Inventory5, 44% of assessed stream miles, 64% of
assessed lake acres, and 30% of assessed bay and estuarine square miles were not clean enough to
support uses such as fishing and swimming...top sources of impairment included atmospheric
deposition, agriculture, hydrologic modifications, and unknown  or unspecified sources."
5 See, The National Water Quality Inventory: Report to Congress:
http://water.epa.gov/lawsregs/guidance/cwa/305b/upload/2009_01_22_305b_2004report_factsheet2004305b.p
df

                                                                                            14

-------
                                                                                2010 U.S. Water Innovation
Moreover, the drought ridden southeastern and southwestern states are facing challenges regarding the
management of water resources to meet the demands of both growing urban populations and industrial
users.  For these reasons, it is critical for EPA to look into incentivizing and developing innovative water
technologies within a broader, more holistic approach to water resource management.

According to several vendor interviews, the current regulatory structure is too compartmentalized and
creates artificial boundaries where a unified approach to water resource management ought to exist.
Regulation at the national, EPA level, is only part of the equation for any vendor that also must navigate
state regulatory policies.  Better coordination and clarity seems a frequent request from the
commercial community.

For many vendors, municipal water utilities are the last customer segment to be addressed given its
notoriously slow procurement process and certification processes. Engineering design firms are rightly
beholden to the public health aspects of drinking water, which results in a preference for legacy, proven
technologies.

As the EPA evaluates the role of regulation on innovation in the drinking water market, it is instructive to
look at best practices around the world:  Israel and Singapore have both leveraged regulation to pursue
bold visions in the water sector and to strengthen their positions as global water leaders.

                                 International Policies In Perspective
                      Israel
                   Singapore
Israel launched its Novel Efficiency Water Technologies
program (NEWTech) in 2006. This program aims to build
on Israel's experience  in addressing its water scarcity
problems, while advancing its water technology
capability at an international level through strategic
investments and allocation of substantial resources.
NEWTech is led by the Ministry of Industry, Trade and
Labor, which oversees a multi-ministerial steering
committee. The committee is comprised of members
from the Prime Minister's Office and the Ministries of
Foreign Affairs, Finance, Science, National
Infrastructure, and Environmental protection, as well as
the Israel Water Authority, water and sewage program
with an annual budget of $300 million.  NEWTech has
established 24 private and government funded water
technology incubators that assist entrepreneurs in
commercializing new technologies. These incubators
are estimated to have  attracted hundreds of millions of
dollars worth of private investment. NEWTech has also
invested in branding technologies within their incubator
globally by establishing international partnerships and
developing WATEC, an international exhibition and
conference showcasing technologies, products and
services. According to  an interview with XPV capital,
Israel's water industry exports doubled between 2005
and 2008, rising to $1.4 billion and are projected to be
worth $2.5 billion by 2011.
In an effort to reduce Singapore's reliance of imported
water from Malaysia, the country has strategically
aligned economic, social and environmental
requirements into a focused policy that prioritizes the
water industry as a key economic growth area.
Singapore has consolidated all water-related
administrations under the Ministry of Environment and
Water to streamline decision making. The main
national water agency, the Public Utilities Board (PUB),
has become a statutory board  member and has
responsibility for managing all  comprehensive water
related matters. The PUB is not only a testing and
demonstration site but as well as facilitator of research
and technology development.  Tax breaks and other
financial incentives have attracted the interest of multi-
national corporations in Singapore's water industry.  In
2006, GE built its R&D center in Singapore, which
resulted in the employment of 100 top-tier researchers.
Siemens Water Technologies similarly opened its global
R&D center in Singapore in 2008. The center
collaborates with Singapore's PUB, universities in
environmental authorities on water and wastewater
projects. And finally, engineering consulting firm CH2M
HILL established its regional headquarters in Singapore
in 2006, which now employees more than 350
individuals
                                                                                                 15

-------
                                                                          2010 U.S. Water Innovation


Focus on Drinking Water: Total Water Management
Israel and Singapore's focus on growing domestic water resources is consistent with other regional
initiatives to pursue Total Water Management (TWM) strategies. While the focus of this report is
limited to drinking water, it is important to acknowledge its place in a potentially broader TWM
framework.

Total Water Management (TWM) is defined as the stewardship of water resources for the greatest good
of society and the environment6.  Many water scarce regions of the world are adopting approaches that
are very similar in principle for managing their water resources. A TWM approach is designed to
integrate and address the major water management problems facing the society. These water
management problems can generally be categorized into one of the following three:

           1)  Water supply problem - How to sustain and adequately expand high-quality water
              resource(s) to meet increasing customer demand(s)?
           2)  Water quality problem - How to minimize the impacts of contamination from  human
              activity and development?
           3)  Environmental problem - How to make water management decisions that result in
              positive changes to the surrounding environment (e.g., hydrologic modification)?

TWM allows for a "holistic" approach where region-specific disparities can be aligned and  addressed in a
comprehensive manner and allows for some variability rather than a "one size fits all" approach.

An often cited example that follows a TWM approach is the European Union (ED) Directive 2000/60/EC
(issued on October 23, 2000). This directive establishes a framework for community action in the field of
water policy and  is commonly referred to as the ED Water Framework Directive (WFD). The ED WFD is
organized to protect and manage water resources at the river basin level. The implementation  of the
WFD is expected  to result in achieving significant improvements in the quality of surface water,
groundwater, transition water (estuaries), coastal waters, and optimize the overall water use
throughout the ED.

In the U.S., development of such a high-level of "command-and-control" framework and shared
governance approach would require collaboration and agreement(s) between a multitude of federal,
state and local agencies.  For example, the following nine (9) federal agencies through various laws and
regulations control the key foundations for implementing a TWM approach:  U.S. Environmental
Protection Agency (EPA), Food  and Drug Administration (FDA), U.S. Fish and Wildlife Service  (FWS),
Federal Energy Regulation Commission (FERC), U.S. Army Core of Engineers (USAGE), U.S. Geological
Service (USGS), U.S. Department of Agriculture (USDA), U.S. Bureau of Reclamation, and Federal
Emergency Management Agency (FEMA).

In addition to these federal regulating authorities, there are numerous authorizations, appropriations,
treaties, interstate compacts, state, tribal, and local laws the also impact the process of TWM. In spite of
the institutional and  political challenges faced by these regulating authorities for adopting a TWM
6AwwaRF, 1996
                                                                                          16

-------
                                                                           2010 U.S. Water Innovation


process, some agencies are innovating by looking at providing incentives for conservation and best
management practices (BMPs), allowing for alternate assessment methodologies, and educating the
consumer.  A few examples of these innovations are: encouraging communities to landscape and garden
in ways that reduce or eliminate the need for supplemental irrigation (Xeriscaping), use of rate
structures and automated metering to reduce water consumption, use of triple bottom line (TBL)
reporting-where environmental, social and economic impacts are assessed collectively.

Conceptually, any commercial innovation within the drinking water category would be designed to treat
water in a more energy and/or time efficient manner, to more effectively remove and/or recover the
contaminant(s) or compound(s) of concern, or to more efficiently distribute water thereby promoting
conservation. All of these water technology innovations are essentially meeting the definition of TWM
process. Therefore, by design these innovative products will appeal to all market sectors participating in
the water cycle even if a comprehensive TWM process  is not in place to encourage these types of
innovations.

As we will discover in our investigation of innovative vendors in the sector,  many have technologies that
can crossover between water markets - i.e. wastewater technologies applicable to drinking water, or
industrial water solutions with applications for drinking water. For example, APTWater, which we will
cover later  in this report, has cross-application in both wastewater and drinking water markets. A
company such as American Micro Detection Systems illustrates how  technology addressing water
challenges in the chemicals and Pharmaceuticals industry can also be leveraged for drinking water
applications.

Despite this natural crossover, a sound TWM process can increase the rate  of adoption of any innovative
technologies across the market sectors.
                                                                                            17

-------
                                                                            2010 U.S. Water Innovation


Focus on Drinking Water: Market Size and Analysis
Even as we take into account all of these value chain, regulatory, and total water management dynamics
and begin to narrow our lens to focus precisely on the equipment opportunity within our three key
drinking water segments, we find a significant market opportunity.  Our analysis indicates that
approximately $1.2 billion will be spent on the three major drinking water innovation product
categories in the U.S. in 2010.
      $1.0

      $0.9

      $0.8

      $0.7

      $0.6

      $0.5

      $0.4

      $0.3

      $0.2

      $0.1

      $0.0
                              $.88B
       $1.2 B
Innovation Opportunity
                     Total U.S. Drinking Water
                        Equipment Market
                             ($12.36)
             Water Treatment/
               Disinfection
        Filtration/ Membrane
           Treatment
System Monitoring &
    Metering
                 Source: Global Water Intelligence, Cleantech Group Analysis
This analysis is derived from information gleaned from vendor interviews, third party research firms and
our own calculations and should serve as a foundation for dialogue, critique, and for continued industry
discussion. This estimate is approximately 10% of the overall $12.3B market for all drinking water
equipment. We expect that this portion of the market classified as "innovation" will increase as a
percentage of total equipment spent as the market rotates to place a greater emphasis on advanced
solutions.

