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A circular business model case study: The Israeli Water System
Jeff Dodick Ben Gurion University of the Negev Yamit Naftali and Steven Zecher Jerusalem Institute of Policy Research Innovation to overcome limited resources: How Israel uses and reuses water assets This project has received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement No
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Contents 1 2 3 4 5 6 Overview Journey Business context Business models
Barriers and Enablers 5 Breakthroughs 6
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The Israeli Water System
Overview
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The Israeli Water system - size and value
Integrated value chain consuming about 2.1 billion cubic meters valued at an estimated 4.5 billion Euros annually. Desalination production estimated at 801 million cubic meters with a market value of about 1.6 billion Euros annually. Recycled water estimated at 428 million cubic meters valued at 898 million Euros annually. Lost water in the system estimated at 168 million cubic meters with a value of 352 million Euros. 300 suppliers in the water eco-system (infrastructure / technology) The Israeli Water system - size and value Integrated value chain. 300 suppliers in the water system (120 are start ups). Based on 2017 prices , 3.5 Sheq per Dollar, .81 EURO per Dollar Water in other products for local consumption or export estimated at about 1.7 billion cubic meters with an estimated value of 3.48 billion Euros annually.
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What are the stages in the water system value chain?
Natural sources, which include rainfall, snowmelt, rivers, aquifers, lakes, and the sea (via desalination). Aquifers act as a holding area, naturally cleaning the water through filtration. From each of the primary sources, water flows into reservoirs, which are natural or man-made surface facilities. After the water is collected, it must be collected, prepared, and transported to municipal or other regional water district facilities. Water is then used by consumers, municipal, industry, and agriculture. The cycle continues with the recovery, treatment of wastewater and residual waste streams from all users. Recycling includes the reuse of a portion of the cleaned or treated water for agriculture, municipal uses, gardens, and even direct human consumption. Natural sources Collection, storage Users Recovery and cleaning Conveyance and distribution \\\\\\\\\\\\\\\\\\\\\\ 1 5 2 4 3 Circular value chain configured from the actual water cycle with the addition of man-made elements. We are trying to save the water itself. System boundary
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The Israeli Water System
Sources Collection and Storage Conveyance and Distribution Uses Recovery and cleaning The Israeli Water System 1 5 2 Do more with less. Mekorot, Israel's' national water company, has always considered the development of the Israel, and the strengthening of the settlements and the economic, political and security situation in the State of Israel. This is fulfilled by the continuous spearheading of the development of the water industry and providing optimal, reliable and quality solutions, from a national perspective, for future generations. In the spirit of this vision, Mekorot is committed, at all times, to expanding its unique knowledge and capabilities with a view to developing and preserving the water resources, leveraging technological innovation worldwide and providing a solution for any problem, at any time and under any circumstances, while ensuring professionalism, efficiency, dedication and continually striving for excellence. Goal: Reliable secure, sustainable water. Translation: Do more with less. 4 “Reliable, secure, sustainable water” 3
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The Israeli water system
Nat. Sources Collection and Storage Conveyance and Distribution Uses Recovery and cleaning The Israeli water system 1 5 … development of the water industry and providing optimal, reliable and quality solutions… Mekorot is committed to expanding its unique knowledge and capabilities… preserving the water resources, leveraging technological innovation worldwide 2 Mekorot, Israel's' national water company, has always considered the development of the Israel, and the strengthening of the settlements and the economic, political and security situation in the State of Israel. This is fulfilled by the continuous spearheading of the development of the water industry and providing optimal, reliable and quality solutions, from a national perspective, for future generations. In the spirit of this vision, Mekorot is committed, at all times, to expanding its unique knowledge and capabilities with a view to developing and preserving the water resources, leveraging technological innovation worldwide and providing a solution for any problem, at any time and under any circumstances, while ensuring professionalism, efficiency, dedication and continually striving for excellence. 4 3
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The Journey Overview
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Journey - timeline 1937 – National Water company created
