Change Makers: Rodney Clemente, Energy Recovery

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Hill Vaden:

All right. Welcome back to EnergyCents, an S&P Global Energy podcast covering all topics on the intersection of energy and finance. This is your host, Hill Vaden, talking from a podcast studio in Houston, and Sam Humphreys, who's just swatting bugs as she's sitting outside in Toulouse, France.

Sam Humphreys:

Toulouse, France, yes, I'm here at EAGE. The only quiet spot I could find is outside, but with that comes every single insect ever that is just attracted to my lovely, shiny screen. So I feel really bad, I think I've distracted everyone today by swatting flies and bugs while I've been trying to talk. But never mind, it's small things.

Hill Vaden:

It's comical to watch you swat bugs throughout the podcast, but it also shows you're going to any length to get this thing done.

Sam Humphreys:

Exactly. No price is too much for the podcast.

Hill Vaden:

All right. We just spoke with Rodney Clemente, who is the senior VP of water at Energy Recovery, which is a pretty interesting company based in California, with the large majority of its market share in the Middle East, North Africa, working on desalination projects.

Sam, can you give people some things to listen to as we get into the conversation?

Sam Humphreys:

Yeah, sure. The interesting thing, I think, we should start with is the shift in desalination methods from thermal, which I think he says is boiling the ocean, that traditional thing of...

Hill Vaden:

Quite literally.

Sam Humphreys:

... quite literally boiling, condensing, getting rid of the salt, to reverse osmosis. I haven't talked about osmosis since I was in school, so it was quite nice to get a refresher in that. So, that complete shift and the energy savings that come with that and come with the technology that this company is offering. And then with energy savings comes cost savings, comes climate and carbon emission savings as well. It's quite an interesting story that gives full picture.

What's also interesting is though, there's a typical market for this desalinization process... I said it... desalination process...

Hill Vaden:

[inaudible 00:02:06].

Sam Humphreys:

... in areas that we would traditionally think of, like the Middle East or North Africa. It's becoming more common in other areas globally. It's in every continent, I think you said, because there's so many purposes for desalinized water and the applications of that.

The company's got a lot of interesting things going on as a whole. They also talk about wastewater. We didn't go into this, but they talk about wastewater management as well. But it was really interesting. And again, it's not something we've talked about before, but there is such an interesting scope here, particularly if you're looking at energy efficiency and carbon reduction.

But what about you? What did you think?

Hill Vaden:

Yeah, I'll echo that. I guess you and I are lucky enough to live in a situation where we take access to clean water and drinking water for granite. But there's not a lot of clean drinking water on the planet relative to all the water that is on the planet, and so the desal technology, I think becomes increasingly important.

As Rodney described, that it's gone from a very energy-intensive process that has improved with some of their technology, but that there's a real overlap between energy and desalination processes. We all love to take for granted access to energy and access to water, but we all need both to survive. It's a really interesting company and an interesting conversation that we'll hand off to you now.

Sam Humphreys:

Enjoy.

Hill Vaden:

All right, Rodney. Thanks so much for joining us today to talk to us about Energy Recovery and the work you're doing in desalination. Are you joining us straight from California?

Rodney Clemente:

I'm actually joining from my home office on the east coast, in Virginia.

Hill Vaden:

Okay, all right. Even better. Oh, you're a University of Virginia grad, aren't you?

Rodney Clemente:

I am, graduate school. I went to the University of Virginia's Darden School of Business, undergrad in Cal State, industrial engineering and operations.

Hill Vaden:

All right. I grew up about an hour from the University of Virginia. I know the area well.

If you could just set us up on a brief description of Energy Recovery, what you guys do, you guys are traded on NASDAQ, and we'll go from there.

Rodney Clemente:

Thank you. Thank you so much. Energy Recovery is the world leader in the manufacturing, design and supply of energy recovery devices for the broader water treatment sector. Our company, just like the energy and water sectors, has evolved. We started as a desalination company, focusing in the desalination sector, providing our technology to reduce the energy intensity of desalination plants. We later moved into wastewater, which was an adjacent technology for us and created a new business unit. And most recently, we've launched another business unit to reduce the energy output for refrigeration, critical CO₂ refrigeration plants.

