European water utilities are adopting smart water and wastewater solutions, a trend that results in increased spending and the forging of strategic partnerships between companies and utilities. Recent analysis from Frost & Sullivan, reveals that the $104 billion European water utility market leads its counterparts globally with an estimated annual growth rate of 3.8 percent between 2015 and 2020.
The European region, particularly Western Europe, is characterized by its high standards of living and organized infrastructure. Historically, Europe had an early start in modern infrastructure planning, with several major cities beginning to build water and sewerage network infrastructure back in the 19th century. The momentum of this early planning continues, and European water utilities remain at the center of innovation and technological advances in the fields of water and wastewater transport and treatment.
The European water utility market serves a population of more than half a million consumers. Faced with the challenges of aging infrastructure, utility spending in Europe is directed towards rejuvenating infrastructure, building resilient, future-proof systems, and improving operational and energy efficiency. Utilities have been making major investments to improve existing network, treatment, and process control infrastructure, which has proven to be a boon to the utility services market.
Current capital expenditure (CAPEX) is planned to reduce the operational expenditure (OPEX) by increasing operational efficiency. OPEX in Europe accounts for 60 percent of a utility’s expenditures. Although utility operations differ in structure and ownership, they are all bound by the same Europen Union directives.
Frost & Sullivan Vice President Fredrick Royan, an expert in global water markets, explains: “In the past, water utilities have largely used the CAPEX as the primary driver in deciding the fate of infrastructure upgrades, refurbishments, or replacement projects. In the current scenario, water utilities are using the TOTEX (CAPEX OPEX) approach to decide on water infrastructure investments, which is beneficial for innovative and smart solutions that at times are relatively expensive in terms of CAPEX. But under the TOTEX approach, tangible economic benefits appear to be present, and sometimes with attractive payback periods.”
Challenges and Opportunities
Many European water systems are in need of a revamp as they near the end of their useful life. Networks require rehabilitation; and treatment plants, in addition to rehabilitation, require improved processes. Additionally, aging infrastructure is a source of challenges. For instance, non-revenue water rates in Europe vary from 5 percent in Copenhagen, Denmark to 50 percent in Sofia, Bulgaria. Non-revenue water constitutes network leakages and unaccounted water that is lost and cannot be billed to customers. Other challenges include network failure due to ill-managed pressure within pipelines, water scarcity, extreme weather conditions, sludge disposal, and decreasing water consumption.
The impact map (Figure 1) illustrates that all challenges in the water sector are linked to one another. The web of challenges presents interesting opportunities for utilities and companies that supply products and services to the water sector. For example, network rehabilitation offers growth opportunities for network inspection and monitoring service companies. Similarly, trenchless technology solutions meet the need for cost-effective network rehabilitation with minimal and non-disruptive excavation.
To reduce non-revenue water, accountability can be improved by installing measuring devices, process control systems, and automation hardware. Data collected from sensors and measuring devices can be analyzed using software to understand consumption patterns and anomalies and, in turn, be used to control the system in real time. Implementation of such smart systems to manage supply and demand will improve efficiencies, a critical priority for the water sector. Greater efficiency would also allow utilities to become more customer-centric in their services.
Trends in convergence such as utilities partnering with technology and software providers will lead to sectoral development. The partnership between the French water company Veolia and IBM, for example, provides evidence of how such convergence can lead to important developments in intelligent municipal water infrastructure. Veolia and IBM are working synergistically to upgrade the existing water networks in Lyon, France and Tidworth, United Kingdom by installing hundreds of sensing devices along the water mains that will allow real-time monitoring and proactive maintenance.
Utility revenues and external funding such as government and private investors supply the assets necessary for capital expenditures, but CAPEX programs are often challenged by insufficient resources that can result from a variety of factors ranging from decreasing water consumption to budget deficits. Consequently, private companies with funds available in the water sector are taking the opportunity to engage in mutually beneficial partnerships with such capital-deficient municipalities by adopting new business models. In France, for example, private water operators who have the advantage of adding value to the water supply are expected to navigate through the wave of re-municipalization, where private sector utility services are to be transferred back to municipalities to be operated publicly.
The European water and wastewater utility services market can be divided into segments and regions as shown in figure 2. The segments include design, engineering, and construction services; operation and maintenance (O&M) expenses; water and wastewater technology; process control and management; and spending on chemicals. It can be geographically segmented into major regions, namely France, Germany, Italy, the United Kingdom, Iberia (Spain and Portugal), Benelux (Belgium, the Netherlands, and Luxemburg), Scandinavia (Denmark, Finland, Norway, and Sweden), Eastern Europe (Poland, the Czech Republic, Hungary, Slovakia, Slovenia, The Baltic States, Romania, and Bulgaria), and the rest of Europe (Austria, Greece, Russia, Ireland, and Switzerland).
