The Economics of Hydrogen: Innovation in Mature and New Technologies

Hydrogen fuel cells are not silver bullet

The science of hydrogen as a fuel source indicates that hydrogen fuel cells are not a “silver bullet” to generate clean fuel and eliminate fossil fuel dependence. The economics of fuel cells reinforce that interpretation. Platinum and other catalysts are costly and scarce. Natural gas and water as hydrogen sources are also costly and scarce, and have many competing alternative uses. Furthermore, natural gas is also facing increasing demand from electricity generation, because it is a cleaner fuel than coal in many ways. So the combination of increased demand for electricity generation and increased demand for hydrogen generation could increase natural gas prices, making hydrogen power even more expensive.

High natural gas prices are also likely to do two things: induce companies to explore and drill for more natural gas deposits, and induce researchers to work on finding alternative ways to generate hydrogen.

The economics of hydrogen as a fuel derive from the comparison with our existing hydrocarbon fuel framework. Once you take into account the cost of releasing hydrogen from molecules, the use of hydrocarbons to produce hydrogen, the less-than-hoped-for benefits of decreased emissions, the costs of inputs, the much lower energy intensity of hydrogen relative to hydrocarbons, and the costs of transporting hydrocarbons and/or water so they can be processed into hydrogen on-site, it becomes pretty clear that hydrogen is not likely to be ready for economic prime time for a while. Most estimates put commercial fuel cell vehicles at 10-30 years in the future.

Importantly, companies are investing in the research to push that commercial timeframe closer to 10 years. Given those time frames and the risks associated with the research, companies must be investing in anticipation of large future returns.

Of course, this is not the first time in human history that we have experienced an energy transition. From the 18th century move from wood to coal that fueled the industrial revolution to the late-19th century transition from coal toward oil, history abounds with examples of old and new energy technologies evolving simultaneously, created by human striving for better economic and environmental lives.

Take for example the invention of the steam engine during the early industrial revolution. Over six years from 1776 to 1783, James Watt and Matthew Boulton created, built, and marketed the first commercially viable steam engine for uses beyond just pumping water out of mines. However, steam engines did not become the standard power source for industry until the 1840s. Why the 60-year delay in the widespread adoption of a clearly superior technology?

One reason was innovation in the mature power technology – the water wheel. Water wheels had been used for centuries to generate power, but they had some serious shortcomings when compared to steam engines. They were not mobile, the depended on seasonal water levels, and the intensity of their power generation was pretty low. But water wheels had a substantial “installed base”, so there was certainly an issue of switching costs. More importantly, though, water wheel technology kept innovating. Inventors like Victor Poncelet applied their increasing understanding of fluid dynamics to invent curved blades for the wheel, which increased the wheel’s energy generation from a given amount of water and improved its viability as a power source.

Thus early on, the margin between water technology and steam technology was small. Only as steam technology continued to innovate beyond Watt’s and Boulton’s original did it start to replace water wheels. During the 60-year transition, water and steam technologies coexisted and evolved simultaneously, increasing power generation at decreasing cost for decades.

We are in the midst of a similar transition from internal combustion to hydrogen engines. The transition will be an incremental evolution because internal combustion engines continue to innovate, as illustrated by the increasing power and commercial viability of hybrid engines. Hybrid technology will continue to evolve as hydrogen technology evolves, and that’s a good thing. Given the science of generating hydrogen, it is not clear that hydrogen vehicles would be any cleaner than hybrid vehicles, as a recent MIT study found.

So it comes as no surprise that during our current transition toward hydrogen, which has been in progress for at least two decades, we have made simultaneous innovations that make hydrocarbon technologies cleaner, more energy efficient, and better able to deliver the same amount of power with less energy use.

This simultaneous evolution of mature and new technologies is one reason why diversity of technologies, a portfolio of technologies approach, will deliver cleaner power in a dynamically efficient manner. The flexibility to include both hydrogen and other fuels, and to have these alternatives innovate and compete against each other over time, will lead to better long-run fuel solutions and a cleaner environment.

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

This is part 2 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?

Lynne Kiesling is Director of Economic Policy at Reason Public Policy Institute. She is also Visiting Associate Professor of Economics at Northwestern University. Her previous positions include Assistant Professor of Economics at the College of William and Mary, and Manager in the Transfer Pricing Economics group at PriceWaterhouseCoopers LLP. She has a Ph.D. in economics from Northwestern University, and has published extensively in academic journals.