The potential for this future market growth becomes evident when we map some of the drinking water
sector's leading venture-backed innovators on our Market Anticipation Matrix. We find that many of
the leading ideas in the market, those with "revolutionary" potential, are also those with longer
predicted times to market - more than three years away from general, commercial availability.  While
relatively long time-to-market has been a venture dynamic in many other cleantech sectors -
investments in technologies such as solar, carbon sequestration, and biofuels also have long time
horizons - advances in water technologies do tend to have markedly long development cycles and pilot
phases. While this gives reason to be optimistic about technologies in current incubation  stages, this
long time-to-market has been a chief concern amongst venture investors that are more comfortable
seeing shorter payback periods.  It is clear that the water sector will require a great level of patience
from both investors and entrepreneurs.
                                                                                             18

-------
                                                                             2010 U.S. Water Innovation
               Cleantech Group Market Anticipation Matrix: Select Water Innovators
             Revolutionary
             Incremental
                                                      Paralytics
                                          APT water
                         Commercially available
                               today
                          Time to Market  —
Pilot/Beta Phase
 (1-3 years out)
  R&D Phase
13-5+ years out)
The following chapters will explore the innovative companies attempting to overcome these long time
markets, complex value chain dynamics, and capital constrained environment to bring new technologies
to market in each of our three drinking water innovation segments.  Our work categorized over 800
companies working across these segments, yet we will focus most of our attention on the private,
venture backed vendors given the scope of this work. A database of all these vendors is available as a
companion to this report.
                                Company Count by Segment Analyzed
                      Water Treatment [POU. Disinfection,
                             Other)
                                      Source: Cleantech Group Analysis


As noted, our report has focused primarily on the water equipment and system monitoring product
vendors. While engineering and operator services represent a massive and very important portion of the
                                                                                              19

-------
                                                                            2010 U.S. Water Innovation


water market, we have not catalogued vendors involved with such services. Secondly, we have not
included vendors involved with the consumables or chemicals market related to water treatment. And
finally, while traditional pipes, pumps and valves currently account for the largest share of the drinking
water equipment market, we omitted vendors of solely traditional technology in our analysis.
                                                                                            20

-------
                                                                            2010 U.S. Water Innovation
I. Water Treatment/ Disinfection Technologies
Key Takea ways
    •  Disinfection technology applications for drinking water represent a significant market
       opportunity.
    •  Many disinfection technologies can also be applied to industrial water and municipal
       wastewater treatment applications
    •  Private companies in this segment illustrate the difficulty of growing to scale for water
       technology providers. Many of these companies do not fit a classic model for either venture
       investors or larger, private equity firms.
    •  Large, legacy vendors have built market dominance through a series of strategic acquisitions;
       the disinfection market continues to be populated by both pure-play water companies and
       these multi-industry giants though suggesting the possibility of further consolidation.
Key Vendors
       ITT: WEDECO
       Siemens Water
       Technologies
       Severn Trent Services
       Degremont Technologies
       - Ozonia
       Trojan Technologies
•   BWT
•   Atlantium
•   ProMinent
•   Fuji
•   Mitsubishi Electric
    Power
APTWater
Puralytics
AquaPure
HaloSource
Pasteurization
Technology Group
Defining clear, simple product categories for drinking water technologies can be a difficult challenge.
This is particularly true for water treatment technologies, which are minutely fragmented and include
treatment methods ranging from activated carbon fabric, electro-coagulation, photo-catalytic processes,
ion-exchange and thermal evaporation.  Consequently, product categorization in water treatment will
be imperfect, but will help us draw distinctions in the sector.  We have included the following
technologies in the Water Treatment/ Disinfection segment:

    (1)  Disinfection
    (2)  Point-of-use (POU)
    (3)  Other technologies

Our analysis indicates that companies concerned with disinfection account for almost half (48%) of this
segment. There is a fine line of distinction  between disinfection and POU, since the latter is an
application and can include other types of technologies like membrane or adsorption technologies.
Other technologies include the various sorption technologies including ion exchange, activated alumina
and activated carbon. Because we (1) see a concentration of innovation in such technologies, and (2)
disinfection represents a large market opportunity, this chapter will focus primarily on the disinfection
market.
                                                                                            21

-------
                                                                              2010 U.S. Water Innovation
We estimate total U.S. spending across these Water Treatment/ Disinfection categories will be
approximately $0.32 billion in 2010. This estimate is based on analysis of third party data, interviews,
and our own internal analysis.
                           Company Count of Water Treatment/ Disinfection Segment
                                         Source: Cleantech Group Analysis
The primary reason for disinfection technologies' significant market opportunity is due to its various
applications. Not only is disinfection the key aspect of treatment for drinking water applications, it is
equally important in myriad industrial process water and wastewater as well as municipal wastewater
applications.

Our analysis indicates that 72% (49) of the disinfection companies that we catalogued are private, 22%
(15) are venture-backed and 6% (4) are public. Many private players are often in the difficult position of
sitting in between the interest of the venture capital and private equity (PE) community. Few private
companies are large and profitable enough to attract PE, while many early stage companies are not
equipped with cutting edge technology or intellectual  property-centric offerings to excite the VC
community.
                             Share of Disinfection Players by Company Type
                                                                I Private
                                                                I Public
                                                                 Venture Backed
                                        Source: Cleantech Group Analysis
                                                                                               22

-------
                                                                            2010 U.S. Water Innovation


The multitude of private players illustrates the elusiveness of scale for water technology companies
combined with the overall dilemma that water technology development may not always fit the venture
capital business model. For one, a key to the success of any water technology company is the ability to
build a list of referenceable clients. To do so, requires both increasing customer access and working
capital - both of these are significant challenges for vendors without ready access to growth capital.
Secondly, some water technology innovation is an incremental process improvement via engineering
design that could include a hybrid of existing technologies, which could potentially be difficult to patent
- a very difficult proposition for the venture capital model.

Of the twelve established players in the disinfection market, two were venture-backed while the
remaining are public companies. These market leaders are older, established companies that grew as a
result of investing through long technology development cycles, developing referenceable projects, and
then for some, a series of strategic acquisitions to expand geographic footprint and technological
capabilities.

                              Evolution of the Disinfection Market
                            Est. 1975
                      1970
                                   1980
                                            OJONIA
                                              Est. 1990
                                            (bBWT
        Est. 1990
          1990
                           t  MITSUBISHI
                          "m ELECTRIC
                           1st 2005
                                                             2000
          Pr Minent
            Est. 1960
                       Est. 1974
4'FUJI WATER
 €      Sytttm*. LLC-
                                              Est, 1991
                               WEDECO
                                   Est. 1976
                                                                          2010
                       Est. 2002:

                       Atlantium
                       Est. 2003
SIEMENS
   Est. 2004
                                                 Est. 1994
                                      Source: Cleantech Group Analysis


There are three disinfection methods that currently dominate the market today: chlorination, ozonation
and ultraviolet (UV) radiation. The majority of competition is occurring between UV radiation and ozone
technologies and established players within disinfection claim market share based on some combination
of these methods.

While conventional chlorine disinfection is increasingly losing market share to advanced ozone or UV
disinfection technologies, chlorine is expected to maintain some presence in the market due to its
disinfection residual capability critical to distribution systems. As the table below summarizes,  UV
                                                                                            23

-------
                                                                            2010 U.S. Water Innovation
disinfection has the key advantage of being a by-products-free physical process with low chemical
management costs and safety risk.

Meanwhile, ozone disinfection is more costly in terms of capital and operational costs but provides the
added benefit of eliminating odor, color and taste - making it a desirable disinfection method for the
beverage industry.
Disinfection Method
Chlorine
Ultraviolet (UV)
Radiation
Ozone
How it works
Chlorine gas, sodium or
calcium hypochlorite is
added to water and within
20 minutes kills bacteria,
viruses and water-borne
pathogens.
Ultraviolet light is exposed to
microbes causing
photochemical damage that
halts cell synthesis and
division.
Ozone, a colorless and
unstable gas, is generated by
air discharge, electro
analysis and ultraviolet light
radiation to kill bacteria and
viruses.
Pros
• Not only disinfects but also
remains at a residual level in
the water, preventing re-
infection by viruses or
bacteria during transport,
storage and distribution.
• Cost-effectiveness
• Cost-effectiveness
• Minimal by-products
• Short reaction time
• Requires no chemicals
• Oxidizes iron and manganese
• Destroys and removes algae
• Aid coagulation
Cons
• Ineffective at deactivating giardia
and cryptosporidium.
• Produces disinfection by-products
• Photoreactivation and dark repair
can reverse the damage of UV
Radiation.
• Cost
• Produces disinfection by-products
• Toxicity
                  Chlorine
                   UV
                   Ozone
                               Vendor Landscape: Disinfection Methods
                                               SEVERN
                                                TRENT
                                              SERVICES
                           Pr  Minent
                                (bBWT
           Atlantium
               SIEMENS
4'FUJI WATER
  *       Sr«»m». U.C.
                                           Source: Cleantech Group Analysis
Within the context of these disinfection challenges, the U.S. EPA has outlined specific drinking water
challenge areas.
                                                                                             24

-------
                                                                            2010 U.S. Water Innovation
Water Treatment
^T
\ Filtration/
Water Treatment/ \ Membrane
Disinfection /
/ Treatment
A /[
Distribution
\ \
\ System Monitoring \
/ & Metering /
i /

Address broad mix of contaminants
Water System IT
                       Disinfectants w/o
                        byproducts
                    Low cost treatment for small/very-small systems/re motes
 Need technology to support the
management of remote DW systems
   (e.g. remote telemetry).
systems
Energy-efficient treatment technology.
Need technology that minimizes wastewater and/or
residuals handling and disposal costs
J 	 '
Need better/faster/cheaper DW
measurement/monitoring
techniques, including real-time
techniques applicable to water-
security needs.
V .J
Tech no logy/ policy for POU/POE for DW & WW (distributed) management
In the following sections, we will:

    (1)  Outline the key drivers of the drinking water challenge areas
    (2)  Address each drinking water challenge area as it relates to the early-stage innovation that we
       have identified.