Within the European region, the United Kingdom, Italy, France, Germany, and Spain have been the biggest spenders (figure 3) because their populations and installed infrastructure are the largest. These countries also report the highest annual per capita spending.
The United Kingdom: The United Kingdom is one of the most advanced markets for water utility services, with 32 private utility operators serving the entire population. The convergence of demand from efficient customer service to cost performance for investor attractiveness makes the country a prime location for investment in smart water technologies. Information and Communications Technology (ICT) will modernize asset management and move toward real-time management. Practices resulting from convergence will benefit both customers and utilities. Customers to benefit from ease of accessibility to perform their transactions and utilities to benefit from being able to manage their services better with the use of data.
Germany: The German water market is fragmented with more than 6,000 public and private utilities, and water and wastewater companies. Regulatory norms in the German water market are the highest levels in the world, which has helped advance treatment technologies and upgrades to smart solutions within the country. The European Union’s Water Framework Directive objectives are implemented in Germany through the Water Resources Management Act, which defines public water supply, wastewater treatment, and sludge disposal.
Italy: The Italian water and wastewater facilities are diverse and heterogeneous in nature. Some areas receive water supply and wastewater services continuously, while other receive intermittent supply. Currently, more than 1,200 operators run water services in Italy. Initially, the government and local bodies owned and funded most water and wastewater assets; hence, a cost recovery model was largely absent in the utilities’ operations. This scenario started changing in the 1990s when public mandates were made for utilities to invest in their infrastructure. Currently, political and public opinion is in favor of the re-munipalization of utilities.
France: France has the longest water network in the world, with resources connecting to almost the entire population. The country also houses large, global water companies such as Suez Environment and Veolia Group. Given the country’s dense water networks and the age profile of the pipes, major investments are directed toward maintaining and rehabilitating these networks. Expenditure is also expected to be greater on process control and management needs to manage the infrastructure better. Re-municipalization has been a prominent trend in the French water industry. Private companies used to supply more than 30 percent of water services and 50 percent of wastewater services. This percentage is declining with as many as 50 municipalities having made provisions to switch to public services from private services.
Spain: Spain is one of the countries most affected by the recent economic crisis and is still recovering. Investments made in the water and wastewater sector decreased between 2007 and 2013 due to the economic crisis. Private companies in the Spanish water utility market control about 45 percent of the market share. Of these, Aqualia and Agbar are the dominant private operators. Public utilities and local authorities provide approximately 55 percent of water and wastewater services in the country.
The rest of Europe: Scandinavia, Benelux, and Eastern Europe constitutes less than 55 percent of the total European water utility services market. Scandinavia has strong and high-quality publicly operated utility services, with most utilities reinvesting their revenue back in improving utility operations. Benelux, comprising the Netherlands, Belgium, and Luxemburg, relies mainly on municipalities for water and wastewater services. The Netherlands, like Sweden, has knowledge creation and transfer platforms through the Netherlands Water Information Network.
Eastern European countries are mainly focused on expanding utility services to rural areas and towns that lag behind their urban counterparts. Significant investments will be made in treatment technologies to sustain the quality of water and improve wastewater treatment. Eastern Europe is expected to witness the highest growth among other European regions owing to the room for infrastructure development. The rest of Europe also consists of Russia, burdened by oil price fluctuations, and debt-burdened Greece. In these outliers, investment growth is expected to be slow and could hinder the private influx of capital in their water sector.
Steady Growth Ahead
Frost & Sullivan forecasts that spending by water utilities in Europe will continue growing at a steady, annual rate of 3.8 percent in the next five years. Most of the growth in the water services sector would be a result of the modernization and rehabilitation of infrastructure as well as the adoption of intelligent water and wastewater solutions.
Modernization of water and wastewater infrastructure is a top priority and includes not only the refurbishment of physical assets but also the installation of smart infrastructure services such as metering and software for integrated operations management. O&M constitutes a major share of utility spending in asset management. However, using the Total Expenditure (TOTEX) approach, current capital investments are expected to reduce long-term operational expenditures. Capital expenditures on smart solutions for process control and management in water and wastewater networks and treatment plants are expected to grow at the highest rate between 2015 and 2020. The market being mature, utilities will begin benchmarking each other to evaluate themselves and adopt best practices, as in the case of Danish utilities where an annual exercise is carried out to benchmark the performance parameters.
The European water utility services market is affected by various factors, including aging infrastructure, the need for increased efficiency, falling water consumption rates, regulations, advanced treatment technology, and a stronger European economy. Both public and private utilities will co-exist depending on political and regulatory scenarios in different regions, while opportunities for private operators are expected to grow with new business models and modified project scopes such as performance contracting, design-finance-build-operate and so on.
Re-municipalization may pose a threat to private operators, but it will not affect utility spending as the need exists. Europe has many public utilities that are sophisticated and operate well under stringent norms. Economic conditions and shortage in capital are likely to consolidate the market lead to mergers of water technology companies and also lead to new business models favoring private utility operators.