Why We Can’t Have Nice Things part 2 – Competing Interests and Rational Actors
There are many examples of organizations in H2 that want to work together to build something – to grow a pie that everyone can have a piece of. This post isn’t about those altruistic actors. This post is about avarice. While front-line bizdev and sales people may care about the industry, corporate makes the big decisions, and they care about shareholder value. Shareholder value for incumbents does not lie in growing new markets.
Despite its $200B annual revenue, the hydrogen industry is concentrated in a small number of players, and they play rough. If they can’t get their way, they will make sure no one else gets their way. In today’s discussion of “Hydrogen: why we can’t have nice things” we look at incumbents blocking market development and pushing complexity onto others – all preventing development of the ecosystem.
One of the more public examples of this is the saga of Air Products patent trolling the entire hydrogen fueling station network.
Is it even legal to patent a jointly developed fueling process?
Much like BEV fast charging requires line cooling and limits charge rate after 80%, hydrogen fueling at high pressure requires pre-cooling and rate controls. The Society of Automotive Engineering (SAE) created a fueling protocol ensure H2 vehicle tanks could not overheat. California then made the SAE fueling standard mandatory.
Despite joint industry development of the protocol, Air Products, a company heavily involved in hydrogen, patented part of the process[1]. They began sending cease and desist letters and demanding licensing fees to any fueling station using the jointly developed, legally mandated fueling protocol.
This directly stalled hydrogen vehicle industry growth, added cost to anyone fueling, and prevented fueling infrastructure expansion. Air products also didn’t build out a viable fueling network – effectively stalling the growth of hydrogen fueling. While this was only one of the contributing factors to slow roll-out, it was a potent one.
This article is part 2 of “why we can’t have nice things” – incumbents acting as rational actors holding the industry back.
The “So what?” There is rarely true collaboration – know your partner and their goals
Playing dirty happens in every industry. Tesla, for example, has purposely skirted right to repair laws by prohibiting aftermarket parts (they will drivers out of their charging network if they use them) and limiting access of certified part to only Tesla service centers so third parties can’t repair – and forces Tesla cars to be repaired at extremely high cost Tesla service centers. It’s 29% higher to repair an EV than an ICE, and Teslas are notably on the high end. This, in turn, increases the cost of accidents, driving up liability insurance premiums of everyone else on the road[2]. It functionally funnels a little bit of insurance premium from everyone without a Tesla towards Tesla service centers. This practice is far more nefarious than anything I detail in this article – it functions as a tax on everyone who doesn’t own a Tesla, whereas Hydrogen tends to keep its fighting internal. While I do enjoy picking on Tesla, a true insider to any industry can detail almost endless shady dealings, many of which are against the law.
How this plays out in hydrogen – and what to do
IGCs and other incumbents do not want new entrants to grow and compete with them for the $200B H2 industry. If they can’t control an expanding industry, they will work to block it. Small projects may move forward at these companies, but the larger trend is “control it or kill it.”
They exert control by joining every industry and policy group and either steering consensus to benefit themselves or by steering the group into the ground via “can’t come to consensus.”
The best way to move forward is to keep them out of your working groups and hydrogen deals OR work with them with extreme caution. Just be warned: they are very good at writing contracts and they will win if you play with them.
The rest of the story
Other examples before details
I won’t go into detail in this post, but some other major examples are:
· Nikola manipulating the entire industry with lies and fraud in hopes that they could push spending into hardware and infrastructure that would make their lies into plausible outcomes
· Hardware providers using their customers as guinea pigs for hardware that had never been tested
· Immense lobbying by startups to strip down and prevent hydrogen credits from being accessible to anyone else – credits that would have made the US the absolute center of the world hydrogen industry
Incumbents - “We don’t want to be the helpful idiot that opened an industry that we can’t compete in.”