– Water Law establishes public water rights and mandatory measurement 1965 – Netafim launches drip irrigation production 1969 – Shafdan wastewater treatment plan completed 1975 – National Sewage Treatment Plan 1988 – Water master plan 1995 Agreement with Jordan on water sharing 2002 – Approval for Ashkelon desalination plant 2006 – Campaign and tariff increase; water/ sewage privatization 2009 – Water management, tariff reforms 2013 – Drinking water regulations
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Result: Major Drop in Domestic Water Use
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Result: Major Drop in Agricultural Water Use with Increased Productivity
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Business Context Map
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Direct government investment and incentives
Sensitivity to fees and tariff Energy-intensive technology solutions New technology company growth POC and Beta site for new tech Drought and water stress Damage to aquifer Water as a service Capital investment in desalination shift priority and revenue model from recycling Demand for efficient, effective, scalable solutions Demand lower price and higher quality Continuous innovation creates competitive environment Public ownership of all water rights Consolidation of water authorities Control of recycled water for agriculture Clean water requirements All water must be measured and monitored by law Population growth and density Changing consumer patterns Changing industry consumption patterns Direct government investment and incentives Meet water needs Lower water use Increase production Information feedback and management Command and control Lower marginal costs National identity Lower tariff (i.e. price) Agritech Water tech Energy/cleantech Adoption risk Overcome legacy costs Increasing drought and water stress condition in Israel and globally Global warming Technology breakthroughs in water recycling and reuse Geopolitics
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Water flow mapping (Israel)
35% of source water from desalination (and growing) 665 liters per capita per day 86% water recycling rate 7% non-revenue water 23% waste water used in agriculture Natural sources Collection, storage Users Recovery and cleaning Conveyance and distribution Secondary market 2,396 MCM 2,131 MCM 168 MCM 395 MCM 1,661 MCM 97 MCM 470 MCM In-system organic waste Out-of system losses 33 MCM 801 MCM ~902 MCM Desalination 428 MCM The definition of the UN for “absolute water scarcity” is less than 500 m3 water per capita annually. Based on your 665 liters per capita / day (= 242 m3 annually) figure Israel exists in a country with absolute water scarcity. Total water used by Ag in Israel = 1.6 BCM annually Total wastewater used by Ag in Israel = 428MCM annually Share of wastewater used by Ag in Israel of total water used in Ag = 23% Source: R2Pi Study Team, CBS, Becker, et al., 2011
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What are the principles of a circular business model?
Close the loop of raw materials by establishing objectives within supply chain, production process, and customer base to implement circular business principles, including: Minimizes (reduce) the use of new raw materials (through efficient production) Limits losses of raw materials (through designs and recycling) Reuses materials wherever possible (through recovery and reconditioning) in the same product or related products
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Business Model Canvas
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Business Model Value Proposition: The value proposition for the water system is to provide a living laboratory for innovation in providing clean, ready water on demand. The system has reliable infrastructure that maximizes reuse and minimizes waste and is managed and measured to ensure efficient and effective delivery. government policy / regulation that enables water conservation and tech development (via economic incentive, and laws which control ownership)
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Israel’s water system on a business model canvas
Key Partners Regulators Technology suppliers Customers (every water user produces waste water) Infrastructure facilities and service providers Key Activities Collection Transport Storage Treatment Monitoring Maintenance Value Proposition Clean, ready water on demand Reliable infrastructure Management and measurement to ensure efficient and effective delivery Maximize reuse and minimize waste Living laboratory for innovation Customer Relationships Reliable, affordable, high quality water on demand Living laboratory for continuous quality improvements and innovations Customer Segments Residences Industry Agriculture Municipalities Key Resources Public ownership and control of water state-of-the art, technologically-enhanced systems Regulation Channels Infrastructure support Services (reporting and maintenance Single central water authority Cost Structure Investments in infrastructure Management and operations Costs amortized over whole system Treatment and transport Security costs Energy costs Whole cost accounting/externalities? Revenue Streams Regulated fees for service based on cubic meter of water Public transfers from taxes and fees Service agreements Public financing for capital improvements Private tender payments from BOT operators Payment for performance A template to understand the relationships of the value chain
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Circular Business Models
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How do these circular business patterns apply to Israel’s water system?