In essence, what our company does is, we look for wasted energy in industrial processes and we try to make them more efficient, lowering the operational expenses of these industries.

Sam Humphreys:

All right. If we're talking then about desalination energy savings, for people listening who might not know, can you explain the savings that are possible? How much energy does it take traditionally to desalinate some water compared to the technology you are offering?

Rodney Clemente:

It's a great, great question. The Achilles heel of desalination is really twofold: the energy intensity of the process itself and the environmental impact. And you can't talk about water without talking about energy, so we'll be talking about this water energy nexus throughout this discussion. You need water to make energy and you need energy to make water.

Historically, when you talked about desalination, you talked about thermal desalination plants. This is literally boiling the ocean. This is condensing and evaporating water. When you talk about the energy input or the energy requirements to do thermal desalination, you're talking about 8 to 10 kilowatt-hour per cubic meter of water. This is the amount of energy required to produce one cubic meter of water, which is equivalent to 1,000 liters of water.

When you talk about world-class desalination plants today, membrane separation plants, reverse osmosis plants, the same seawater can be done around three, three and a half kilowatt-hour per cubic meter, so you see this massive reduction in energy intensity. Likewise, you've seen a massive shift from thermal desalination to seawater reverse osmosis or membrane separation technologies.

I would say well before I started my career, in, call it, the '70s, '80s, you probably had close to 100% market share with the thermal desalination technologies. Today, seawater reverse osmosis has 100% market share, so there've been a complete shift in this market share between different technologies from thermal to seawater. And a big part of that has been due to the energy reduction and requirements from shifting from thermal, boiling the ocean, to membrane separation, RO membranes.

Hill Vaden:

Can you talk a little bit more about the membrane separation and how that works for the layperson?

Rodney Clemente:

Sure. If you can go back to biology class in middle school, you remember osmosis, right? When you separate...

Hill Vaden:

Yeah.

Rodney Clemente:

... two fluids, one with saline water and one with fresh water, there's a natural equilibrium that tend to occur. The flow of water wants to flow from the less saline to the saline solution. You can actually overcome or reverse the naturally occurring osmosis process by applying pressure to one end of the process.

When you think about membrane separation, the RO membrane is what actually separates the salt from the water. In order to do this, you need pretty large high pressure pumps that pump up to about 1,000 PSI, 1,000 pounds per square inch of pressure across the membrane or through the membrane, which can reverse that natural occurring process. So, you need to overcome that osmotic pressure of the seawater.

In most cases, the osmotic pressure of the seawater is about 3-, 4-, 500 PSI, and then to get the water flowing for the full membrane separation process to commence, it's typically 800 to 1,000 PSI. There's a lot of energy required, as you can imagine, from these pumps. Pumping large amounts of water at high pressures to overcome the naturally occurring osmosis process requires a lot of energy.

What Energy Recovery does is, in this process, the membrane has two ways for the water to come out. One way the water comes out is pure freshwater, a permeate flow, and then the other way the water comes out is in a very highly concentrated brine flow. What can you do with this highly concentrated brine flow? There's a lot of energy still left in this brine flow, so think about 1,000 PSI of water coming into the membrane and about 990 of it coming out of the membrane. What do you do with this?

In the past, before energy recovery devices were widely deployed, you'd have a valve there that just dissipated the energy and sent it back to the ocean. What Energy Recovery does with our pressure exchanger is we harness that otherwise wasted pressure energy, and recycle it into a reusable asset that the process can use. In this case, the reusable asset is pressurized seawater, exactly what you need. Why is this important?

In layman's terms, this reduces the size of the high pressure pump, which is the largest consumer of power in the RO process, by up to 60%. The pressure exchanger really revolutionized the way that desalination is done today, and it's one of the major reasons why you have this shift from thermal technologies to membrane separation technologies like reverse osmosis.

Just to give you a little more context and color here on the economics of water, that energy-water nexus a little bit more: When you look at these large desalination facilities, typically you see them in the Middle East, 100,000 cubic meters per day, 500,000 cubic meters per day, 1 million cubic meters per day. And we'll talk about the scope and size of these plants with respects to how much of the population is conserved.

