Published 3Q Betsy Loeff Industry Analyst. Jevan Fox Research Analyst

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1 EXECUTIVE SUMMARY: Smart Water Meters Advanced Metering Infrastructure for Water Utilities: Market Drivers, Technology Issues, Deployment Case Studies, Key Industry Players, and Market Forecasts Published 3Q 2010 NOTE: This document is a free excerpt of a larger research report. If you are interested in purchasing the full report, please contact Pike Research at sales@pikeresearch.com Betsy Loeff Industry Analyst Jevan Fox Research Analyst

2 Section 1 EXECUTIVE SUMMARY Smart water metering will grow significantly in North America over the next 5 years. Defined as water meters equipped with radios that deliver hourly consumption data via a fixed-network communications system, smart water metering now accounts for 8% of the 39 million water meters read remotely through communications technology in the United States and Canada. By 2016, that percentage will grow to 26%. As a percentage of annual meter shipments, smart meters will represent nearly half. Since North America comprises more than 80% of the market for fixed-network meter reading systems in 2010, the forecast indicates a dramatic growth in smart water metering worldwide. Chart 1.1 Smart Meter Module and Traditional Meter Shipments, North America: ,000 Shipments (Thousands) 7,000 6,000 5,000 4,000 3,000 2,000 Smart Meters Total Meters Shipped 1, (Source: Pike Research) The primary driver for this dramatic growth is conservation. Some 36 U.S. states will face water shortages by 2013, according to government projections. Yet, North America is not alone facing this challenge. Nearly half of the world s population will face freshwater stress by 2030, a condition described as a water withdrawal level that exceeds the renewable water supply by 10% or more. Note, though, that population growth is only one factor leading to impending water shortages. Irrigation makes up around 70% of water use in most nations, and more than 40% of the world s food crops are grown using irrigation. Consider that the amount of water needed to produce one cup of coffee equals 37 gallons. Producing a pound of beef requires 1,857 gallons. 1

3 Water metering alone has a powerful conservation impact. Studies show that using water meters to bill customers based on their actual consumption cuts water use by 15% or more. When water suppliers add meter reading automation to the mix, the conservation impact is even more significant. With a fixed-network system or advanced metering infrastructure (AMI), utilities can see leaks in customer premises because the hourly reading data will demonstrate where water consumption never ceases, indicating a leak. The data also enable utilities to easily balance water produced against water billed. Where differences exist, so do what utilities call non-revenue water (NRW). Non-revenue water hovers around the 20% mark in many developed nations. In the developing world, about 50% of water pumped, treated, and distributed is lost without being billed because of distribution system problems, theft, or non-meter uses (e.g., line flushing). Not surprisingly, smart water metering is gaining attention and some ground outside North America, though the term generally refers to different technology. In other parts of the world, utilities are deploying water metering systems through which meter readers walk or drive by the radio-equipped meters and capture the consumption data. This is called automatic meter reading (AMR). Many of these systems, such as those being deployed in France, England, Brazil, and India, have the capability to migrate to fixed-network technology without changing radio equipment. Pike Research calls theses systems smartenabled meters. Some newer AMR systems have data-logging capability, which means the utility can view hourly usage that can be used in system planning, customer leak detection, responding to billing inquiries, and theft detection. Even without data logging, remote meter reading delivers customer service improvements by making sure customers receive bills that reflect actual usage. The technology also eliminates the need for meter readers to gain access to customer premises. Drivers for remote meter reading in Europe include the European Union s Water Framework Directive. This directive requires water providers to adopt pricing policies that provide cost recovery for water service and motivate consumers to use water wisely. It calls for policies to be in place by the end of Impediments to fixed-network systems are many. Regulators limit the radio transmission power of the systems, and there is congestion in available frequency bands. In many areas, meters are read once per year or less. Alternatively, customers read their own meters, so there is little labor savings to help justify the cost of AMR. Despite these impediments, we forecast that remote water meter reading growth will occur in Europe, as well as other world regions. The European market will experience a compound annual growth rate (CAGR) of 6% between 2010 and Latin America, with very few units now deployed, will see a CAGR of 27% as one or two larger utilities, most likely in Brazil, deploy the technology. Similar circumstances and growth will occur in the Asia Pacific region, where Mumbai now plans to install 300,000 units and may increase the deployment to 1.2 million units. Elsewhere, smart water metering will grow only slightly. Automated water meters in Africa will probably be of the pre-paid variety, and most Middle Eastern nations, with the exceptions of Israel, Kuwait, and Abu Dhabi, have not made significant moves to add water meter reading automation. 2