Production How water is produced? Consumption How water is used? End of life End-of-life uses? Re-make - repairing damaged water resources and restoring them to active and safe use Re-condition - water is used and reused at the technical and biological level in a closed system Circular sourcing - treating and reusing water sources within a single user operation Co-product recovery – recovering waste materials such as sludge from the water to be used as fertilizer and energy stock Access – all water is owned by the public, it is used subject to a fee per quantity paid to a regulated public authority Performance – water services, particularly third-party services, are paid on efficiency and effectiveness (e.g. saving water) Resource recovery – water used in agriculture production is an input into a new value chain. Not applicable to this case study
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Where are the CEBMs found in the Israeli water system?
Performance (systems to lower use and cost are provided on a performance basis Access (systems are financed, owned and operated by public authority and provided to users on a fee basis ) Natural sources Collection, storage Users Recovery and cleaning Conveyance and distribution Secondary market Rain, snow, aquifers, seawater Desalination circular sourcing (treating and reusing water sources within a single user operation Re-make - (repairing damaged water resources and restoring them to active and safe use) Co-product recovery (recovering waste materials such as sludge from the water to be used as fertilizer and energy stock). Recondition and Re-use (water is used and reused at the technical and biological level in a closed system
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Barriers and enablers
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Questions How would you rank each of the following as barriers and enablers? 5 = Very High = significant impact on the operations of the water system, 3 = Moderate = impact but not pivotal, 1 = Very Low = little or no impact
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Key barriers and enablers of circularity
Domestic and global drought and water stress conditions Ownership and control of value chain Mandatory monitoring/measurement Acceptance, compliance, and commitment of consumers to goals Technology innovations + gov beta Strict regulation and transparency Integrated cost and fee structure mitigate financial shift from circularity Changes in cost and fee structure of capital investment may erode recycling/reuse incentives Political costs of central ownership and control Resistance to full accounting of externalities Given the integrated pricing and cross subsidization of costs in the tariff for water and the substantial capital investment and long-term payment agreements to system operators (e.g. desalination built and financed through Build-Own-Transfer public private partnerships), the pricing system has mitigated the internal financial motive to move from recycling to desalination. While costs of treatment and desalination differ, the revenues for each are the same in the integrated pricing model. (1) a municipal water district or utility implements (2) a bundle of water technologies using (3) an “environmental service partnership,”(Environmental Service Company); ESCO uses (8, 9) performance-based mechanisms, which include payment based on a series of performance milestones and savings thresholds. Several governmental mechanisms, such as (5) tax-exempt finance (6) export trade credit guarantee & (7) special loans, serve to increase yields and the return on investment for the (4) investors
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Breakthroughs What have we learned in Israel…
Pivotal role of government regulation Role of public responsibility and awareness Graduated pricing/shock pricing to change behavior Sensitivity of water to energy price and availability Mobilize private and public sectors for rapid deployment of new technologies; allow regulation to accommodate change Operating facilities as “laboratory” / for managed innovation (“beta”) Accept and manage risk Integrate IT into infrastructure; enabling mandatory measurement and transparency Leverage pivotal roles of key industry e.g. agriculture Externalities are expensive…can’t ignore Breakthroughs Public responsibility – Water is a public good. It is legally owned by the public. The public sector has the responsibility to ensure that people, including residents and industry, have a safe and sustainable supply of water. As described elsewhere, with the early adoption of national conveyance systems in the 1950 through the introduction of new technologies and organization of management and delivery system, the public sector has taken responsibility. However, an equally important point is that the public is also responsible. The ethos of saving water, the preciousness of water resources, and the personal responsibility of each citizen has been a consistent theme in the history of the country. Graduated pricing/shock pricing to change behavior – The cost of water should reflect the value of water, taking into account the infrastructure to deliver clean water to consumers, but also taking into account the ecological system that supports such clean water. The “real” cost of water will shocked the public into dramatic changes in consumption and use behavior as was seen in the measures taken beginning in 2008 that led to “water independence” in 2013. Mobilize private sector for rapid deployment of new technologies – Israel has allowed the private sector to innovate through public private partnerships (PPPs) in its infrastructure. Funding support for basic and applied research and financing for the introduction of new technologies across industries (e.g. cybersecurity to leak detection, information technology to smart metering, etc.). Importantly, these public and private investors recognized the importance of direct and indirect financial and public returns on investment. Operating facilities as “Laboratory” for managed innovation – Coming up with good solutions to pressing problems is good. Continuous innovation that consistently improves performance and outcomes is better. Israel, through the combination of its well-documented entrepreneurial culture and existential demands, has instituted innovations key sectors, including defense, energy, agriculture, and water. Accept and manage risk – New installations of carry a variety of risks, including development, financial, political, and technological risks. Each of these categories of risk are recognized and addressed through a variety of mitigation measures, including regulatory reforms, pricing, alignment of stakeholder interests, and