When you look at these plants, typically if you think about a pie chart, 60% of the pie chart is OPEX, 40% is the CAPEX. The OPEX is typically more than the initial capital expenditure over the life of the plant. When I'm talking about the life of the plant, the assumptions I'm making here are the plant is for a 25- to 30-year life. The power costs are reasonable, call it 10 cents per kilowatt-hour. There's a 80 to 20 debt-to-equity ratio split to finance the project, et cetera, et cetera.

But now when you zoom in and you look at the OPEX, you look at the operational piece of the pie, 40 to 50% of the OPEX is energy. It takes a lot of energy to operate these desalination plants. And when you zoom in to this 40 to 50% energy sector, 70 to 75% of it is from this high pressure pump that I'm talking about, this massive pump that needs to provide that flow to drive the process. So energy, for sure, is a major component to the operational expenses. Anything you can do to reduce the large pieces of the pie is a good thing. And this has really helped drive the cost of desalination. It's a race to the bottom these days.

When I started in the industry almost 30 years ago, the cost of a cubic meter of water from a desalination plant, depending where you are in the world, for sure, but call it California, Carlsbad, Australia, some of the more expensive desalinated waters in territories on the planet, you're looking north of 2- to $3 per cubic meter. Today, world-class facilities are operating at less than 50 cents per cubic meter. Just to put that into some color and context, a cubic meter is 1,000 liters. An average water bottle is 500 milliliters. So, you can get 2,000 water bottles for 50 cents. That's pretty good.

But everyone still harps and complains a little bit about the cost of desalinated water, but when you walk through an airport and you buy a 500 milliliter bottle of water, could be five bucks. So, you got to put things into perspective as well.

Sam Humphreys:

There's a lot of things I want to ask. But I'm going to just go back to the... You said that the energy consumption was reduced by around 60%. If we are looking at it from a climate perspective, what is the impact that has on CO₂ emissions or companies or facilities, greenhouse gas emissions overall?

Rodney Clemente:

I want to answer this in a couple of ways. Obviously when I talked about the Achilles heel of desalination technologies, specifically seawater reverse osmosis, I talked about energy input, energy intensity, and environmental impact. Those two things are also related. You can't talk about one without the other. When you reduce the amount of power or energy required to do the desalination process, you're inherently reducing the amount of carbon footprint within the plant.

Just some quick statistics: We've been around north of 30 years now, we finally passed $1 billion worth of aggregate sales, which was a big milestone for us. We're able to produce globally around 38- to 40 million cubic meters per day of permeate, of potable fresh water to people that really need it, for industries that really need it all around the world. That 40 million cubic meter per day number might not mean anything to you, but that's equivalent to about 15,000 big swimming pools. There's tons and tons of water being produced.

When you think about how many metric tons of CO₂ that we're saving per year, we're approaching 20- to 22 million metric tons of CO₂ per year that we're saving these desalination plants. That's equivalent to taking 5 million cars off the street every year. So, there's a massive, massive reduction in CO₂ output with plants utilizing our technology.

And then finally, when we talk about dollars and cents, we're north of $7 billion worth of energy savings per year, which is a massive amount of energy savings that our customers are able to benefit from. I try to put this into perspective as well. $7 billion is equivalent to building a SpaceX shuttle and launching it 10 times per year.

Sam Humphreys:

Right, yeah.

Rodney Clemente:

That's how much energy we're talking about here. So it's a lot, a lot of energy, a lot, a lot of water, a lot, a lot of savings.

Hill Vaden:

[inaudible 00:14:11]?

Rodney Clemente:

That's correct. Yeah, we're in the San Francisco Bay Area, in San Leandro.

Hill Vaden:

Okay, but most of your operates are in North Africa, Middle East area?