No public company can act against its own interests. For hydrogen incumbents, it is a rational decision to prevent new market growth if they can’t control that market. Hydrogen is currently a $200B annual market worldwide– mainly in chemicals, fertilizer, refineries, etc. New use cases represent a threat to their dominance in this market.
A few years ago, I was at a Chatham House Rules meeting in Houston to discuss hydrogen energy. A major incumbent said “we don’t want to be the helpful idiot that spends tens of millions to open and industry that we can’t compete in.” The point was that fast-moving startups and new entrants will undercut pricing and erode current industry profit in new segments.
Project size, markets, and who can compete – being a first mover loses money and nimble fast-followers will reap the benefit
The vast majority of projects in the $200B H2 market are so large that only massive international companies can truly compete. A large refinery will use 300 tons of hydrogen per day from a plant that costs over $150M to build. The largest hydrogen fueling station in the world only dispenses 1 ton of hydrogen per day, and most stations will never get beyond this even if hydrogen fueling takes off.
A large incumbent that relies on 300 tons per day buyers has no interest in small, dispersed offtake. As a result, new use cases are not a market that interests them unless they are big. The fear is that encouraging growth of small new markets in the meantime will result in the development of competition that they can’t simply buy out – that will compete with them later. Spending vast amounts of money on opening a market that will introduce competition to their existing core business is a bad business strategy.
Why the fear? Small players doing horizontal integration will create competitors for their core business
H2 incumbents sell many types of gases, liquids, and chemicals. A new competitor specializing in only hydrogen will be able to focus all of its operations on only hydrogen, gaining more efficiency and undercutting the large incumbents for hydrogen. In this way, an incumbent supporting a refueling network could be planting the seeds to be outcompeted in hydrogen. If a single new entrant established a new hydrogen network from aggregated small use cases, it could begin to compete for the large use cases.
What does this mean for the new industries in H2?
It means choosing your partners carefully. A large incumbent will not advertise they are out to stymie any market they can’t control. They join working groups and make the requirements to deploy so onerous that only a large company could pull it off, and even that it would be too expensive.
This is not theoretical. When I was leading the development of DOE’s commercial hydrogen liftoff report, we interviewed nearly 100 companies. Incumbents would purposely leave out information or present actual false information in the report – a standard tactic that I had seen on other joint efforts. The goal was to make competing technologies seem too expensive and drive away investment in potential competition.
Another incumbent tactic - pushing the complexity onto others – a story of car fueling
The second major way the hydrogen industry damages itself is pushing complexity and cost onto other parts of the value chain. In a developing industry, it is death for the industry.
Major examples:
· Electrolyzer companies will develop the lowest cost electrolyzer – but in a way that adds even more cost to the rest of the plant installation.
· Hydrogen distributors that provide low-grade hydrogen that requires refining at the end-use site – which is far more expensive than refining at the production site
· Car manufacturers have chosen a fueling pressure that requires space-travel level technology rather than on-highway fueling technology in order to save money – resulting in massive cost increases and resilience issues on the fueling station side.
In all these cases, a company makes their product less expensive while making the stacked value chain far for the end user far more expensive and difficult.
The car example: $2B to properly design a car around a new drivetrain paradigm
One of my largest contributions to the hydrogen ecosystem was challenging existing paradigms to find out where cost savings could be had. One of the largest was halving the pressure of vehicle fueling, but the vehicle companies would have none of it. Later I would find out that it was solely because designing a new car around this idea would be a massive one-off expense, and the car companies would rather push cost and complexity onto the fueling stations and end-use customers instead.
A clean-sheet design for an existing vehicle company costs on the order of $2B if using a familiar frame design, much more if trying new frame shapes. The auto companies instead Frankensteined H2 components into gasoline cars. Because the car was not designed to accommodate hydrogen, the only way to achieve long range was to make hydrogen far higher pressure than was reasonable – 700 atmospheres. This pressure is well past the point where small hydrogen compressors destroy themselves and well into the pressure where extreme cooling at the fueling station is required to make fueling safe. It’s truly dumb.