Below are the ten drinking water challenge areas outlined by the EPA:

    (1) Need innovative drinking water and water reuse treatment technologies to address health risks
       posed by mixtures of a broad array of contaminants, including emerging (currently unregulated)
       contaminants.
    (2) Need alternative disinfectants and treatment technologies that effectively control pathogens
       without formation of disinfection by-products.
    (3) Need cost-effective DW/WR treatment technology for small/very-small systems and remote
       systems.
    (4) Need technology that minimizes wastewater and/or residuals handling and disposal costs.
    (5) Need more energy-efficient technology
    (6) Need effective/useful information technology infrastructure to support decision making that
       improves the safety and sustainability of water systems for Total Water Management.
    (7) Need technology to address water supply (quality/quantity) challenges associated with
       demographic and population change impacts.
    (8) Need DW/WR point-of-use/point-of-entry (POU/POE) treatment technologies for operational
       regulatory, and management approaches (need both a technical solution and policy incentives).
    (9) Need monitoring and control (MC) technologies to support the management and regulatory
       compliance of remote DW/WR systems.
    (10) Need better/faster/cheaper DW/WR measurement/monitoring techniques, including real-time
       techniques applicable to water-security needs.
                                                                                             25

-------
                                                                             2010 U.S. Water Innovation


Drinking Water Challenge Area Drivers
The 1996 Milwaukee Wisconsin cryptosporidium outbreak that caused the death of at least 100 people,
catalyzed the adoption of ultraviolet radiation as an alternative to chlorine disinfection. The outbreak
revealed chlorine disinfection was ineffective at deactivating both cryptosporidium and giardia. Indeed,
the desire to avoid such public health issues for drinking water applications similarly incentivize
industries like food and beverage to mitigate reputational and litigation risks associated with
contaminated products. Ultrapure, disinfected water is fundamental to their business.

Meanwhile, as our understanding of the chemistry of water contamination expands and as analytical
technologies improve, we continue to discover more compounds of potential concern to human health.
Particular emerging contaminants, including pharmaceutical and personal care by-products and
endocrine-disrupting compounds, have been detected in low levels in the environment not only in the
U.S. but across the globe, according to various studies.7

Because chemical species in water can often react with a disinfectant to form a disinfection by-product
(DBP) - carcinogenic, mutagenic compounds capable of causing birth defects are of increasing concern.
Chlorinated DBPs include trihalomethanes and haloacetic acids. Ozone disinfection, on the other hand,
transforms large organic polymers to  smaller organic molecules, which results in nutrients that
encourage biofilm growth in distribution lines. Finally, ozone disinfection also converts bromide to
bromate, a regulated compound.

Emerging Innovation
Against this backdrop, innovators are increasingly concerned with developing alternative disinfection
methods that not only control pathogens, but do so with low capital & operational costs while
addressing a wide array of contaminants and reducing disinfection by-products.
                 Revolutionary
                 Disruptive
                    Ability
                 Incremental
                                 Cleantech Group Market Anticipation Matrix
                                         JHALOSOURCE.
     Puralytics
       Pasteurization
       Technology
          Group
                                          APT water
Commercially available
     today
Time to Market
Pilot/Beta Phase
 (1-3 years out)
                                                                   R&D Phase
                                                                  (3-5+ years out)
We have developed an extensive data set of venture-backed innovators in the space.
7 See, http://epa.gov/waterscience/ppcp/studies/results.html
                                                                                              26

-------
                                                                                            2010 U.S. Water Innovation
          Recently Funded Water Treatment/Disinfection Companies (Funding in 2009 or 2010)
            Company
Country
Description
Most Recent Capital Raise
   Water-Health International Inc.     USA
                                      Developer of water purification and disinfection technology for areas
                                      with little or no access to clean and affordable water.
   Quench
                              USA
  Aqua Designs Pvt. Ltd.           India
   Mingbo Qinyuan Group
   HaloSource, Inc.
   WaterHealth International Inc.     USA
   Clean Filtration Technologies      USA

roup


China
USA
       Maker and distributor of water purification 'point-of-use' coolers that
       utilize ultraviolet light technology and avoid the waste of bottled water
       and traditional cooler systems.
       Aqua Designs is a Total Water Management Engineering Company with
       engineering capabilities to undertake and execute turnkey solutions for
       water and waste water management.
       A developer of water treatment equipment for drinking water
       machines.

       Developer of antimicrobial coatings and drinking water treatment
       products.
                                                                          $22,100,000
                                                                                                        $13,000,000
                                            $12,000,000
                                                                                                        $12,000,000
                                                                                                        $10,000,000
  Activeion
   Claranor
                              USA
                              France
   WaterHealth India Private Limited  India
   Hydro-Photon, Inc.
                              USA
   Microvi Biotech
       Developer of water purification and disinfection technology for areas
       with little or no access to clean and affordable water.

       Developer of a self-cleaning, maintenance-free metal membrane used
       to process waste water and produce clean, drinking water.

       Developer of a portable cleaning tool that converts tap water into a
       powerful cleaner on demand, eliminating the need for repeat
       purchases of toxic, general-purpose cleaning chemicals.
       Developers of low-energy, zero water consumption pulsed light
       desinfectant technology. Can be used for water treatment as well as
       other non-liquid products.
       WHI's unique and creative combination of break-through technology
       and innovative business models enables the delivery of highly
       affordable, clean water.
       Developer of a handheld device - Steripen - that utilizes ultraviolet light
       to purify water.
                                            $10,000,000


                                            $5,500,000


                                            $5,000,000
                              USA
                                      Developer of biotechnology based water treatment solutions that are
                                      capable of destroying a wide array of pollutants in water.
                                            $3,500,000


                                            $2,660,993


                                            $2,000,000


                                            $1,000,000
                                                 Source: Cleantech Group Analysis
To illustrate innovators in this space, we have identified four key vendors that are offering disinfection
solutions:

Pleasant Hill, California-based APT Water, is developing an advanced oxidation technology utilizing an
ozone based HiPox process to degrade compounds such as pharmaceutical and personal care by-
products and endocrine disrupting compounds. Advanced oxidation technologies generate highly
reactive hydroxyl radical species, which are a powerful oxidant.  The oxidants can result in complete
oxidation and mineralization of organic contaminants and break them down to carbon dioxide, water
and mineral acids.

The company is currently at a piloting-commercialization development stage with a full scale water
reuse installation at Orange County's groundwater replenishment system. While the technology is very
effective in removing emerging contaminants, doing so may be prohibitively costly.
                                                                                                                27

-------
                                                                                                       2010 U.S. Water Innovation
                        APT water
                        Clean Water. No Waste6
Pleasant Hill, CA
                  Overview: Developer of an advanced oxidation technology utilizing an ozone based HiPox process to degrade compounds such as
                  pharmaceutical and care by-products and endocrine disrupting compounds.
                  Development Stage: Pilot- Commercialization

                  How does it work? AOT generate highly-
                  reactive hydroxyl radical species, which area
                  powerful oxidant.Theoxidants can result in
                  complete oxidation and mineralization of
                  organic contaminants and break them down to
                  carbon dioxide, water and mineral acids.

                  Applications: Water Reuse {full scale at Orange
                  County ground water replenishment system),
                  Wastewater Treatment.

                  Limitations: Whilevery effective in removing
                  emergingcontaminants, doingso may be
                  prohibitively costly.
         Address broad array of contaminants, including     |
         emerging unregulated contaminants. (DWCA1)

         Alternative disinfectants and treatments technologies|
         that effectively control pathogens withoutformation
         of disinfection by products. (DWCA2)

         Cost-effective DW treatment technology for       |
         sma I I/very-small systems and remotes systems
         (DWCA 4)
                                                  :
         POU/POE for drinking water and distributed
         wastewater management approaches and
         technologies (need both a technical solution and
         policyincentives). (DWCA5)

         Energy-efficient treatment technology. (DWCA7)
                                                  •
         Minimizes waste water and/or residuals hand ling and
         disposal costs. (DWCA 8)
 Yes

 Yes


 Yes

 Yes


Yes

Yes
Beaverton, Oregon based Puralytics is developing a UV-based technology which utilizes UV light-
emitting diodes (LED's) with a titanium dioxide catalyst to achieve advanced oxidation. The systems is
designed for point-of-use applications in a domestic or commercial  setting.  The advanced oxidation
technology can be used to destroy organic matter.
                          Puralytics
                                              Beaverton, OR
                 Overview: Developer of a UV-based technology which uses UV light-emitting diodes {LED's} with a titanium dioxide catalyst to
                 achieve advanced oxidation. The system is designed for point-of-use applications in a domestic or commercial setting. The advanced
                 —oxidation technology can be used to destroy organic matter.
                 Development Stage: Pilot-Beta Phase

                 How does it work? There are a wide variety of
                 methodsto achieve advanced oxidation
                 including ozone-based or UV-based methods
                 that generate hydroxyl radicals. Puralytics
                 utilizes UV LED's in combination with a titanium
                 dioxidecatalyst.