performance guarantees by those with the most to gain (and lose). Israel has managed to build a system that addresses each of these risks to the satisfaction of its stakeholders, including the Government, industry, and consumers. For stakeholders, including financial and public sectors, the approach and ability to manage and mitigate risk is most important. Integrate IT into infrastructure – Israel has leveraged its world-class achievements in information technologies into water infrastructure, using the Internet of Things model. Examples of this are found in the dissemination of the Internet connectivity in leak detection that identifies leaks and deploys and manages repairs in real time, smart metering that connects real time water usage metering to the home owner or company management, the company, precision irrigation management that customizes the delivery of water and nutrients to each plant according to the conditions and lifecycle of those plants, and information security systems that protect valuable and mission-critical municipal infrastructures against hacking. Many of these IT innovations came from Israel’s defense and communications industries and have been adapted and implemented in scalable installations in Israel and elsewhere.
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Summary The “subtle” Interplay between government, private sector companies and Innovation
Policy Public Sector Government Private Sector Innovation
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If challenges cross borders, so should solutions
Global National Regional Industrial parks Business Consumer Water systems can be found at the micro (company or consumer level) meso (eco-industrial parks levels) and macro levels (nations, regions, provinces and cities) of the circular economy. This means that changes at any one level cascade through the entire system. This creates both challenges and opportunities.
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Breakthroughs What have we learned in Israel…
Pivotal role of government regulation Role of public responsibility and awareness Graduated pricing/shock pricing to change behavior Sensitivity of water to energy price and availability Mobilize private and public sectors for rapid deployment of new technologies; allow regulation to accommodate change Operating facilities as “laboratory” / for managed innovation Accept and manage risk Integrate IT into infrastructure; enabling mandatory measurement and transparency Leverage pivotal roles of key industry e.g. agriculture Externalities are expensive…can’t ignore …that can be used elsewhere Use capital structure to shift risk to private sector; use systems financing to pay for services and reward for performance Integrate pricing among multiple nodes in the value chain to ensure financial competitiveness of recycling Invest in continuous innovation Design regulation to facilitate market-driven change Bundle solutions to create financeable scale and service revenue models Leverage cross sector linkages (energy, agriculture, and water) Breakthroughs Public responsibility – Water is a public good. It is legally owned by the public. The public sector has the responsibility to ensure that people, including residents and industry, have a safe and sustainable supply of water. As described elsewhere, with the early adoption of national conveyance systems in the 1950 through the introduction of new technologies and organization of management and delivery system, the public sector has taken responsibility. However, an equally important point is that the public is also responsible. The ethos of saving water, the preciousness of water resources, and the personal responsibility of each citizen has been a consistent theme in the history of the country. Graduated pricing/shock pricing to change behavior – The cost of water should reflect the value of water, taking into account the infrastructure to deliver clean water to consumers, but also taking into account the ecological system that supports such clean water. The “real” cost of water will shocked the public into dramatic changes in consumption and use behavior as was seen in the measures taken beginning in 2008 that led to “water independence” in 2013. Mobilize private sector for rapid deployment of new technologies – Israel has allowed the private sector to innovate through public private partnerships (PPPs) in its infrastructure. Funding support for basic and applied research and financing for the introduction of new technologies across industries (e.g. cybersecurity to leak detection, information technology to smart metering, etc.). Importantly, these public and private investors recognized the importance of direct and indirect financial and public returns on investment. Operating facilities as “Laboratory” for managed innovation – Coming up with good solutions to pressing problems is good. Continuous innovation that consistently improves performance and outcomes is better. Israel, through the combination of its well-documented entrepreneurial culture and existential demands, has instituted innovations key sectors, including defense, energy, agriculture, and water. Accept and manage risk – New installations of carry a variety of risks, including development, financial, political, and technological risks. Each of these categories of risk are recognized and addressed through a variety of mitigation measures, including regulatory reforms, pricing, alignment of stakeholder interests, and performance guarantees by those with the most to gain (and lose). Israel has managed to build a system that addresses each of these risks to the satisfaction of its stakeholders, including the Government, industry, and consumers. For stakeholders, including financial and public sectors, the approach and ability to manage and mitigate risk is most important. Integrate IT into infrastructure – Israel has leveraged its world-class achievements in information technologies into water infrastructure, using the Internet of Things model. Examples of this are found in the dissemination of the Internet connectivity in leak detection that identifies leaks and deploys and manages repairs in real time, smart metering that connects real time water usage metering to the home owner or company management, the company, precision irrigation management that customizes the delivery of water and nutrients to each plant according to the conditions and lifecycle of those plants, and information security systems that protect valuable and mission-critical municipal infrastructures against hacking. Many of these IT innovations came from Israel’s defense and communications industries and have been adapted and implemented in scalable installations in Israel and elsewhere.
