Just a few years ago, natural gas fuel was supposed to take over everything from trucking to small cars in the U.S. But it has so far failed to take significant market share in the U.S. and Clean Energy Fuels (NASDAQ:CLNE) and Westport Fuel Systems Inc (NASDAQ:WPRT) are emblematic of that failure. There were lots of factors to blame from falling oil prices to the lack of natural gas infrastructure and it doesn't appear that the industry will turn around anytime soon.
While natural gas didn't work out as an alternative fuel, that doesn't mean it isn't worth pursuing transportation fuels outside of oil. One alternative fuel that may break that trend is hydrogen. And it's quietly showing more progress than some may realize.
Where natural gas failed
The theory of moving transportation to natural gas was great a few years ago, particularly in the trucking industry. Fleets could save on fuel costs by buying inexpensive natural gas and trucks could be converted to natural gas using Westport Fuel Systems' technology. The infrastructure of filling stations was built out by Clean Energy Fuels, which would bring more adoption, and a virtuous cycle would begin.
But energy markets didn't cooperate with natural gas fuel. Crude oil prices plunged two years ago and the incentive to move to natural gas deteriorated.
In the first half of 2016, Clean Energy Fuels' gallons delivered increased just 7.3% from a year earlier to 160.4 million gallons, only about 0.5% of diesel fuel supplied.
There were also structural problems. Along with the conversion of trucks to natural gas, infrastructure to compress or liquefy natural gas had to be built around the country. And natural gas isn't exactly clean energy, it's still a fossil fuel. All of these factors combined to limit the growth of natural gas as fuel.
Why hydrogen could succeed where natural gas failed
As natural gas seems to be topping out as fuel, hydrogen is just starting to get its legs as a clean fuel option for the future.
Hydrogen is emerging as an up and coming fuel for vehicles large and small. Toyota (NYSE:TM), Hyundai, and Honda (NYSE:HMC) all have fuel cell vehicles and General Motors (NYSE:GM) is building a fuel cell vehicle for the U.S. Army's Tank Automotive Research, Development, and Engineering Center. Trucking upstart Nikola Motor Company is building a Class 8 semi truck and the Stark Area Regional Transit Authority in Ohio is testing hydrogen buses in the field. These are just a few examples of transportation companies moving into hydrogen.
The appeal of hydrogen over electric or natural gas vehicles may help it grow adoption, particularly in the large trucking market. Despite running on electricity (fuel cells turn hydrogen into electricity), they're quick to fill, unlike an electric vehicle, and drivers will likely be less worried about range.
Infrastructure for hydrogen will also be much easier to build than for natural gas. Hydrogen made through electrolysis only needs water and electricity, meaning it can be installed anywhere.
Hydrogen can also be a cleaner fuel source than any other in the world today, even though most current hydrogen is made from natural gas. In the U.K., ITM Power has demonstrated hydrogen fueling stations powered by wind and solar energy, making its hydrogen extremely clean. Natural gas is cleaner than burning oil, but it's still a fossil fuel, and electric cars are charged with coal and natural gas, which still account for a vast majority of electricity in the U.S. Hydrogen might be the cleanest fuel option available.
Finally, hydrogen is very flexible in how it can be used. Clean Energy Fuels built its infrastructure for trucking fleets, not the everyday commuter, who has different needs. EV charging is built for cars, but is nearly impossible to see charging a semi truck. Hydrogen could be used by everyone.
Can hydrogen crack the transportation market?
If hydrogen is going to break into the market, I think it'll have to be led by trucking fleets and large truck consumers. Hydrogen may be the only option they have for using clean energy and if the technology continues to improve, then it could be an economical option with environmental benefits.
Where there needs to be improvement is on cost. ITM Power recently signed some supply deals at 10 British pounds ($12.20) per kg, or about four times as expensive as gasoline. If costs were to decline at rates we have seen in adjacent industries like wind and solar, hydrogen could be cost competitive within a decade.
At the very least, it looks like hydrogen has a better chance to succeed on a mass scale than natural gas fuel. It's easier to deploy and a lot cleaner on the environment. Now, we'll have to see if costs come down quickly enough and consumers are willing to make the change as more vehicle options emerge.