Rodney Clemente:

Correct, correct. We have our technology operating on all seven continents, including Antarctica, believe it or not. But the large high concentration of our facilities is in the Middle East and North Africa. Think about Saudi Arabia, the United Arab Emirates, Abu Dhabi, Dubai, leading the charge there. North Africa, I'd think about Egypt, Algeria, Morocco. And then there's places outside the Middle East and North Africa, for sure, places like Australia, Spain. There's places in South America that are starting to use desalination. And China and India always have routine plants as part of their governmental programs that they build, own and operate within country as well.

The US is a little behind with respects to desalination, we're more or less... Outside of, I would say the Southwest US, we're a pretty water-rich country. I'm here in Virginia. It rains a lot, just to say, so you don't really see desalination plants in the US so much. But we're starting to see tenders, specs, discussions happening at the government level. The places in the US that are really driving desalination activities are California, Texas and Florida.

Sam Humphreys:

Right. It's interesting you say that even with somewhere that it rains a lot. Because it rains a lot in the UK, where I am from, and there was a report out even yesterday, I think it was, that I think our fresh water supply will disappear within 10 years if we don't start building more reservoirs or invest in desalination. Just a little fun fact for you, but anyway.

Rodney Clemente:

It's true, it's true.

Sam Humphreys:

It is true.

One thing I wanted to ask is: You've got these plants up and running, and technology is constantly evolving, and I know you've been working on some cool pressure exchanges, what is the process or the future there? Are you retrofitting new facilities, so you're continuously evolving and improving that efficiency and that energy recovery, or is that less of a focus?

Rodney Clemente:

We're always in the laboratory, for sure, working on the next-generation technologies to bring to the industry. In the megaproject space in seawater reverse osmosis, these are plants that are 50,000 cubic meters per day and larger, we have a dominant share in this sector. And when I say dominant: 100%.

Sam Humphreys:

Wow.

Rodney Clemente:

We have 100% market share in this sector over the past, call it, decade. So, we feel like we've cracked the code here with respects to energy recovery devices, providing the value that this industry needs to drive the market. We're dominant in this sector, for sure. In the smaller systems, where plants are a little more CAPEX sensitive, efficiency isn't as big of a deal, it's decentralized desalination systems, skid-mounted desalination systems, these are the systems that are operating in the resort, in the basement of the hotel in Cancun, for example, our market share here is reasonable, but it's probably closer to 50 to 75%.

One of our strategy as a company is to develop new technologies to revolutionize the way industries operate. And we're looking at different ways outside of desalination to do that. And the closest adjacent market that we could find, for example, is wastewater. Wastewater is a very fragmented, large market for us, but it's full of potential for energy recovery. When we think about wastewater in our wastewater market, we think about industrial and municipal wastewater.

When we think about the industrial space, we're thinking about things like lithium battery manufacturing, semiconductors, et cetera, et cetera. When we think about the municipal space, we're thinking about municipal wastewater plants, reuse, recycling, et cetera, et cetera. Maybe not the most politically correct term, but toilet-to-tap, converting municipal wastewater into drinking water, which is being done in some of the most sophisticated cities in the world and countries in the world, such as Singapore. This has been approved in California. There's a lot of different sectors outside of seawater that we can deploy our technologies. Wastewater is one of them.

And I mentioned CO₂ facilities earlier in the podcast here. What we're trying to do there is also pretty interesting, and I'll just make a mention here, although it's not related to water desalination at all, but it does have a very similar value proposition. The world currently, today uses synthetic refrigerants for cooling. The global warming potential for these refrigerants has a global warming potential of 10,000. The world is starting to put in regulations, primarily driven by Europe and the US, to use natural refrigerants, like CO₂, which have a global warming potential of one.

You can imagine if you retrofitted all of the HVAC plants in the world, what could this mean from a reduction in CO₂ perspective. Buildings alone count for 20% of all electricity demand, just the buildings. Heating and cooling is... I think cooling is about 10% of that, 25%. If you can reduce the carbon footprint of cooling, refrigeration, grocery stores, you can have a massive, massive impact on the global footprint here.

Hill Vaden:

You talk a little bit about the business model. You talked about the technology and the desalination process. Do you then sign an offtake for the water that you have desalinated with a group of customers? And is that a multi-year agreement in the way it would be for a power purchase agreement?