Opting for the 350-bar design would allow for all the complexity of hydrogen fueling to be put upstream at the production site – which is an industrial site away from the public. It would eliminate pre-cooling and allow for fueling from much smaller compressors at fueling sites, bringing down the cost of fueling while increasing reliability.
This is a $30B mistake
Most H2 fueling stations will be 1 ton per day. A reasonable cost for this would this now is on the order of $5M for a 700-bar station. Cost reductions will happen, but it will take a while. A 1 ton 350 bar station today would cost around $1M-$2M. It would take about 1000 stations to make sure 95% of the US is within 50 miles of a station, and that $3M in savings per station would be on the order of $30B in CapEx – a massively larger amount than the $2B saved for an initial clean-sheet design.
For a pilot program it made sense to simplify the car and have complex fueling. For commercial deployment, fueling pressure must come down, and vehicles must be redesigned. Car companies, however, locked in that 700-bar pressure to put all the cost on others in the industry. In doing so, they help stymie the industry. Until it is fixed, fueling will only work in industrial environments – which drastically limits the scale of deployment to the point where it is not worth it for light duty.
These are rational responses, and they are omnipresent, but H2 is at a disadvantage compared to other industries
Nearly all major companies lobby, join industry groups, and generally are out to harm the competition. These companies are beholden to investors. When companies try to invest in sectors where they can’t make money, investors revolt. See Shell in 2023 when the new CEO refocused on fossil fuels.
The H2 distribution infrastructure is currently held entirely by a few large companies, and much of the offtake is held by another few large companies. Until distribution becomes more open, these inequities will remain. Competing industries that rely on the power grid or gas grid don’t have to deal with these issues, because the open access infrastructure exists to allow competition.
The industry needs to work together to build something – but as we’ve seen, the rational action of the incumbents is usually to work against it
Anyone with a goal of moving hydrogen forward needs to recognize that the incumbents are acting in their own best interest – not in the interest of growing new industries. This is especially a problem with regulators – who hear a lot from incumbents but don’t understand that the incumbents are actively trying to stymie competition.
Because new hydrogen use cases require cooperation, working together will be required. Invitations for infrastructure development frameworks should be limited to groups who earnestly want new industries to take off, and any participant that throws sand into the gears needs to be removed.
We can’t have nice things in H2 until we can work together – but not in the way they have been doing it
What needs to change
A successful working group requires some degree of altruism and shared vision. I’ve seen examples in this industry. More of it will be necessary for industry to be taken seriously and to enter the future rather than being left behind.
For these working groups to succeed, they should only include companies that honor the intent to work together and kick out the companies that have a record of obstructing progress.
From a tactical perspective, the IGCs are terrible to work with, and Air Products has the worst reputation in the industry for defiling[3] customer relations. But it’s manage risks with them, or manage an entirely different set of risks with less experienced players
Before I get into this, I want to reiterate every industry plays dirty to the fullest extent they can skirt the law. While some of the examples below are shocking, they are tame compared to other companies – like the above example of Tesla skirting “right to repair” laws by disabling charging of cars which results in higher insurance premiums for non-Tesla drivers. This is what big companies do, and if you want to change it, you need to push for senators and congressmen that empower the US Department of Justice to fight on behalf of consumers.