                 Applications: Drinking Water Point-Of-Use
         Address broad array of contaminants, including     |
         emerging unregulated contaminants. (DWCA1)

         Alternative disinfectants and treatments technologies|
         that effectively control pathogens withoutformation
         of disinfection by products. (DWCA2)

         Cost-effective DW treatment technology for       l~
         small/very-small systemsand remotes systems
         {DWCA4)

         POU/POE for drinking water and distributed       |
         wastewater management approaches and
         technologies (need both a technical solution and
         policy incentives). (DWCA 5)

         Energy-efficient treatment technology. (DWCA 7)

         Minimizes waste water and/or residuals handling a ndl
         disposal costs. (DWCA 8)
 Yes

 Yes


 Yes


 Yes


 Yes

 Yes
While there are a wide variety of methods to achieve advanced oxidation including ozone-based  or UV-
based methods that generate hydroxyl radicals, the company utilizes an innovative combination of UV
LED's and a titanium dioxide catalyst. The company is still at a pilot-beta phase.
                                                                                                                             28

-------
                                                                                                   2010 U.S. Water Innovation


Bothell, Washington-based HaloSource is developing a bromine based disinfection technology: N-
halamines and Chitosan utilizing chlorine and bromine for drinking water and antimicrobial treatment.
Bromine belongs to the  halogen chemical group, which are strong oxidizing agents and could be used to
disinfect water and inactive pathogens.
                    ^HALOSOURCE  Bothell, WA
                   Overview: Developer of a two core technologies: N-halaminesand Chitosan uti I izng chlorine and bromine for drinking water and
                   antimicrobial treatment.
                   Development Stage: Pilot - Commercialization

                   How does it work? Bromine belongs to a
                   chemical group known as Halogens, which are
                   strong oxidizing agents and could be used to
                   disinfect water and inactive pathogens.
                   Applications: Drinking Water Point-Of-Use
Address broad array of contaminants, including
emerging unregulated contaminants.(DWCAl)

Alternative disinfectants and treatments technol
that effectively control pathogenswithoutformation
of disinfection by products. (DWCA2)

Cost-effective DW treatment technology for       |
small/very-small systems and remotes systems
(DWCA4)

POU/POE for drinking water and distributed       |
wastewater management approaches and
technologies (need both a technical solution and
policy incentives). (DWCA5)

Energy-efficient treatment technology. (DWCA7)

Minimizes waste water and/or residuals handling andl
disposalcosts.(DWCAS)
 Yes

 Yes


 Yes


 Yes


 Yes

 Yes
San Leandro, California based Pasteurization Technology Group is developing a technology that utilizes
waste heat to provide disinfection.
                   Pasteurization
                    Technology         San Leandro, CA
                        Group
                   Overview: Developer of a technology that utilizes waste heat to provide wastewater disinfection.
                   Development Stage: Early Commercial

                   How does it work? A patented air-to-water
                   heat exchanger which can take waste heat from
                   the exhaust gases of a combined heat and
                   power (C HP) system, or any other source of
                   waste heat, to heat water up to 80 degrees
                   celsius.

                   Applications: Wastewater, treatment, water
                   reuse.
                   Limitations: While very effective in removing
                   emerging contaminants, doing so maybe
                   prohibitively costly.
Address broad array of contaminants, including     |
emerging unregulatedcontaminants.(DWCA 1)

Alternative disinfectants and treatments technologies|
that effectively control pathogenswithoutformation
of disinfection by products. [DWCA2)

Cost-effective DW treatment technology for       £
small/very-smallsystemsand remotes systems
(DWCA4)
                                      :
POU/POE for drinking water and distributed
wastewater management approaches and
technologies (need both a technical solution and
policy incentives). (DWCA 5)
                                      I
Energy-efficient treatment technology. (DWCA 7)
                                      •
Minimizes waste water and/or residuals handling and
disposal costs. (DWCA 8)
Yes

Yes


Yes

Yes


Yes
Yes
The company has a patented air-to-water heat exchanger which can take waste heat from the exhaust
gases of a combined heat and power (CHP) system, or any other source of waste heat to heat up water
up to 80 degrees Celsius.  The technology is in an early commercialization development stage.
                                                                                                                        29

-------
                                                                         2010 U.S. Water Innovation
II. Filtration/ Membrane Treatment
Key Takea ways
    •   New membrane technologies have long development cycles and often require upwards of five
       years to complete development and piloting cycles.
    •   Reverse osmosis (RO) membranes have succeeded in reducing the energy requirements of
       desalination plants and have broader applicability in ultrapure industrial process water.
    •   Low pressure ultrafiltration and microfiltration membranes provide a simple means of
       guaranteeing not only safe drinking water but high quality treated effluent and industrial
       process water.
    •   The optimization of RO desalination systems is dependent on the innovation within the core
       subsystems: (1)  pretreatment (2)  RO membrane units and (3) energy recovery devices.

Key Vendors

    •   Dow Water & Process         •   Koch Membrane              •   Norit X-Flow
       Solutions                       Systems                     •   Siemens - Memcor
    •   Hydaranautics                •   Pall-Asahi Kasei             •   Porifera
    •   Toray                       •   GE-Zenon                  •   Oasys
    •   Saehan CSM                 •   Aqualyng                    •   Aquaporin
    •   Toyobo                     •   Inge                        •   NanoH20
While evaporation has served as an important method for removing dissolved solids out of water for
centuries, the development of the reverse osmosis (RO) membrane in 1965 began a fundamental
disruption of the thermal desalination market by drastically reducing energy costs.

Since this breakthrough, there has been tremendous interest in membrane technology that not only
focuses on salt separation using high pressure RO and nanofiltration (NF) membranes but also
encompasses the emergence of low pressure membranes including ultrafiltration (UF) and
microfiltration (MF) membranes. Both classes of membranes are offering advanced treatment methods
that could provide safe drinking water supply, provide high quality treated effluent for reuse and serve a
number of industrial applications.

The Filtration/ Membrane Treatment segment is comprised of vendors concerned with the
improvement of conventional media filtration methods as well as low or high pressure membranes.
Because membrane technologies are core components of subsystems within larger plants, some of the
companies that we captured are concerned with not only optimizing the membrane equipment itself
but the entire subsystem.
                                                                                         30

-------
                                                                             2010 U.S. Water Innovation
                                  Membrane Product Landscape
    Micrometers
     (log scale)
     Membranes
1000
         100
                  10
                           1.0
                                    0.1
                                             0,01
                                                      0.001
                                                                0.0001
    Contaminants
                                                  Colloids
                                                         Viruses
                                                          Dissolved Organics
                                       Source: Cleantech Group Analysis


We estimate a total of U.S. spending across the Filtration/ Membrane Treatment segment will be
approximately $0.07 billion in 2010. This estimate is based on analysis of third party data, interviews,
and our own internal analysis.

Our analysis indicates that 75% (236) of the filtration/membrane companies that we catalogued are
private, 17% (53) are venture-backed  and 9% (27) are public. Similarly with the many private players we
identified in the Water Treatment/ Disinfection segment, such companies are often in the difficult
position of sitting in between the interest of the venture capital and private equity community.
                                                                                              31

-------
                                                                         2010 U.S. Water Innovation
                   Share of Filtration/ Membrane Treatment Companies by Type
                                                                  Private
                                                                 I Venture-Backed
                                                                  Public
                                      Source: Cleantech Group Analysis
While technology advances in membrane technology have improved the energy requirements of RO
membranes in desalination they are still subject to the laws of thermodynamics, which means that a
minimum of 0.8 kWh/m3 of energy is required. According to Global Water Intelligence, the best
performing RO membranes utilize between 3.8 - 4.2 kWh/ m3. Because RO membranes have now been
standardized in RO systems, the membranes themselves have been commoditized and with the leading
six suppliers highlighted in the table below.

