Increased water scarcity means that the water sector will need to find ways to do more with less. Innovative new technologies promoting efficiency and conservation can address these challenges and help the nation continue to grow in the face of scarce water supply. However, the cultivation of an innovation-friendly environment in the water sector is hindered by inefficient water pricing, counterintuitive regulations promoting status quo technologies, and limited access to capital for financing research and development. To reform water pricing policies, the authors propose pricing schemes that capture the full cost of providing water, the adoption of pricing structures that force consumers to confront the marginal cost of their water usage, and decoupling utility revenue from sales targets. In addition, to make water regulations more innovation-friendly, the authors propose a statewide review of regulatory practices and in some cases implementation of statewide offices of innovation. Finally, the authors propose levying a public benefit surcharge on water use to raise public investment in research and development, buy down the cost of new technologies, and attract private capital.