I wrote in a prior post that to succeed in hydrogen, in many cases you must work with industry incumbents – they actually do have some of the most experience in the industry. Many of the direct salespeople have your best interest in mind. Their corporate counterparts do not, and eventually corporate will come down and destroy your business model for a very minor boost in their shareholder value. This is why you need to hire people with experience in the industry to know the true risks and rewards of certain partnerships. While almost every player is out to get you, some are worse than others. Here are a few examples of what I’ve heard about Air Products while doing background work for this post (most of it verified):
· Air Products had a fire from an untrained worker playing with hydrogen - and having equipment without proper safety valves – that burned 80% of their hydrogen delivery trucks. It shut down hydrogen fueling in Northern California and cost tens of millions of damages. Instead of owning up to it, they declared force majeure – which isn’t meant to be used when the company is at fault (this happened while I was at Shell and I had a front row seat)
· Air Products then had the temerity to cite that others should not enter the hydrogen industry because “new entrants can’t meet safety standards,” further spreading fear while hypocritically pretending they meet high standards of safety after a major incident
· Air Products jacking up the price of hydrogen to Plug Power – and thus damaging the best existing H2 use cases at Walmart and Amazon forklifts – coincidentally just after Plug Power bought a hydrogen production plant in Tennessee that Air Products wanted. Yes, this is illegal, particularly because no other customers saw the price increase. I have also heard that it is in court (I have not confirmed this by seeing contracts, but it checks out)
· Air Products jacking up the price of hydrogen by a factor of 4-8x at the most successful hydrogen fueling station in the world – Shell’s Torrance station. That station fueled more hydrogen cars than all 37 Shell H2 stations in Germany combined. Instead of allowing the best example of hydrogen to work, Air Products effectively shut it down by making it too expensive to run. Note that this happened after my time at Shell, I never saw the contract for this and was not involved (obligatory cover-my-behind sentence so AP doesn’t sue me for divulging contract details)
· The industrial gas companies functionally divide regions into territories where they won’t compete. I’ve talked to people that wanted to switch providers, and an alternative IGC will say “oh, we don’t service other company’s equipment, until that is removed we can’t work with you.” Meanwhile all the IGCs charge back-breaking fees for equipment removal – making it impossible to switch providers. They must have very good friends at the DOJ for not getting hit with collusion charges on these activities
· All Industrial Gas Companies charging US hospitals massive rates for oxygen delivery during COVID – and not calling it price gouging because they had pre-existing clauses in their contracts that said any off-schedule deliveries incurred massive premiums. This is one of the best examples of “the IGCs always win.” Because it was already in the contracts, it was not price gouging, so they could 5x-10x the prices for life-saving oxygen despite the fact that the US had no shortage of oxygen supply. Hospitals had no choice in the matter, because people would die if they didn’t absorb the massive costs. In most industries, this sort of behavior would be excoriated. In Hydrogen with the IGCs, it’s just another Tuesday
You likely have to work IGCs and other incumbents if you are in hydrogen, and you have to manage your risks when you work with them. Otherwise you will work with a more helpful but less experienced provider (and yes, less competent, the IGCs are actually good at what they do for the most part), and then you will have another entire set of risks to manage. Shameful self plug - get help, hire some of freelancers with experience to help maximize your success with whoever you work with.
Thanks for reading!
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Footnotes
[1] Whole story: There are two parts to the J2601 fueling protocol: a lookup table with “worst case scenario” fueling, and a “MC” which standards for “mass times specific heat.” Which is basic physics. The MC fueling was granted a patent because it was a process for measuring the flow rate and temperature of hydrogen and then controlling it based on whether it matches estimates. In other words – it measured whether the fueling equipment was operating properly and then checked a table. Some idiot judge took the patent because “measuring the performance of your equipment and then adjusting is not obvious” (it is obvious). It is not a viable patent, and I worked with Shell lawyers to tell Air Products we would challenge the patent and get the whole thing invalidated if they kept pushing.
[2] For those of you that struggle with logic, this paper indicates that higher repair costs directly increase premiums for everyone. Tesla is pushing higher repair costs in many ways, but a big one is the skirting of “right to repair” laws – which end up causing many of their cars to have skyrocketing repair costs. This high repair cost for their cars means that any accident will result in higher repair bills – and as the linked article indicates, higher repair costs l lead to higher insurance rates for everyone.
[3] Yes, I am being hyperbolic, but just wait until you read the examples below