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Why is Israel’s water experience relevant to the EU?
Total water used by Ag in Israel = 1.6 BCM annually Total wastewater used by Ag in Israel = 428MCM annually Share of wastewater used by Ag in Israel of total water used in Ag = 23% Managed water is the water that goes into the pipes. Total water used by Ag in Israel = 1.6 BCM annually Total wastewater used by Ag in Israel = 428MCM annually Share of wastewater used by Ag in Israel of total water used in Ag = 23%
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A circular business model case study: The Israeli Water System
Questions? Innovation to overcome limited resources: How Israel uses and reuses water assets This project has received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement No
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Extra
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What is the Business Model Canvas, what questions does it seek to answer, and how does it describe circularity? Key Partners Who are key partners? (e.g. engineering, suppliers, finance, customers, etc.) Who are key suppliers? What is supplied? What supplies are recycled products, residual waste, recycled materials, etc.) Which key resources are acquired from partners? Do partners engage in circular economy business practices? How? Which key activities do partners perform? How is the value chain vertically and horizontally integrated? What are the criteria for key partners? (e.g. reducing risk, optimizing profitability, aligning interests, etc.) Key Activities What key activities are involved in the value proposition (e.g. production, problem solving, platform/networking services, etc.) What is the method of distributing products and/or services? How are customers reached? Served? What are the revenues associated with each key activity (product sales, services, etc.) Key resources What resources are needed to deliver the product and/or service? What are the sources for those key resources? What resources are reusable from product recovery, residual waste, other? Value Proposition What value is delivered from products and services? (e.g. performance, flexibility, price, risk mitigation, usability/flexibility, etc.) What customer needs are being met? What is the synergy between products and/or services for each customer need/segment? How is the product and/or service increasing the customer’s value? How does the product/service reduce the consumption of raw materials for the customer? Customer Relationships How are customers integrated into the value chain? What feedback and expectations are built into the relationships with customers to improve circularity? How do customers return used products into the production cycle? Channels What are the channels used to reach customers? What is the energy and materials efficiency of the channels? (e.g. minimize transport distance, method of distribution, etc.) Which channels work best in returning the best value? How are the phases of each channel measured in terms of efficiency and circularity? (e.g. awareness, evaluation, purchase, delivery, and after sales service) Customer Segments What are the customer segments? What is the relative value from various segments? How do various customer segments lower the environmental impact of product and services? How are these impacts measured? Evaluated? Used in assessing marketing strategy? Impact? Effectiveness? Revenue Streams What value is the basis of customers’ willingness to pay? How much do they pay? Are they willing to pay more or less for recycled products? What is the breakdown of revenues by product and/or service? What is the payment method? What are the terms of payment? How is credit given to customers involved in reuse, recycling, reduction of materials? How are performance payments structured in revenue model? How to structure avoided costs? (e.g. energy savings, materials savings, How to account for full costs? (e.g. full cost accounting methods used, life cycle internalization, etc.) Cost Structure What the major costs inherent in the business product? What re the major cost drivers? (low cost inputs, low price market, low labor costs, alternative materials costs, outsourcing, etc.) What are the major value drivers? (e.g. value creation, competitive value, etc.) How are economics of scale and scope achieved? How are externalities accounted for and reflected in the cost structure (e.g. pollution, residual waste, life cycle product waste, redundancy, etc.)