Rodney Clemente:

Yes, that's how it works. No, we don't do that.

Hill Vaden:

Oh, okay.

Rodney Clemente:

That's what our customers do. We're typically a technology provider, so we just provide technology for the process, and then our customers integrate our technology within their plants, and then they're responsible for the water purchase agreements. For large-scale desalination plants, primarily again in the Middle East, North Africa, which I always like to say is the center of the desalination universe, the center of the desalination universe, it's starting to operate in a PPP mode. So, these are public-private partnerships driven by project developers.

A government entity will tender a large-scale desalination facility. This will be open for all international bidders, for the domestic players as well as international players. Once awarded, the developer has to come with financial closure, water purchase agreements. They're selling the water ultimately to an end user. This could be a municipality. This could be to a heavy industry. This could be to a massive end user, like let's say, a Saudi Aramco in Saudi Arabia or OCP, one of the largest phosphate producers in the world in Morocco, for example.

That's a little bit about the ecosystem in which desalination projects happen. So there's a tender, there's an award, there's a construction and execution period. And then it's sell water, limit the downtime of plants, and make sure that you're meeting the quality and quantity that you signed up for.

Sam Humphreys:

I know in the last year, my numbers might be wrong here, you've signed... What?... over 7 million, or this year, $7 million in contracts for desalination. I hope those numbers are right. Is that global? You've mentioned Africa and Middle East being the biggest area of your markets. Are any of these new contracts coming from places that you've not worked in before?

Rodney Clemente:

That's a great question. I'd say around 60 to 65% of our historical revenues have come from the Middle East and North Africa. When I say Middle East and North Africa, a majority of it came from the Middle East. Most recently we've seen North Africa starting to percolate into our pipeline. We always see projects outside of that region as well. We've seen projects, as I mentioned, in Australia, South America, pretty much driven by heavy industries. Think about Chile, think about mining, things like this.

The largest desalination plant in my side of the world, in the US, is in Carlsbad, California, which is just shy of 200,000 cubic meters per day. That's enough for about 400,000, half a million people in the greater Carlsbad, San Diego area. Just from the sheer numbers, from population, we'll talk a little bit about the demand here, but you can't ignore China and India. And we're starting to see projects on a reoccurring basis in those two territories. And then we're starting to see interesting places, some of the South Pacific pop up, areas like Taiwan, being driven by heavy industries. You guys know about semiconductor production in Taiwan, petrochemical production in Taiwan, things like this. But we're also looking at interesting areas all across the globe.

But I don't see the Middle East and North Africa being unseated here as far as the desalination leader, at least in the near term. But we are keeping an eye fixed on the global desalination trends. But you're right, 95 to 98% of our revenues are international, so not a lot of domestic desalination being done, at least today. But we are projecting upwards of $140 million worth of revenue just in our desalination business unit this year.

Hill Vaden:

You've talked some about the geography, and it makes sense that those arid climates are the ones that are driving the interest. Are there new opportunities for water use beyond the obvious drinking water or things like that? Are you seeing market expansion in ways for the technology to be used?

Rodney Clemente:

Let's talk a little bit about supply and demand. And we really should have probably started here. Every story, to me, starts with a challenge or a problem. The problem that we're facing as humanity is that we can't avoid this divergence between the global fresh water supply and demand. So, I always start with, let's talk about the supply. You can Google this. Everybody knows about this. I think you learn about this in elementary school.

70% of the Earth's surface is covered in water. We know about this. Out of that 70%, 97% of it is seawater, so you're left with 3% of all the water on earth as fresh water. Out of this 3%, 70% is captured in the glaciers. It's frozen, so you can't really drink this. And then 29% of that is in underground aquifers. It's groundwater, not very easily accessible. That leaves less than half of 1% of all the water on earth that is available, fresh water that's easily accessible. So, let's start there. The supply of water on this planet is more or less fixed. We're not generating any really new water, so to speak.

