For years, cleantech/greentech industry observers have identified water as a sector to watch, one where innovation is needed and massive capital outlays and profits seem unavoidable.

While there’ve not yet been any Googles to emerge in the water industry, there have been impressive returns quietly posted by public water companies worldwide over the past year. And industry observers at the Cleantech Venture Network’s Cleantech Forum in San Francisco today gave reasons for the pace of change and investment in the sector to accelerate.

If investors have been waiting for a rainy day to invest in the industry, the clouds have been forming for some time, they argued.

There’s widespread understanding of the value and increasing scarcity of fresh water. And in recent years, global warming and the change it’s bringing to precipitation patterns, and the threat of U.S. water supply compromise by terrorists, have both kickstarted new technology innovations in water, noted Steve Maxwell of TechKNOWLEDGEy Strategic Group, a management consulting firm in the industry.

One recent breakthrough he pointed to is science’s new ability to detect trace amounts of certain substances in drinking water that had been going undetected and untreated.

“They’re now finding cancer treatment drugs, birth control drugs and other chemicals we use every day in water in trace amounts. Water treatment plants weren’t designed to treat these kind of things. We’re just now beginning to understand that they’re having a negative impact on the endocrine systems of human beings.”

Maxwell also pointed to new advances in quantity measurement, especially in miniature, rugged, field-deployable analytic technologies. He said there were opportunities in the analysis of the vast volumes of sensor data now being accumulated by these technologies, with some companies finding opportunities in working with this intelligence and data, and finding “needles in the haystacks.”

New measurement capabilities are leading to optimized efficiencies in water distribution systems.

“Buffalo, New York thought it was losing as much as 25% of its water between its treatment plants and faucets. They deployed new equipment that found they were, in fact, losing 52%,” said Christopher Lueneburger, principal of 3Stone Advisors, a private equity firm focused on water.

New advances have also driven down the cost of historically expensive desalination, noted John Sylvia, Managing Director of Texas Pacific Group Ventures.

“Desalination now costs about 50 cents a gallon, about one third the price it was ten years ago,” he said. “That’s about the same now as what you pay to your utility for it. Of course, your utility still has to mark it up to sell it to you, but desalination is going to get cheaper, still.”

Between $13 billion and $15 billion USD is expected to be invested in desalination between now and 2015, said Sylvia.

Speakers anticipated further consolidation in the water industry. Large companies like General Electric and Siemens have been driving consolidation in the sector, but significantly more is expected.

“There are 900 valve manufacturers. The top four manufacturers each have less than 10 per cent market share. Everybody’s ‘part of the solution’, somebody needs to be THE solution,” said Lueneburger of 3Stone Advisors. “The water market is ready for consolidation like oil was 100 years ago. Not every company has competencies across the board. Consolidation would benefit many companies.”

One company expected to be well positioned to be a consolidator would be American Water, the formerly public, now private, but soon-to-be public again water company in New Jersey. See the Cleantech Group’s IPO on track for America’s biggest water company [1].

With a growing understanding worldwide of the importance of fresh water services, water companies internationally like Veolia, Geberit and others have been posting outstanding returns of late.

“Water has consistently outperformed the Dow Jones index over all periods in the last 15 years,” said Lueneburger. “Water would have been a good investment for anyone at any time in that whole period.”