                        RO MEMBRANE LEADERS
Company Established

~*fffit^ Water & Process Solutions

MYDRANAUTICS iq7r
www.membrxnox.com 131 J
'TORAY' «*
MKOCH
MEMBRANE SYSTEMS 1959
=3S=g^3==gS53=g
Key Acquisitions/
Transactions
Zhejiang Omex
Environmental
Engineering
Aquired by Nitto
Denko in 1987
Ropur and Suido
Kiko Kaisha
Romicon, Fluid
Systems Corp.,
Puron
                          CSM
1972
                          (TOYOBO)        1914
                                    Source: Cleantech Group Analysis

-------
                                                                                 2010 U.S. Water Innovation
Still, RO systems are but one subsystem within a broader desalination plant and indeed, the RO
membranes in terms of the initial capital outlay and operating costs account for 5% and 7% respectively
of the total plant.
                              RO Desalination Unit Share of Capital Costs
                                                    Engineering
                                                    Design, 5%
                        Civil Engineering,
                            18%
                                                                Construction &
                                                                  Installation
                                                                  Services, 8%
                              Pumps, 10%
                                                                     Equipment &
                                                                     Materials, 23%
                                                                  Pressure Vessels,
                                                                      2%
                                              Piping & High-
                                              Alloy Materials,
                                                 15%
                                                              Membranes, 5%
                               Source: Global Water Intelligence, Cleantech Group Analysis
                             RO Desalination Share of Operating Costs
                                                                Replacement
                                                                  Parts, 7%
                    Electrical Energy,
                         50%
                                                                     Chemicals, 15%
                                                                      Labor, 22%
                                                     Membranes, 7%
                                 Source: Global Water Intelligence, Cleantech Group Analysis

Engineering procurement and construction (EPC) firms compete with each other to buy the same parts
from the same suppliers. And since the margins for designing and building such plants are so thin, EPCs
often broaden their role in such projects by providing operations assistance or else working with a
project developer to take an equity share in the project. While there is some scope to employ process
engineering to deliver water at a lower cost, this is a not a patentable proposition, which leads to EPCs
gaining only a short-term edge in terms of cost.
                                                                                                  33

-------
                                                                           2010 U.S. Water Innovation
The main areas where EPCs can innovate will be the overall optimization of the RO process across the
core subsystems: (1) Pretreatment, (2) RO membrane units and (3) energy recovery devices.
                    RO Desalination Plant Subsystems
                    Pretreatment Systems   RO Membrane Units
                    (PALL) Pall Corporation
                    ^—^ AsahiKASEI
                                            - Water & Process Solutions
                              izJYDRANAUTICS
                              m m www.membrmn9S.com
                   ZENON Environmental
                                             'TORAY'
                                 M KOCH
                                 MEMBRANE SYSTEMS
                                              CSM
                      heart of ^J pure water
                              X-Flow
                                         CTOYOBQ)
   Energy Recovery
      Devices
AOUALYNG
                                      Source: Cleantech Group Analysis

Pretreatment
The pretreatment process for RO systems is critical in the prevention of fouling and scaling of the RO
membranes. While the pretreatment method depends on the feedwater quality, the success of an RO
plant is often associated with the effectiveness of the pretreatment system. Today, the typical
pretreatment process involves coagulation and flocculation followed by sand and then cartridge
filtration. Increasingly, UF membranes are being used for pretreatment as they offer a solution to the
removal of microorganisms and provides guaranteed feedwater quality, while reducing the amount of
chemicals required to pretreat the water.

Not only are low pressure UF and MF membranes gaining market share in desalination applications, they
are enjoying growth in drinking water, tertiary wastewater treatment, membrane bioreactors and
various industrial applications. UF/ MF membranes are not yet commoditized and thus are sold either as
systems or else with a great deal of engineering support from the supplier to ensure that system
configurations comply with membrane warranties.
                                                                                           34

-------
                                                                       2010 U.S. Water Innovation
                  Low Pressure Membrane Leaders by Applications

                 Drinking Water
                   Tertiary
                 Wastewater
                  Treatment
                    MBR
                  Industrial
                 Applications

                 Pretreatment
                 for RO Desal
                        Pall Corporation
                                  orit
SIEMENS    d

      X-FlOW	METAWATER-
                                       ZENON Environmental
SIEMENS
orit
         x-Fiow
         f\ I  IV/VV
                                     Source: Cleantech Group Analysis
RO Membrane Unit
According to Global Water Intelligence, 43% of RO membrane sales now go to industrial customers while
the remaining share is sold for applications in desalination. Since RO membranes were first developed in
1965, significant improvements in flux rates and reductions in price has assisted the seawater RO
desalination price to drop from $10/m3 in 1980 to $l/m3 in 2008.

Energy Recovery Devices
Two thirds of the feedwater in a RO desalination plant does not actually go through the membrane and
is instead washed out as part of the high pressure brine stream that goes back to the sea. Energy
recovery devices aim to capture this wasted energy by reapplying it to the feedwater stream. There are
three main types of energy recovery devices: (1) Pelton  wheels or energy recovery turbines, (2) Isobaric
devices or work exchangers and (3) turbo chargers.
                                                                                       35

-------
                                                                             2010 U.S. Water Innovation
             Energy Recovery Devices
                 Pelton Wheels
    Isobaric Devices
             Energy recovery turbines. 90%
             Efficiency
Utilize the direct pressure of the
brine stream to add to the pressure
on the feedwater. 97% Efficiency
             FLOWSERVE
    Turbo Chargers
Brine flow directed to wards a
centrifugal impellerthatsharesa
shaft with high-pressure centrifugal
pump supplying the feed water to
the membranes. 90% Efficiency.
                                                                   PUMPENGINEERING
                        Calder™ DWEER™
                                  DCO
                                      AOUALYNG
                                       Source: Cleantech Group Analysis

Recent consolidation in the market includes Texas-based Flowserve's acquisition of Switzerland-based
Calder in April of 2009 as well as California-based ERI's acquisition of Michigan-based Pump Engineering.

In the following section, we will address each drinking water challenge area as it relates to the early-
stage innovation that we identify within the context of the current vendors and dynamics of the
membrane treatment market.
Water Treatment
\
Water Treatment/ \
Disinfection /
/
Filtration/
Membrane
Treatment
4
Distribution
\ System Monitoring \
/ & Metering /
f /
Address broad mix of contaminants
Disinfectants w/o
byproducts
Low cost treatment for small/very-small systems/remotes
systems
Energy-efficient treatment technology.
Need technology that minimizes wastewater and/or
residuals handling and disposal costs
Water System IT
[Need technology to support the 1
management of remote DW systems
(e.g. remote telemetry).
Need better/faster/cheaper DW
measurement/monitoring
techniques, including real-time
techniques applicable to water-
security needs.
V J
Technology/policy for POU/POE for DW & WW (distributed) management
                                                                                              36

-------
                                                                                                  2010 U.S. Water Innovation
Emerging Innovation
It is in this context of the membrane market that innovators are increasingly concerned with developing
more efficient membrane filtration methods that not only control pathogens and filter a diversity of
contaminants but do so utilizing less energy and by-products or waste.

         Recently Funded Membrane Treatment/Filtration Companies (Funding in 2009 or 2010)
               Company
                                    Country
                                                                   Description
                                                                                                  Most Recent Capital Raise
      Seven Seas Water Corp.
      (AquaVenture)
                                Israel
      Qasys Water
                                USA
Provider of seawater desalination and wastewater recycling plants in
which the water can be reused for plant, lawn, and golf course
irrigation.
Developer of nano filtration membranes and systems for waste water
treatment.

Developer of a forward osmosis desalination technology.
      Inge AG
      Voltea
      Likuid Nanotech
                                Germany        Developer of ultrafliter membranes and modules for the treatment of
                                              drinking water.
                                United Kingdom   Provider of desalination solutionst hat requires less power and no
                                              chemicals.
                                Spain
                                              Developer of inorganic membranes for filtration processes.
      nano-porous solutions Ltd.
      Nordaq
                                United Kingdom   Developers of multi-layer adsorbent hollow fibre material used in
                                              separation and filtration processes.
                                France
      Advanced Hydro Inc.
                                              Provider of water purification solutions.
                                USA
                                Israel
                                              Developer of a technology to reduce fouling of membranes used for
                                              water purification and filtration systems by using a deposition
                                              technique to adhere Polydopamine, a highly hydrophilic polymer onto
                                              Producer of reverse osmosis technologies.
                                                   Source: Cleantech Group Analysis

We have identified four vendors that are offering innovative membrane technologies:
                                                                                                            $15,000,000
                                                                                                            $12,000,000
                                                                                                            $10,000,000
                                                                                                             $6,955,000
                                                                                                             $4,600,000
                                                                                                             $2,700,000
                                                                                                             $1,170,000
                                                                                                               569C..CGC
                                                                                                               $500,000
                                                                 $100,000
                                                                                                                       37

-------
                                                                                             2010 U.S. Water Innovation
                                       Cleantech Group Market Anticipation Matrix
                  Revolutionary
                  Disruptive
                      Ability
                   Incremental
                                Commercially available
                                       today

                                Time to Market —
         Pilot/Beta Phase
          (1-3 years out)
  R&D Phase
(3-5+years out)
Denmark-based Aquaporin is developing a biomimetic membrane capable of separating and purifying
water from all other compounds based on nature's own method. Aquaporins act like water channels
which selectively allow water molecules to pass through in single file while the transport of ions, protons
and hydroxyl ions is abrogated by an electrostatic tuning mechanism.