So, you got to look at the demand side. And when I think about the demand side, there is a very strong correlation between water demand and population growth and industrial growth. The population in our lifetime, we've seen a dramatic increase, and we're projecting to see this massive acceleration in population growth in the future, as well as industrial growth. Now that you have this supply that's more or less fixed and diminishing, in a way, and you have demand increasing heavily, we looked at how much of the world's fresh water was being supplied by desalination today. It's about 1%.

So, there's a lot of upward trajectory, there's a lot of upside in desalination. I used to be fearful of saying the statement publicly, but I'm not anymore: Desalination is a technology of last resort. But we are now reaching the last resort for many places around the world. You're talking about Day Zero in UK. You've heard about Day Zero in South Africa. You've heard about all the desalination activity that's happening in the Middle East and North Africa. Why is it happening in the Middle East?

Because there's nothing left. When you go to Saudi Arabia, it's a desert. They have a grand vision to turn the desert into an oasis, and this oasis is going to be flooded with water from desalination. It's the only thing left. When I say it's the technology of last resort, that's not 100% true. You have to have this all-above mentality when you think about water management. You can't just focus in on one sector of the water industry, you have to look at a diversified, all-inclusive strategy.

I like to use Australia as an example of this. They went through a massive build-out of large-scale desalination plants. Shortly after these desalinations were built, the plants were shut down and they were mothballed and they were put into standby mode for quite a while. This caused quite an uproar in many of the large cities in Australia. They said, "We just spent billions of dollars on desalination plants, and they're sitting idle. What's happening?".

I have to give Australia credit. They had the foresight. They had the foresight to build desalination plants, to diversify their water infrastructure, to have different technologies available depending on what was happening in the environment at that time. What they did was, they allowed the desalination plants to be an insurance policy. And as mother nature needed to recoup and recover, they would turn on the desalination plants, letting the dams fill up and the reservoirs fill up to a level that they were comfortable with. And when they got to those levels, they would shut the plants off. They were able to do this.

Why desalination is a unique part of any water management strategy is because it's drought-proof. It doesn't matter if it doesn't rain for 365 days, you can produce water with a desalination plant. It's an interesting part of not only water management, but also with climate change. When people talk about climate change, it's always pointing the finger at the energy guys. You always have to look at water as well. How are you managing water when you're not getting it in places that you need it most, and you're getting floods in places that you don't want it? It's an interesting story and dynamic again, that water-energy nexus.

Sam Humphreys:

And on that, I think, looking at time, we like to wrap up these conversations with a look ahead at the future. In particular, what do you think that we would like people to look out for in the next six to 12 months that could be happening for Energy Recovery?

Rodney Clemente:

That's a great question. We're chasing a lot of interesting things these days, but we're really looking to grow and protect our share in the desalination space, which is projected to almost double out here past a little beyond 2030, which is great. We're tracking all the trends in water, seeing how we could play and benefit as an organization and as humanity. We're looking at this idea of circular economy. Can you offset some of the cost of desalination by brine valorization? Or this brine reject flow: Can you remove any minerals of value for this and offset some of the cost of desalination, and how do you do that? You got to go to higher pressures, you got to go to higher recoveries. What do the pressure exchangers of the future need to look like to be able to work in those spaces?

We're following regulations now, where... There's MLD and ZLD technologies and regulations being deployed, which means Zero Liquid Discharge, not one single drop of harmful brine back into the environment. What does it take to do that? What does the pressure exchangers need to look like to be able to work in those types of processes? There's a lot of process and applications that are being developed to further squeeze out more water at higher quality in the same footprint. What do the energy recovery devices need to look like for that?

Historically, we've been a dominant player in seawater reverse osmosis, which operates at about 1,000 PSI. Now we're looking at advanced water treatment sectors that operate as low as 100 PSI and as high as 15- to 1,800 PSI. So, we're scanning the globe for water treatment sectors like this. Like I say, we're always in the laboratory, working on the next best pressure exchanger. And I would just say stay tuned, it's on the way.

Hill Vaden:

All right. Rodney, thank you. This has been a great conversation. [inaudible 00:30:20].

Rodney Clemente:

Thank you.

Hill Vaden:

I'm glad to have learned more, and look forward to watching Energy Recovery from here.