Supply Chains and Network Effects
During the last years of the nineteenth century, a few thousand automobiles traveled on the roads across the United States.
By the turn of the century, in 1900, multiple entrepreneurial manufacturers produced 4,192 cars, out of which 1,681 were steamers, 1,575 were electrics, and only 936 used internal combustion engines fueled with town gas, alcohol, kerosene, or mixtures, according to the historian Rudy Volti.
Which fuel or energy type would dominate wasn’t clear at the time. But since the internal combustion engine evolved from the steam engine, the final race was likely between electric and combustion systems.
The electric car was simpler: A box of batteries, an electric motor, and a pedal to control the motor’s speed. It had a few problems, such as frequent and slow recharging and relatively low power. But in exchange, it was clean and quiet, ideal for, and almost limited to, city driving, as electricity wasn’t available in large at the countryside. The internal combustion car, in comparison, was noisy and dirty (something widely condemned as cities dreamed of leaving the layers of horse manure from the buggy days behind). They were hard to start (unpopular with female drivers) and way more complex.
But one could find fuel in any general store as gasoline was used both as a cleaning agent and as a solvent. The electric car held no chance.
Combustion cars capitalized on an existing supply chain that allowed anybody to enjoy it immediately, in the countryside and cities. Ford’s first production car, the Model T, even used a flex-fuel system that could run on either gasoline or alcohol (which farmers made themselves). Almost immediately, John Tokheim introduced and patented measuring pumps at curbside filling stations, which allowed fuel to be pumped and stored safely underground. New oil demand pushed for more oil discoveries, making refineries and a growing pipeline network economical. Auto part manufacturers, mechanics, oil logistics emerged to strengthen the first layer of the supply chain even more. By 1924, The National Auto Show exhibited no steam or electric vehicles.
Robert Metcalf, one of the founders of the Ethernet Standard, formulated the value of a communication network as the square of the number of users on it (N^2 where N is the total number of users.)
This concept first described the power of communication networks like Ethernet, fax, or phone systems and later the power of social networks and marketplaces when the internet arrived. The power of network effects is such that the Venture Capital firm NTX concluded through a study that they were responsible for roughly 70% of the value created by tech companies.
This concept can be applied to understand (and foster) new energy adoptions and transitions. The value that each new user/node/supply chain component brings to the network makes it not linear but orders of magnitude more valuable than before. Every new auto part manufacturer, mechanic, oil extractor, or filling station pushed combustion cars forward in ways that made all its disadvantages look tiny. It also discouraged future consumers and car entrepreneurs from buying or starting a non-combustion car company, which pushed the virtuous cycle even further.
Historically, it took 40 to 50 years for a new energy source to go from 1% to 10% of market share and almost a century to go up to 50%, according to Luis de Sousa’s Energy Substitution Model.
The pace at which the world substitutes an energy source is marked, by and large, by economic forces. The main challenge is finding complementary forces to accelerate adoption when the stakes are higher than ever.
Hydrogen-powered applications have been available for decades, from fuel-cell vehicles to combined Heat & Power units. Its potential was always evident. In the 70s, Alvin Weinberg, a Manhattan Project nuclear physics who directed the Tennessee Oak Ridge National Laboratory for twenty years, presented the value of nuclear energy as a green source of energy for desalinating and splitting water to generate hydrogen as a fuel for transportation and industry. But market and economic forces prevailed, and today nuclear barely provides ~6% of the energy we consume. Hydrogen production at scale is yet to be seen.
We learned from history that reliable supply and value chains are essential for a new energy source to finally leave the R&D parks and get the network effects (and benefits of scale) rolling. Realizing national hydrogen strategies and decarbonizing heavy-duty transportation, fertilizers, and coal-reliant power plants depend on the availability of price-competitive green molecules at scale.
To accelerate the adoption pace for hydrogen as an energy source, we need to leapfrog to a world with scaled-up operational supply chains. But how do we get green hydrogen producers to go full scale before the market demands it? NewBalance Energy connects the best hydrogen producers and their current scale aspirations with their future demand. Leading organizations rely on us to reduce their exposure to current uncertainties and get early access to a roadmap that covers their transition requirements and stakeholders’ expectations through de-risked, competitive, and reliable processes. Connecting those parts also pushes forward the required supply elements in between, like logistics, infrastructure, and OEMs. Remember combustion cars and the formulation of the value of a network? Every node makes its value (and adoption) orders of magnitude higher (faster.)
Hydrogen adopters in transportation and industry should have easy and early access to scaled-up supply chains for hydrogen to have a chance. We work to bridge the gap between producers and future consumers to get the network effects to hit the ground running by the second half of this decade.