The key advantage of Aquaporin's membranes  is that it is 100 times more permeable than commercial
RO membranes.  At the moment, stability and strength to withstand the operating pressures and
repeated fouling and cleaning expected in full-scale operations remain unknown. The technology is
currently in basic and applied research.
                              Denmark
                AQUAPORIN
                Overview: Development of a biomimetic membrane capable of separating and purifying water from all other compounds based on
                nature's own method, aquaporins.
                Development Stage: Basic & Applied Research

                How does it work? Aquaporins act as water
                channels which selectively allow water
                molecules to pass through in single file while
                the Iran sport of ions, protons and hydroxyl ions
                is abrogated by an electrostatic tuning
                mechanism of the channel interior.
               Advantages: 100 times more permeable than
               commercial RO membranes-

               Issues: Stability and strength so they a re able to
               withstand the operating pressures and repeated
               fouling and clean ing expected in full-scale
               operations.

               Applications: Ultra pure process water, water
               reuse
Address broad array of contaminants, including    |
emerging unregulatedcontaminants.(DWCAl)

Alternative disinfectants and treatments technologies|
thateffectively control pathogens withoutformation
of disinfection by products. (DWCA2)

Cost-effective DW treatment technology for
small/very-small systems and remotes systems
(DWCA4)

POU/POE for drinking water and distributed       £
wastewater management approaches and
technologies (need both a technical solution and
policyincentives). (DWCA5)
                                     I
Energy-efficient treatment technology. (DWCA7)

Minimizes waste water and/or residuals handling a ndl
disposal costs. (DWCA 8)
               Yes

               Yes


               N/A


               No


               Yes

               Yes
                                                                                                                 38

-------
                                                                                       2010 U.S. Water Innovation
Hayward, California-based Porifera is developing a carbon nanotube membrane that may provide better
performance and require lower energy requirements than conventional membranes. The technology
was originally developed at Lawrence Livermore National Lab and is a recipient of SBIR funding.
Membranes constructed of carbon nanotubes have graphitic walls less than 2 nanometers in diameter
that form hydrophobic pores.

Advantages of this technology are that the membranes are more robust than conventional membranes
and have shown high permeability rates and reduced energy requirements. The problem is that practical
methods for large scale fabrication of carbon nanotube membranes are not yet economical. The
company is currently in basic and applied research.

                         Hayward, CA

                Overview: Developer of carbon nanotube membra nest hat may provide better performance and require lower energy requirements
                than conventional membranes. Technology was originally developed at Lawrence Livermore National Lab and is a recipient of SBIR
                funding.
                Development Stage: Basics applied research.      Address broad array of contaminants, including    ^       Yes
                                               emerging unregulatedconta mi nants.(DWCAl)
                How does it work? Membranes constructed of
                cabonnanotubeshave graphitic walls less than   Alternative disinfectants and treatments technologiesj^^^.    yes
                2nmin diameter that form hydrophobic pores    that effectively control pathogens without formation
                less than 2 nm in diameter.               of disinfection by products. (DWCA2)
                                               Cost-effective DW treatment technology for      ^^^^     N/A
                                               small/very-small systemsand remotes systems
                Advantages: The membranes are more robust    (nwrAdl
                than conventional membranes and have shown
                high permeability rates and reduced energy
                  uirements                       POU/POE for drinking water and distributed      [   '*>     fsjo
                                ^^^^^^^^^^5   wastewater management approaches and
                Issues: Practical methodsfor large scale        technologies (need both a technical solution and
                fabrication of carbon nanotube membranes are   policy incentives). (DWCA5)
                not yet economical.                                                     I   7^     Y6S
                                               Energy-efficient treatment technology. (DWCA7)
                                               Minimizes waste waterand/or residuals handlingand^M^     Y0S
                                               disposal costs. (DWCA8)

Cambridge, Massachusetts-based Oasys is developing an engineered osmosis process employing an
ammonium/carbon dioxide draw solution developed at Yale University. The company has received a $10
million Series A round of funding. Osmosis refers to the spontaneous diffusion of water from a low
concentration of semipermeable membrane to a higher concentrated solution referred to as the draw
solution. The process driven by the difference in the solutions' osmotic pressure and continues until the
osmotic pressure on  both sides reaches equilibrium.
                                                                                                         39

-------
                                                                                           2010 U.S. Water Innovation
                &oasys
Cambridge, MA
                Overview: Developer of an engineered osmosis process employing an ammonium/carbon dioxide draw solution developed at Yale
                University. The company has received aSlO million Series A round of funding.
                Development Stage: Applied Research pilot

                How does it work? Osmosis referstothe
                spontaneous diffusion of water from a low
                concentration solution through a
                semipermeable membraneto e higher
                concentrated solution referred to as the draw
                solution.

                The process is driven by the difference in the
                solutions' osmotic pressure and continues until
                the osmotic pressure on both sides reaches
                equilibrium.

                Advantages: Ability to produce both fresh water
                and power through the FO process.

                Issues: Lack  of commercially available forward
                osmosis membranes.

                Applications: Drinking Water, Desal
             Address broadarray of contaminants, including    |
             emerging unregulatedcontaminants.(DWCA 1)

             Alternative disinfectants and treatments technologies|
             that effectively control pathogens without formation
             of disinfection by products. (DWCA2)

             Cost-effective DW treatment technology for      |
             small/very-small systemsand remotes systems
             (DWCA4)

             POU/POE for drinking water and distributed      |
             waste water management approaches and
             technologies (need both a technical solution and
             policy incentives). (DWCA 5)
                                                •
             Energy-efficient treatment technology. (DWCA 7)

             Minimizes waste water and/or residuals hand ling a ndl
             disposakosts.(DWCAS)
Yes

Yes


N/A


Yes


Yes

Yes
The advantages of this technology are its ability to produce both fresh water and power through the
forward osmosis process. The downside is the lack of commercially available forward osmosis
membranes. Currently, the company is in applied research and piloting stage.

El Segundo, California based NanoHZO has developed a thin film nanocomposite (TFN) membrane. The
company has nano-engineered the porosity of a membrane at a molecular level to ensure that pores are
straight,  requiring less flux as well as fouling and scaling.

The advantages of the technology is  its ability to decrease the capital cost of the system and reduce total
energy costs by 25%. At the moment, however, the company is piloting the membrane to test  its
reliability at full scale.  Interestingly,  for purposes of assessing the role of various value chain
participants, NanoH20 has a strong working partnership with Veolia Water to bring this technology to
market.
                                                                                                              40

-------
                                                                                              2010 U.S. Water Innovation
     NanoMJb
                         ElSegundo, CA
Overview: Developer of a thin film nanocomposite(TFN) membrane
Development Stage Applied -;:-r :!---•:

How does it work? One of the reasons why RO
membranes require a tremendous amount of
energy is because the pores in the membranes
a re not straight, requi ring f lux. TFN offers the
possibility of engineering the porosity of a
membra neon a molecular level that could also
enjoy the ad vantages of being less prone to
fouiingand scaling.
Advantages: Improvement of the performance
of the membrane could result in an overall
decrease in the capital cost of a system and a
total energy cost reduction of 25%.

Issues: Yet to be proven reliably on a large scale.


Applications: DrinkingWater, Desal
Address broad array of contaminants, including     |
emerging unregulated contaminants. (DWCA 1)

Alter native disinfectants and treatments technologies]
that effectively control pathogens without formation
of disinfection by products, (DWCA2)

Cost-effective DW treatment technology for        |
small/very-small systemsand remotes systems
(DWCA 4)

POU/POE for drinking water and distributed        |
waste water management approaches and
technologies (need both a technical solution and
policy incentives). (DWCA 5)
                                              •
Energy-efficient treatment technology. (DWCA 7)

Minimizes waste water and/or residuals hand I ing and!
disposal costs. (DWCA8)
 Yes

 Yes


 N/A


 Yes


Yes

Yes
                                                                                                                      41

-------
                                                                           2010 U.S. Water Innovation
IV. System Monitoring & Metering
Key Takea ways
    •   Near real-time remote monitoring of water quality for municipalities is the ultimate goal of
       analytical capabilities, but significant development is required to make this a reality.
    •   Established instrumentation for the detection of flow rates will become increasingly critical for
       intensive water users to monitor and become more efficient with use and footprinting.
    •   Utilization of existing data to detect anomalies in distribution systems will allow municipalities
       to create efficiencies with existing infrastructure and upgrades by addressing non-revenue
       water in the short term.
    •   Metering technology is improving and innovation from other sectors, namely smart grid
       technologies for electric utilities, are slowly being brought to bear in the water sector; adoption
       of smart metering amongst water utilities has lagged that of gas and electric utilities.
Key Vendors

    •   Badger Meter Inc.            •   Merck                      •   Bruker
    •   American Micro              •   Siemens                     •   Perkin Elmer
       Detection Systems           •   GE Ionics                    •   Oxford Instruments
    •   Itron                        •   Hach of Danaher             •   Takadu
    •   Loviband                    •   ThermoScientific             •   Aquarius Spectrum
    •   ABB                        •   Pressure  Pipe Inspection      •   TACount
    •   Schneider Electric                Systems
                                   •   Pure Technologies
System monitoring & metering involves technologies concerned with water quality management,
distribution network & process control management, and automated metering. Both government and
private sector support of an electric smart grid has brought attention to the potential analogy of a water
smart grid. Relative spending in venture-grade companies to support an electric smart grid, however,
dwarfs dollars spent into water smart grid technologies.