4 Chart 1.2 Smart Meter Module Shipments by Region, World Markets: ,000 Shipments (Thousands) 6,000 5,000 4,000 3,000 2,000 Middle East/Africa Asia Pacific Europe Latin America North America 1, (Source: Pike Research) 3

5 Section 9 TABLE OF CONTENTS Section Executive Summary... 1 Section Market Issues Market Fragmentation Water Provider Governance Drivers Overview Industry Drivers Water Scarcity Conservation Impact of Metering Non-Revenue Water Utility Operations Savings Energy Use and Climate Concerns Bandwagon Effect Cost: The Top Concern Market Drivers Significant Water Metering Legislation and Policy U.S. Federal Funding Privatization, a European Motivator for AMI Impediments to AMI in Europe Infrequent Meter Reading Labor Issues Technology Challenges Section Technology Issues Definition of Smart Water Metering Components of Smart Water Metering Mechanical Water Meters Static or Solid-State Meters Meter Registers Meter Encoders AMI Modules The Communications Network Characteristics of RF Communications Network Topologies Backhaul or WAN Communications ZigBee Automated Meter Reading Fly-By Technology Head-End Software Online Access to Consumption Data for Customers Ancillary Devices Remote Shut-Off Valves In-Home Consumption Displays Acoustic Sensors Composite Pit Lids In-Line Connectors

6 3.5 Standards Section Key Industry Players Aclara (ESCO Technologies) Arad/Master Meter Badger Meter Datamatic Diehl Metering Group Elster Group Itron Neptune Technology Group Sensus Ancillary Equipment Providers DFW Plastics Fluid Conservation Systems Nicor, Inc Section Case Studies The District of Columbia Water and Sewer Authority East Bay Municipal Utility District City of Ann Arbor, Michigan City of Fresno, California Israel Section Market Forecasts The World Water Meter Market Smart Water Metering in North America Water Meter Automation Around the World Revenue Section Company Directory Section Acronym and Abbreviation List Section Table of Contents Section Table of Charts and Figures Section Scope of Study Sources and Methodology Notes

7 Section 10 TABLE OF CHARTS AND FIGURES Chart 1.1 Smart Meter Module and Traditional Meter Shipments, North America: Chart 1.2 Smart Meter Module Shipments by Region, World Markets: Chart 2.1 Meter Penetration in Select Countries Chart 6.1 Water Meter Shipments by Region, World Markets: Chart 6.2 AMR/AMI Vendor Market Share, North America: Chart 6.3 Installed Smart vs. Automated Water Meters, North America: Chart 6.4 Smart Meter Module and Traditional Meter Shipments, North America: Chart 6.5 Smart or Smart-Enabled Module Shipments by Region, World Markets: Chart 6.6 Smart Meter Shipments as a Percentage of All Water Meter Shipments, World Markets: Chart 6.7 Smart Meter Penetration Rate (of All Water Meters), World Markets: Chart 6.8 Meter and Communications Devices Revenue, World Markets: Chart 6.9 Meter and Communications Devices Revenue, North America: Figure 2.1 Number of Community Water Systems, United States... 4 Figure 2.2 Community Water Systems by Size and Population Served, United States... 5 Figure 2.3 World Population Living with Water Stress... 7 Figure 2.4 Shower Meter... 8 Figure 2.5 Non-Revenue Water from Self-Reporting Utilities... 9 Figure 3.1 Diagram of a Nutating Disc Water Meter Figure 3.2 Typical North American Water Meter Figure 3.3 Solid-State Meter by Sensus Figure 3.4 Meter Register Figure 3.5 Diagram of a Contact Closure in an Encoder Figure 3.6 Mesh Network Diagram Figure 3.7 Star Network Diagram Figure 3.8 The Drone from Arad/Master Meter Figure 3.9 City of Ann Arbor, Michigan Customer Usage Data Figure 3.10 Badger Meter s In-Home Water-Consumption Display Figure 3.11 Diagram of Acoustic Sensor Placement Figure 5.1 DC WASA, Reductions in Off-Cycle Meter Reading Costs: Figure 5.2 AMI Data Reveal a Household s Leaks Figure 5.3 How AMI Data Demonstrates the Effectiveness of an ET Controller Figure 5.4 Ann Arbor Consumption Drop after Rate Changes Table 4.1 Aclara SWOT Table 4.2 Arad/Master Meter SWOT Table 4.3 Badger Meter SWOT Table 4.4 Datamatic SWOT Table 4.5 Diehl Metering Group SWOT Table 4.6 Elster Group SWOT Table 4.7 Itron SWOT Table 4.8 Neptune Technology Group SWOT Table 4.9 Sensus SWOT