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Water Value Chain - Barriers - Environmental
Unaccounted cost of eco-system services High energy cost and pollution from energy production for from desal and treatment Real estate constraints Public health risks Evaporation costs High salinity Levels and intensity of precipitation Long distance to sources Municipal Primary sources (Nature) Treatment & Distribution Reservoir Aquifer Industry Waste Treatment Recycling Agriculture Flooding from storm run-off Development encroachment Brackish water sources complicated mixing and water quality Infrastructure cost Combined storm and sanitary systems Residual and toxic wastes Limited market for treated water Contamination Environmental impacts, permitting and approvals
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Water Value Chain - Barriers - Governance
Political costs of central water ownership and governance Technology, market, financial, and political risks Maintenance costs Municipal Primary sources (Nature) Treatment & Distribution Reservoir Aquifer Industry Waste Treatment Recycling Agriculture Political costs of central ownership and governance fragmentation ??s 1. Show the volume of water through each stage (California v. Israel) Infrastructure cost Environmental impacts, permitting and approvals Regulation and enforcement fees and penalties
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Water Value Chain Barriers – Financial, Tech and Market
Unaccounted cost of eco-system services Political costs of central water ownership and governance Real estate constraints High energy cost Technology, market, financial, and political risks Public health risks and costs Evaporation costs Maintenance costs Levels and intensity of precipitation Long distance to sources Trade-offs with competitive uses Municipal Primary sources (Nature) Treatment & Distribution Reservoir Aquifer Industry Waste Treatment Recycling Agriculture Ownership and governance fragmentation ??s 1. Show the volume of water through each stage (California v. Israel) Development encroachment Brackish water sources complicated mixing and water quality Scale and cost of financing limit returns Infrastructure cost Limited market for treated water Technology translation, beta, and commercialization Capital investment in desalination shift priority and revenue model from recycling
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Water Value Chain- All Barriers
Political costs of central water ownership and governance Unaccounted cost of eco-system services High energy cost and pollution from energy production for from desal and treatment Real estate constraints High volume water usage High energy cost Technology, market, financial, and political risks Public health risks Evaporation costs High salinity Maintenance costs Levels and intensity of precipitation Long distance to sources Trade-offs with competitive uses Municipal Primary sources (Nature) Treatment & Distribution Reservoir Aquifer Industry Waste Treatment Recycling Agriculture Ownership and governance fragmentation Flooding from storm run-off ??s 1. Show the volume of water through each stage (California v. Israel) Development encroachment Overuse and depletion Brackish water sources complicated mixing and water quality Technology translation, beta, and commercialization Scale and cost of financing limit returns Limited market for treated water Infrastructure cost Combined storm and sanitary systems Residual and toxic wastes Contamination Environmental impacts, permitting and approvals Regulation and enforcement fees and penalties Capital investment in desalination shift priority and revenue model from recycling
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Water Value Chain- Enablers
Integration of the energy costs into overall tariff Public demand for water Ecosystem services are identifiable, quantifiable, and valued Public ownership and control of water; central authority and comprehensive, integrated pricing amortizing costs across all parts of the value chain Less natural water necessitates innovation Coastal access enables extensive use of seawater desalination Demand for technology innovations to improve effectiveness and efficiency Awareness of health and safety issues Reservoirs use covers to minimize evaporation Major transport infrastructure amortized over very long terms Municipal Primary sources (Nature) Treatment & Distribution Reservoir Aquifer Industry Waste Treatment Recycling Agriculture ??s 1. Show the volume of water through each stage (California v. Israel) Public ownership and control Monitoring technologies measure health and access to underground resources Measurement, reporting, monitoring, accountability, and transparency Technology translation, beta, and commercialization of real-time solutions for efficiency, effectiveness, and scale Public financing and creative infrastructure ownership and operating structures Municipal storm systems integrate water retention and reuse strategies Strict land use controls minimize land contamination; public clean-up strategies limit leaching Acceptance of water saving technologies and recycling Regulation and enforcement fees and penalties Environmental impacts, permitting and approvals
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