Are Hydrogen Fueling Station Subsidies Necessary?

Forcing hydrogen to follow gasoline model is poor choice

In the wake of the President’s State of the Union Address, Representatives Cox and Wyden proposed a bipartisan bill that would subsidize the construction of hydrogen filling stations. It’s common wisdom that hydrogen vehicles suffer from a chicken-and-egg problem – no one will buy hydrogen vehicles until they can get them fueled, and no one is going to build a hydrogen filling station until there’s a critical mass of consumers that have purchased hydrogen vehicles. Chicken-and-egg problems are fascinating illustrations of how markets can harness individual incentives to bring complementary new technologies to fruition efficiently.

The hydrogen vehicle/fueling infrastructure chicken-and-egg problem is not the first or only time such an issue of complementary technologies has occurred. Take the example of the major transportation revolution of the 20th century – the internal combustion-powered automobile. Why did Henry Ford and his competitors even consider marketing cars, given that there were no filling stations? Yet by the 1930s an extensive retail filling station industry co-evolved with a thriving automobile industry and we (well, most of us) have never looked back. But how did we get there without government subsidies to build gasoline filling stations?

Before the invention of the automobile and its first commercial sales in the early 20th century, the predominant commercial product from crude oil was kerosene, not gasoline. Kerosene provided primarily cooking fuel and lamp fuel. Consumers bought kerosene at their local dry goods store or general store. Oil companies provided wholesale distribution to these stores. Then, in the early 20th century, the automobile began to create a demand for gasoline (which, interestingly, had been perceived as a waste product in the pre-car era). But early automobiles were not very comfortable and not many folks viewed car journeys as a pleasant way to travel, so gasoline demand increased slowly.

Where do you think those “early adopters” could buy gas? You bet – that same dry goods store! The wholesale distribution channel worked for gasoline much as it had for kerosene.

But the car was not a stagnant technology. Automobile entrepreneurs competed to offer consumers a more comfortable ride, and after World War I and with rising incomes in the 1920s, the market for automobiles grew. More people wanted to drive further, and the technology made it both possible and pleasant.

But the technology was not perfect. Breakdowns and required maintenance created profit opportunities for the mechanically talented – they opened service stations (think, for example, of the tragic cuckolded husband in The Great Gatsby). That created an alternative distribution channel for gasoline, a distribution channel that created profits for service station owners while providing convenience for customers – the full-service filling station.

Note that the early service and filling stations were usually independents – they had wholesale contracts with oil producers. Only once automobile ownership and increased vehicle miles traveled hit a critical mass later in the 1920s did the oil companies start operating retail filling stations, complete with attendants in spiffy uniforms. The fully vertically integrated oil company, from exploration and drilling to wholesale to retail filling station, was therefore a fairly late development, following the increased customer demand for automobiles.

What does the internal combustion engine automobile/gasoline filling station experience tell us about the development of hydrogen fueling infrastructure? I would not expect the development to mirror gasoline development, nor should we force it to. But some simple insights apply.

  • 1. Fueling is likely to follow “early adopter” hydrogen vehicle consumers. We owe a debt of gratitude to early technology adopters, but they do not do it out of altruism – they like being the first ones on the block to have those newfangled fuel cell vehicles, and they feel good about clean technology. As demand for fuel cell vehicles moves beyond early adopters, the demand for fueling will follow.
  • 2. Fueling will be decentralized and local, and will exploit existing distribution channels. Both because of the evolution of demand from early adopters and because of the technology and danger of generating and transporting hydrogen, local inventories of natural gas and/or water to provide fuel make the most sense. Hydrogen’s volatility also makes locking in to a fueling technology by subsidizing it extremely risky. In my opinion, those who have both the economic interest and the space for this to make economic sense are automobile dealers. For example, if Honda and Toyota sell fuel cell vehicles and provide their dealers with a profit opportunity to sell hydrogen fuel, that would help them sell more fuel cell vehicles. The oil companies do not have an existing distribution channel to take advantage of like they did in the kerosene/gasoline markets, so they do not really have a leg up relative to automobile manufacturers.
  • 3. Fueling infrastructure will evolve as the vehicles, and the demand for them, do. One major lesson from the gasoline experience is that entrepreneurs who see profit opportunities will cause the evolution of distribution channels, and will do so in ways that benefit consumers.

Forcing hydrogen fueling to replicate the existing gasoline distribution infrastructure by subsidizing the construction of a fueling network is a very static approach to an incredibly, beautifully dynamic co-evolution of technologies and consumer preferences. Such subsidies are also likely to undercut the creativity of entrepreneurs who will seek to find novel and convenient ways to provide hydrogen fueling to consumers who want it, and to profit from it.

Lynne Kiesling is director of economic policy at Reason Foundation and senior lecturer in economics at Northwestern University.

This is part 3 of Reason’s 5-part Let the Hydrogen Economy Evolve series:

Part 1: The Science of Hydrogen Fuel Cells
Part 2: The Economics of Hydrogen: Innovation in Mature and New Technologies
Part 3: Are Hydrogen Fueling Station Subsidies Necessary?
Part 4: Hydrogen-Powered Buildings
Part 5: Can the Government Pick Technology Winners? Can Anyone?