In addition, the American Recovery and Reinvestment Act (ARRA) electric smart grid investments and
broader package of grid-related products exceeded similar spending going into water infrastructure
upgrades by $6.5 billion in 2010. Unlike smart grid investments, where a significant portion of funding
was allocated to projects that would directly benefit venture-grade companies, investments in the water
sector were dedicated only to infrastructure upgrades.
                                                                                           42

-------
                                                                             2010 U.S. Water Innovation
                     2010 U.S. Public Funding into Smart Grid and Water Sectors
                $12
                $10
                 $8
                 SO
  $6.5 B
difference in
 spending
                                     Source: EPA Data, Cleantech Group Analysis
Despite this gap in funding, the system monitoring & metering market is growing steadily. We estimate
a total of U.S. spending across the System Monitoring & Metering segment will be approximately
$0.88 billion in  2010. This estimate is based on analysis of third party data, interviews, and our own
internal analysis.

Our analysis indicates that 61% (106) of the System Monitoring & Metering companies that we
catalogued are  private, 25% (44) are venture-backed and 14% (25) are public. While private companies
still dominate the list, venture activity in this particular space is healthy - relative to other water
segments. The intersection of water and information technology (IT) is a comfortable space for many
venture capitalists; the need for efficient and remote water quality monitoring and distribution &
process control management are increasingly critical for municipal and industrial water users.
                       Share of System Monitoring & Metering Players by
                                         Company Type
                                                                 l Private
                                                                 l Public
                                                                  Venture-Backed
                                       Source: Cleantech Group Analysis
                                                                                              43

-------
                                                                           2010 U.S. Water Innovation


Water Quality Management
Time efficient water quality management remains the holy grail for not only drinking water utilities but
also for industries like food and beverage where the public health scare of recalls subjects companies to
litigation and reputational risks. In recent weeks, the interest in such real-time monitoring was
illustrated by Badger Meter's minority stake in American Micro Detection Systems (AMDS) to help the
company finalize the development of their REX Sensor, which has the ability to detect dissolved metals
down to the parts-per-billion in real-time. AMDS is also working on a second sensor product that will be
able to detect hazardous organic chemicals that  could act as a stepping stone to the real-time detection
of other contaminants in drinking water, wastewater and process water applications.

The quality management of water, however, is complex as there are approximately 100 substances that
are regulated and require testing on a regular  basis. Whether for drinking water, swimming pools or
water utilized for the beverage industry variables to be tested range from chlorine levels, biochemical
oxygen demand (BOD) and the presence of microorganisms such as cryptosporidium and legionella.
Water quality testing in and of itself is one market.
                Sample of Tested Contaminants
Groundwater
•Volatile organic
compounds
(VOCs)
•Polychlorinated
biphenyls (PCBs)
•Herbicides
•Pesticides
•Nitrogen
•Phosphorous
•Magnesium
nutrients
Drinking
Water
•Chlorine levels
• Biochemical
oxygen demand
(BOD)
• Microorganisms




Wastewater Industry-
(Beverage, Power,
Chemicals)
•Chlorine levels 'Chemical
concentrations
• Biochemical
oxygen demand
(BOD)
• Microorganisms




Commercial -
Recreation/
Aquatics
•Chlorine levels
•Biochemical
oxygen demand
(BOD)
•Microorganisms




Water testing facilities are estimated at approximately 1,300. Many of these laboratories are in-house
and embedded in major water use facilities like municipal water and wastewater plants, beverage
bottlers, breweries and pharmaceutical manufacturing plants. Tests that are done in commercial
laboratories typically cater to a regional need within a small geographic area.

Equipment providers supplying analytical instrumentation are divided into (1) onsite treatment
equipment, (2) In-line monitors and (3) high-end testing devices.
                                                                                           44

-------
                                                                         2010 U.S. Water Innovation
              Specialty Analytics & Instrumentation Equipment
               Onsite Test Equipment
              E.g. swimming pool chlorine
              samplers
                  £LnMotte
   In-Line Monitors
Often used in industrial settings to
supply real-time measurements
from flowing liquids.
                                     SIEMENS
   High End Testing
       Devices
e.g. gas chromatographyand mass
spectrometry used by special
technicians in laboratories.
                     BRUKER
                        MERCK
                             BtwtU
              Pa I infest
                  Thermo Fisher
                  SCIENTIFIC
                                                        Perkin.-lmer
                                                              OXFORD
                   Thermo Fisher
                    SCIENTIFIC
                                    Source: Cleantech Group Analysis
Distribution and System Management
Large information technology (IT) players including Cisco, IBM and Oracle are increasingly interested in
the water business and the opportunity to find convergence between IT and water - specifically where
data aggregation, management and control are concerned. Some water industry veterans, however,
argue that there is a limit to the role of IT in water, where environments are harsh and regulation is
extremely thick. One large corporate vendor went so far as to say that it is not in the interest of a
company to identify and measure unregulated contaminants so as to avoid any potential liability.

Meanwhile, innovators have  been addressing the non-revenue water loss through leaks in Europe and
North America's aging infrastructure. An estimate of 30% of treated water is lost through leaks in aging
distribution systems.
                                                                                         45

-------
                                                                           2010 U.S. Water Innovation
System
Input
Volume
Authorized
Consumption
Water
Losses
Billed Authorized
Consumption
Unbilled
Authorized
Consumption
Apparent Losses
Real Losses
Billed Metered Consumption
(including water exported)
Billed Non-metered Consumption
Unbilled Metered Consumption
Unbilled Non-metered Consumption
Unauthorized Consumption
Metering Inaccuracies
Leakage on Transmission and/or Distribution Mains
Leakage and Overflows at Utility's Storage Tanks
Leakage on Service Connections up to Customers'
Meters
Revenue
Water
Non-
Revenue
Water
                                          Source: Cleantech Group Analysis


Activity in this segment is increasing steadily as are the issues surrounding innovative water resource
management approaches. For example, Canadian-based Pure Technologies, developer of acoustic
monitoring systems for monitoring and management of infrastructure acquired Emerald Technology
Ventures company, Pressure Pipe Inspection Co. (PPIC) to broaden the company's international
expansion.  PPIC currently has customers not only in North America but South America, the Philippines
and Hong Kong. And large IT players like  IBM are partnering with startups like Takadu - an early stage
player we profile later on.

Automated Metering
For all of the investor and public attention to "smart meters" for electric utilities, the evolution of
automated meter reading in the water sector has lagged the adoption of similar technology in the
electric and gas sector.  According to most industry estimates, there are approximately 100 million
water meters in the United States. Of this total, approximately 40% have been outfitted with first
generation  automated meter reading (AMR).

AMR meters integrate communication units to transmit data in at least one direction. Most of these
meters are  RF (radio frequency) devices that are read by drive-by or handheld receivers. These meters
have steadily, albeit slowly, been replacing legacy meters that required visual inspection. The second
generation  of AMR meters, known as AMI (advanced metering infrastructure) or "smart meters" allow
for bi-directional communication to/from the meter primarily over fixed wireless networks. AMI
deployments have seen fast adoption amongst electric utilities that received funding through the
American Recovery and Reinvestment Act of 2009 to invest  in these implementations.
                                                                                           46

-------
                                                                              2010 U.S. Water Innovation
                         Distribution of U.S. Water Metering Technologies
             120
             100
              80
                    Not Automated
                                      AMR Meters
                                                        AMI Meters
                                                                           Total
                Source: Itron, Badger Meter, IMS Meter Report, Scott Report, Cleantech Group Analysis
Water utilities have not been as quick to deploy AMI units.  We estimate that only 10% of the 40 million
AMR units deployed by water utilities, or approximately 4 million, would be classified as AMI. As a
comparison, electric utilities will have deployed approximately 20 million AMI units by the end of 2010
according to the Cleantech Group's 2010 U.S. Smart Grid Vendor Ecosystem Report commissioned by
the U.S. Department of Energy.

These estimates are in line with a recent water utility study published by Oracle 8. The study indicated
that only 7% of utilities have implemented a smart meter program with an additional 7% in pilot phases.
A majority of utilities in this study, and the vast majority of smaller utilities, have  not yet considered a
smart meter program.
 http://www.environmentalleader.com/2010/01/ll/33-of-water-utilities-adopting-smart-
meters/?graph=full&id=l
                                                                                               47

-------
                                                                              2010 U.S. Water Innovation
                                       •.  .«!..  i
                                                   How far along is your program?
                                                              nave fully implemented a
                                                              smart meter program
                                                              nave implemented a smart
                                                              meter pilot program
                                                              have prepared a »trate»c
                                                              plan (or adoption
                                                              haw assessed the
                                                              opportunity for a smart
                                                              meter program
                   Larger w»l*r utMcts < 100 enfXcyves or more; *e» more than ttasOJtsMtU ** smaOfr w»lor uUfie* llfit
                     than 20 employees! to consider or implement smart meter technologies - S9S to 26't respectivefy
                                  Source: Oracle, Environmental Leader

While AMI meters hold the promise of not only enabling consumers to better understand water usage,
but also the operational benefit of enabling utilities to more accurately identify leaks and operational
problems, the investment in this next wave of technology has not yet been compelling for most utilities.
The one benefit of this delayed deployment is that AMI technology continues to mature through its
deployment to electric and gas utilities.  Reliability should increase over time and costs should decline
enabling water utilities to reap these returns to scale on future implementations.

