Turning bad water into good

Alchemy refers to a medieval science that turns metals into gold. As our planet depletes natural resources at a frantic pace, one brand of alchemy that will become critical to humanity's survival is technology that turns sea water into drinking water.

There are two primary processes today for extracting salt from water--thermal distillation and sea water reverse osmosis--but both are expensive and waste a lot of energy. Enter Energy Recovery. The small San Leandro, Calif.-based company created a ceramic device called the PX pressure exchanger that has helped water treatment plants around the world reduce desalination costs to a fraction of what they were in the mid-1960s.

At that time, the cost of producing a cubic meter of fresh water from sea water averaged $10. With the help of Energy Recovery's PX device, desalination costs now an average $0.46 per cubic meter.

Here's how it works. The PX device captures the energy that otherwise would have been discarded in the reject stream of the sea water reverse osmosis process and pushes it back into the system. Since its debut in 2002, the PX device has become a leading desalination product, installed in more than 300 desalination plants worldwide.

Sales of the PX devices have pushed Energy Recovery's revenues to $35 million in 2007 from $4 million in 2003. In April, the company filed for a public offering and plans to raise as much as $175 million. It plans to use the proceeds to develop more products and ramp up sales and marketing.

Energy Recovery's path to success, however, has been anything but smooth. It was founded in 1993, almost went out of business a few times, had three rounds of significant management changes, and had to fight lawsuits to gain control of its intellectual property.

It took enormous patience and conviction from its management team as well as its investors--high-net-worth individuals from Norway who believed that the company was doing something worthwhile and important. They funneled $12 million of their own money into Energy Recovery over a 15-year period. The company didn't raise an ounce of Silicon Valley venture capital.

"Venture capitalists are coming from the money management side, and, of course, they have the obligation to cut their losses," says Energy Recovery Executive Chairman Hans Peter Michelet. "If a traditional venture capital firm had been behind ERI, they would have pulled the plug long before we did. We went all the way."

Michelet says Energy Recovery expected to reach $20 million in sales by 2000. It finally reached that milestone in 2006. The company had to experiment with multiple generations of technology and initially went to market with a PX device that wasn't powerful enough. The PX product it has on market today is five times more powerful.

Is Energy Recovery's market mainly in the developing world? No, says Michelet. There's also a great need for desalination technologies in industrialized nations. "You don't have to go overseas to look at the critical aspects of desalination," he says. "It's enough to just go to California. We demonstrated that we could now, in California, desalinate a cubic meter of water for a total of 1.58 kilowatt hours."

That number doesn't tell you anything, but let me put it in context. Colorado today spends about 1.9 kilowatt hours just to pump the state water around to California. In addition to that, about 1.6 kilowatt hours of additional energy is spent just to slush the Colorado River water around in California. When you look at all the energy being consumed by California today just by pumping water around, you realize that it is actually cheaper to desalinate water from the Pacific Ocean.

And the Environmental Protection Agency forecasts that the U.S. will have to spend $277 billion on water infrastructure by 2019. Suffice it to say, Energy Recovery has a large market to tap into in building its business.