Is the UK now the best water technology market in the world?
I’m British. Burnt Island Ventures is named after three islands where I grew up on the West Coast of Scotland. Accusations of favoritism may be inevitable, but it’s starting to look like the UK is the place to be for water startups in the coming years. Why?
In short - market structure, focusing on a few key words: concentration, ownership, liquidity, and credible regulatory threat.
Why does concentration matter? While the US has 150,000 water and wastewater systems to service 330 million people (averaging 1 system per 2,200 people), the UK has 28 systems (including Scotland and Northern Ireland) to service 67 million (averaging 1 system per 2,393,000 people). They benefit from a far higher population density (UK has 679 people/square mile vs 84.2 people/square mile in the US) which means households are physically closer together, and the higher revenue basis of each of the systems means that they all can operate a sustainable business model. That means they can afford technology to improve their operations.
Crucially, this concentration means they all know and talk to each other. Of the 28 systems, only 12 water and wastewater service companies cover England and Wales. As a founder, if you nail the delivery of value to one, it’s almost certainly going to be discovered by the rest of the network (or passed on through introductions). When you layer on the dynamics highlighted below, innovation teams are working together on ideas to make improvements to operations as fast as possible.
In terms of ownership, the privatization of the water systems in 1989 has provided some useful dynamics. For publicly traded companies, improving financial performance usually means improved technological or process performance - peers that perform better and show greater profitability will attract the marginal investor. Management is answerable to shareholders in real time. If UK utilities want to stay competitive for investor dollars, they have to do more with less (or provide fat dividends, of course - of which more below).
In terms of liquidity, or the cash position of the utilities and municipalities, the 28 companies look generationally healthy. They raised a combined £1 billion in bond financing in June 2020, and the recent announcement by Thames Water of £250 million in further financing that the shoring up of company balance sheets is not over yet.
Again, why? Well, partly it’s because they’re capital intensive operations, and capital is historically cheap, so maybe it’s “fill yer boots” on the public capital markets. While that’s part of it, a better explanation is that it’s a response to effective regulation.
Ofwat (the UK water sector regulator) has decided it means business. Look at the case of Southern Water in 2019. The company failed to make upgrades to its process and infrastructure, which “led to equipment breakdowns and unpermitted spills of wastewater into the environment” and then they lied about it. What followed was significant. The £3m fine from the regulator (seems fine?) was accompanied by £31.7 million in compensation to customers for failing to meet their obligations (ouch) and £91.2 million in underperformance penalties (almost quite literally triple ouch). Ofwat have decided to be a regulator with teeth.
This makes the Asset Management Period 7 (AMP7) which runs from 2020-2025 serious business. You miss the targets, you pay heavy fines. You meet them, you’re financially rewarded. Management is deeply incentivized to invest where and when they need to make sure they hit the targets as defined at the end of 2019:
A 12% reduction in mains bursts
A 16% reduction in leakage
A 30% reduction in pollution incidents
12,000 km of river improvements
A 13% reduction in water use by customers
Nearly 1.5 million customers getting help with bills
£469 million to address long-term drought challenges
Over £1 billion to help protect from flooding
A 12% fall in bills before inflation
The only thing that has changed in the 11 months since is that a UK oversight committee has allowed certain companies to spend more to reach those targets. Anything that helps managers of UK utilities meet those targets will be very welcome indeed.
It also helps technologists that the owners of UK water utilities are an unsympathetic bunch. If you were to ask the average member of the UK public that they were experiencing a poorer water service while investors took in £57 billion in dividends since privatization, then you can guess the response. Past management behavior has given the regulator room to manoeuvre, and they’re doing just that.
The UK, as they say, has become a target-rich environment for entrepreneurs with differentiated technology. Supported by Ofwat’s £200 million Innovation Fund which will pull utilities together to work on technological upgrades, next-generation technology companies that have been targeting UK utilities like Datatecnics, Typhon, StormSensor and Orb just had their value propositions strengthened significantly. Layer on utility teams dedicated to finding and implementing the best available technology outside of the usual procurement channels (e.g. the United Utilities Innovation Lab, Anglian’s “Innovation Shop Window”, Northumbrian “Innovation Festival”, South West Water’s Centre for Resilience in Environment, Water and Waste (CREWW)), and new companies also have an obvious first point of contact.
The UK as a water technology market is going to benefit significantly from all of these dynamics. It doesn’t look like it’s going anywhere either. Water UK recently announced that achieving the net zero carbon emissions commitment by 2030 will involve a capital deployment of up to £4 billion. “Rule, Britannia!” indeed - at least as far as water innovators are concerned.