8 Section 11 SCOPE OF STUDY Pike Research has prepared this overview of the smart water metering industry as a resource for market participants such as meter manufacturers and suppliers, communications vendors, water utilities, regulators, investors, and other interested parties. This report focuses on the communications technology that makes water meters smart, as well as on the meters themselves. Its major objective is to identify and evaluate opportunities and challenges facing the industry and to forecast likely growth. Pike Research also provides a review of demand drivers, technologies, key players within the competitive landscape, and noteworthy deployments. The report s purpose is not to provide an exhaustive technical assessment of the technologies and markets covered, but rather a strategic examination from an overall business perspective. Pike Research strives to identify and examine new market segments to aid readers in the development of their business models. All major global regions are included, and the forecast period extends through SOURCES AND METHODOLOGY Pike Research s industry analysts utilize a variety of research sources in preparing Research Reports. The key component of Pike Research s analysis is primary research gained from phone and in-person interviews with industry leaders, including executives, engineers, and marketing professionals. Analysts are diligent in ensuring that they speak with representatives from every part of the value chain, including but not limited to technology companies, utilities and other service providers, industry associations, government agencies, and the investment community. Additional analysis includes secondary research conducted by Pike Research s analysts and the firm s staff of research assistants. Where applicable, all secondary research sources are appropriately cited within this report. These primary and secondary research sources, combined with the analyst s industry expertise, are synthesized into the qualitative and quantitative analysis presented in Pike Research s reports. Great care is taken in making sure that all analysis is well supported by facts, but where the facts are unknown and assumptions must be made, analysts document their assumptions and are prepared to explain their methodology, both within the body of a report and in direct conversations with clients. Pike Research is an independent market research firm whose goal is to present an objective, unbiased view of market opportunities within its coverage areas. The firm is not beholden to any special interests and is thus able to offer clear, actionable advice to help clients succeed in the industry, unfettered by technology hype, political agendas, or emotional factors that are inherent in cleantech markets. 65

9 NOTES CAGR refers to compound average annual growth rate, using the formula: CAGR = (End Year Value Start Year Value) (1/steps) 1. CAGRs presented in the tables are for the entire timeframe in the title. Where data for fewer years are given, the CAGR is for the range presented. Where relevant, CAGRs for shorter timeframes may be given as well. Figures are based on the best estimates available at the time of calculation. Annual revenues, shipments, and sales are based on end-of-year figures unless otherwise noted. All values are expressed in year 2010 U.S. dollars unless otherwise noted. Percentages may not add up to 100 due to rounding. 66

10 Published 3Q Pike Research LLC 1320 Pearl Street, Suite 300 Boulder, CO USA Tel: This publication is provided by Pike Research LLC ( Pike ). This publication may be used only as expressly permitted by license from Pike and may not otherwise be reproduced, recorded, photocopied, distributed, displayed, modified, extracted, accessed or used without the express written permission of Pike. Notwithstanding the foregoing, Pike makes no claim to any Government data and other data obtained from public sources found in this publication (whether or not the owners of such data are noted in this publication). If you do not have a license from Pike covering this publication, please refrain from accessing or using this publication. Please contact Pike to obtain a license to this publication. 67