The U.S. water metering market has been dominated by a small number of large, established vendors:
Badger Meter, Neptune, Itron, Elster, and Master Meter account for the majority of automated meters
deployed. Advanced metering, in particular next generation communication infrastructure, has
garnered a significant amount of venture capital with companies such as Silver Spring Networks and
Trilliant receiving large investments. These companies have primarily targeted electric utilities, but are
beginning to penetrate the water market.  It should be noted that these venture-backed innovators do
not actually manufacture meters, but rather focus on communication units and partner with vendors
such as Itron, GE, and Landis+Gyrthat integrate communication units into meter hardware.

We expect that the automated and advanced water metering market will grow as the economic drivers
to manage and conserve water more efficiently become more acute.  Rising energy prices and the desire
of both consumers and utilities to better manage electricity use, has been the driving force behind
deploying more advanced metering infrastructure in the electric grid. As the water industry begins to
experience similar pressure, we will see  analogous needs develop.

In the following section, we will address each drinking water challenge area as it relates to the early-
stage innovation that we identify within the context of the current vendors and dynamics of the System
Monitoring & Metering market.
                                                                                               48

-------
                                                                                      2010 U.S. Water Innovation
Water Treatment
Water Treatment/ \
Disinfection /
A
N
Filtration/
Membrane
Treatment
4
Distribution
I \
\ System Monitoring \
/ & Metering /
f /
          Address broad mix of contaminants
                                                                   Water System IT
   Disinfectants w/o
      byproducts
Low cost treatment for small/very-small systems/remotes
                      systems
         Energy-efficient treatment technology.
  Need technology to support the
management of remote DW systems
      (e.g. remote telemetry).
   Need technology that minimizes wastewater and/or
         residuals handling and disposal costs
  Need better/faster/cheaper DW
    measurement/monitoring
  techniques, including real-time
  techniques applicable to water-
         security needs.
             Technology/policy for POU/POE for DW & WW (distributed) management
                                                                                                              49

-------
                                                                          2010 U.S. Water Innovation
Emerging Innovation
It is therefore in this context of the System Monitoring and Metering market that innovators are
increasingly concerned with developing more flexible water systems and creating efficiencies with
current systems.

       Recently Funded System Monitoring & Metering Companies (Funding in 2009 or 2010)

Company
i20 Water
Hydretis
Intellect Water
Aqualabo
Check light. Ltd.
Cyber-Rain, Inc.
Sorbisense ApS
Shaw Water Engineering
Checkhght, Ltd.
Sens-lnnov
Aquarius Spectrum
Checklight, Ltd.
Ecochemtech Ltd.
Hydrospin Ltd.
Sorbisense ApS
En Print
BiAqua
Echologics Engineering, Inc.
Smartap
SPC Tech Ltd.
TaKaDu


Country Description
United Kingdom Developer of a smart metering and pressure control system that
ensures the average zone pressure in pipes is kept to the minimum
required, leading to reduced leaks and bursts.
France Developer of leak detection systems and water management systems.
United Kingdom Developer of water quality sensors and instruments.
France A provider of instruments and probes for water quality monitoring,
checking and analysis.
Israel Developer of real-time water quality testing and monitoring kits and
products.
USA Developer of water management systems for smart sprinkling
homeowners' landscapes.
Denmark Developer of water quality monitoring technology for a variety of
sources including drains, groundwater, drinking water, and industrial
waste water.
United Kingdom Developer of Crypto-Tect" technology to detect the presence of harmul
parasites in fresh water supplies."
Israel Developer of real-time water quality testing and monitoring kits and
products.
France Sensors for water pollution detection.
Israel Developers of online water leak detection system for municipalities.
Israel Developer of real-time water quality testing and monitoring kits and
products.
Israel Developers of a self-powered water monitoring system.
Israel Developers of inside pipe generator that supplies electricity for water
monitoring and control systems.
Denmark Developer of water quality monitoring technology for a variety of
sources including drains, groundwater, drinking water, and industrial
wastewater.
United Kingdom Applied DNA fingterprinting technology to deliver accurate assessment
of water quality.
Netherlands Developer of bio-based contamination detection in water treatment.
Canada Developer of an acoustic tech no logy for leak detection in pipes.
Israel Developer of smart residential water solutions.
USA Developers of smart pressure control system to prevent leaks.
Israel Developer of a water management software.
Source: Cleantech Group Analysis

Most Recent Capital Raise
$6,350,000
$4,500,000
$3,300,000
$2,800,000
$2,000,000
$1,800,000
$1,200,000
$1,190,000
$1,000,000
$640,000
$500,000
$500,000
$500,000
$500,000
$461,000
$248,400
Undisclosed
Undisclosed
Undisclosed
Undisclosed
Undisclosed

                                                                                          50

-------
                                                                                      2010 U.S. Water Innovation
                                     Cleantech Group Market Anticipation Matrix
                  Revolutionary
                  Disruptive
                      Ability
                   Incremental
                                                  TACount
                                                    AL TIME MICROBIOI
                                                     (TaKoDCT)
               REAL TIME MICROBIOLOGY
                       • Aquarius Spectrum Ltd.-
                               Commercially available
                                     today
                               Time to Market  -
                  Pilot/Beta Phase
                   (1-3 years out)
  R&D Phase
(3-5+ years out)
We have identified three vendors that are offering innovative System Monitoring & Metering
technologies:

Israel-based TaKaDu is a Software-as-a-Service (SaaS) solution providing water utilities with Water
Infrastructure Monitoring. TaKaDu detects, alerts and provides real-time insight on leaks, bursts and
network inefficiencies. Complex statistical algorithms correlate and analyze existing online data from
meters within the network (such as flow, pressure, quality, etc) and external data (weather, holidays and
more), allowing water utilities worldwide to efficiently manage their networks. The technology requires
no changes to the network, no additional devices and no capital expenditure.
         (TaKaDu')
Israel
          Overview: TaKaDu is a Soft ware-as-a-Service (SaaS) solution providing water utilities with Water Infrastructure Monitoring. TaKaDu
          detects, alerts and provides real-time insight on leaks, bursts and net work inefficiencies.
          Development Stage: Pilot - Commercialization

          How does it work? Complex statistical
          algorithms correlate and analyze exist ing on line
          data from meters within the network (such as
          flow, pressure, quality, etc) and external data
          (weather, holidays and more}, a (lowing water
          utilities world wide to efficiently manage their
          networks. The technology requires no changes
          to the network, no additional devices and no
          capital expenditure.
                                            Water System IT
         IT for remote DW systems (e.g. remote telemetry).
         Cost-effective DW treatment technology for
         small/very-srnal I systems and remotes systems

         Cost effective, smart, secure realtime monitoring
         techniques.
                   Yes

                   N/A


                   Yes
                                                                                                         51

-------
                                                                                       2010 U.S. Water Innovation


Israel-based Aquarius Spectrum is developing a wireless sensor network to provide online monitoring
and detection of water leaks. The system is powered by algorithms for leak detection in complex
pipeline networks and is based on distributed signal process and ultra low power communication system
enabling up to 4 years maintenance free operation.

         Aquarius Spectrum Ltd.   Israel

         Overview: Developer of a wireless sensor network to provide on line monitoring and detection of water leaks..

         Development Stage: Pilot-Commercialization      Water System IT                             B^     YeS

        How does it work? The system is powered by
        algorithmsforleakdetection in complex        IT for remote DW systems (e.g. remote telemetry).
        pipeline networks and is based on distributed     Cost-effective DWtreatmenttechnologyfor
        signal process and ultra low power            small/very-small systems and remotes systems
        communication system enabling up to 4 years
        maintenancefreeoperation.                Cost effective, smart, secure real time monitoring
                                            techniques.
Israel-based TA Count is developing a rapid microbiology technology that can enable the detection and
counting of microorganisms in a matter of minutes. By detecting culturable / colony forming
microorganisms only, it provides a CPU count equivalent to what would be obtained using plate count
method. The technology is based on the discovery of a specific intracellular activity.

A key advantage of the technology is its broad application area beyond drinking water. It can be applied
in wastewater Pharmaceuticals and food and beverage production line applications.
            T/VCount
             REAL TIME MICROBIOLOGY     '   '

             Overview: Developer of a rapid microbiology technology that can enable the detection and counting of microorganisms in a matter of
             minutes.


             Development Stage: Pilot - Commercialization      Water System IT

             How does it work? By detectingculturable/
             colonyforminemicroorganismsonlyjtprovides   ITfor remote DW systems (e.g. remote telemetry).      ^^     ..,.
             a CFU count equivalents what would be        Cost-effective DWtreatmenttechnologyfor
             obtainedusingplatecountmethod.The        small/very-small systemsand remotes systems
             technology is based on the discovery of a
             specificintracellularactivitv.                Cost effective, smart, secure real time monitoring
           ^^^^^^^^^^^^^^^^^^^    ^^^^     techniques.
             Advantages: Broad applications beyond drinking
             water: waste water, pharmaceuticalsandfood
             and beverage product lines.
                                                                                                          52

-------