Hydrogen Has Two Economies. We Should Stop Pretending It Has One

There is a habit in the hydrogen industry that has become so common it almost passes without notice.

We talk about hydrogen as if it were a single market.

We speak about production cost curves, tax credits, electrolyzer deployment, decarbonization, infrastructure, and future demand as though all hydrogen users sit inside the same system, face the same constraints, and need the same solutions.  We talk about hydrogen as if it were one economy waiting to scale.

It is not.

Hydrogen in the United States already operates as two very different economies.  One is large, centralized, and mature.  The other is distributed, fragile, and poorly served by the infrastructure it depends on.  The first economy was built to serve giant industrial consumers with enormous, concentrated demand.  The second consists of everyone else who needs hydrogen but does not live next door to a large plant, or consumes enough volume to justify dedicated production or 100% reliable supply.  The mistake is not that these two economies coexist.  The mistake is that we keep pretending they are the same.

They are not the same in scale.  They are not the same in logistics.  They are not the same in economics.  And they should not be forced to share the same supply architecture.

The first hydrogen economy is the traditional one.  It revolves around large steam methane reforming (SMR) plants and large industrial consumers.  Oil refineries sit at the center of this world.  Fertilizer manufacturers are a core part of it as well.  There are also major institutional users and other large industrial applications that consume hydrogen in meaningful volume.  This is the legacy hydrogen business that most of the industry inherited.  It is big.  It is concentrated.  It is built for scale.  It is optimized around massive demand centers that can justify centralized production and dedicated supply of gaseous hydrogen via pipelines.

The numbers make this concentration hard to miss.  The United States produces about 10 million metric tons of hydrogen per year.  According to the U.S. Energy Information Administration, about 68 percent of that production goes to petroleum refining and another 21 percent goes to nitrogenous fertilizer manufacturing.  In other words, nearly 89 percent of total U.S. hydrogen production is consumed by those two traditional uses alone.  EIA also reports that about 40 percent of U.S. hydrogen production in 2018 was merchant hydrogen sold by industrial gas companies, but even that merchant layer still sits downstream of an industrial base dominated by refining and fertilizer.

The second hydrogen economy is much broader and much more overlooked.  It includes merchant buyers, regional distributors, specialty gas suppliers, laboratories, electronics manufacturers, metal processors, research institutions, and a long list of industrial users whose hydrogen needs may be smaller than a refinery’s but are no less real. It also includes the emerging applications that people like to talk about when they describe the future of hydrogen.  Mobility pilots, fuel cell deployments, backup power systems, material handling fleets, and smaller industrial conversions do not fit neatly into the legacy model.  They live in a different reality.  They are dispersed.  They are regional.  They are logistics dependent.  And most importantly, they are still being asked to rely on a supply system that was never designed for them.

That is the central problem.

The merchant and distributed hydrogen market today is not standing on its own infrastructure. It is living off the excess capacity of the traditional hydrogen economy. And recent attempts to use renewable energy to produce liquid hydrogen and truck it to customers have been oversized to achieve scale and significant tax credits and have either been cancelled, delayed or unsuccessful for a variety of reasons.  In many regions, the hydrogen that reaches smaller customers is effectively whatever spills over from a system designed primarily for large industrial users and hauled to them.  The molecule may start in a world built for refineries or fertilizer.  Only later does some portion of it make its way into merchant channels, through a chain of processing, handling, transport, and resale that adds cost and fragility at every step.

This arrangement may have been tolerable when distributed demand was small and expectations were low.  It is not a good foundation for growth.  It is not a resilient system.  And it is certainly not the system that should carry hydrogen into wider industrial adoption.

The hydrogen conversation is still too focused on the wrong bottleneck.  People ask how cheaply we can make hydrogen.  That matters, of course.  Production cost matters.  But in the distributed hydrogen economy, the real problem is often not the first step of production.  It is everything that happens after production.  It is the dependence on distant sources.  It is the need to condition, move, and manage a difficult molecule across long distances.  It is the mismatch between centralized production and fragmented distributed demand.  It is the fact that both a regional distributor serving smaller customers can be completely exposed to decisions, outages, maintenance schedules, and economics that originate in a totally different market.

In other words, the distributed hydrogen market is fragile because it was never truly built for itself.

What works for a refinery is not what works for a regional distributor.

A refinery is a giant, concentrated consumer.  Its hydrogen demand is continuous, large scale, and deeply integrated into a complex industrial process and purity is not critical.  Most refineries produce the hydrogen that they need internally.  The balance between what they produce and what they consume is based on the crude oil that each refinery processes.  This balance will change over time.  The economics of supply can justify a large, dedicated plant.  The infrastructure can be planned around a single major node of consumption.  The system is optimized for huge volumes moving into one place.

A regional distributor operates in the opposite world.  Demand is spread across many customers and products which means purity matters a lot.  Volumes are lower.  Delivery is route based.  Reliability matters as much as price because customers often need hydrogen as one gas among many in a broader operating environment or in a mix with other gases.  The distributor’s world is built around responsiveness, service, and regional density.  It is not built around multi state long haul hydrogen logistics. It is not built around chronic dependence on large distant plants.  And it is certainly not built around the idea that hydrogen must first be tied to the economics of giant industrial users before it can reach everyone else in a super cold liquid form when they need it as room temperature gas!

Yet that is exactly the architecture we have.

This is why the distributed hydrogen market so often feels scarce, expensive, and unstable. Not because the underlying molecule is impossible to produce, but because the supply chain serving distributed demand is upside down.  DOE’s hydrogen delivery materials describe the comparatively smaller merchant market as being served by cryogenic liquid hydrogen trucks or gaseous tube trailers.  DOE also states that over 90 percent of merchant hydrogen is transported in liquid form because, for larger market demands and longer truck distances, liquid is the more practical transport mode. That means the distributed market is forced into an investment intensive delivery architecture that the producers’ control which limits competition, keeps prices high and controls capacity additions all of which reinforce that the current system is unlikely to change.

That point needs one important clarification.  It would be wrong to say that a large share of all U.S. hydrogen is liquefied and trucked across the country.  It is not.  Most U.S. hydrogen is produced at or near refineries and fertilizer plants and consumed close to the source.  The liquid and trucked segment is small relative to total U.S. production.  But it is disproportionately important because it is the segment that serves the distributed merchant market.

According to an Argonne National Laboratory presentation delivered at DOE’s 2022 Liquid Hydrogen Technologies Workshop shows just how small that liquefied layer really is.  The workshop lists about 206 metric tons per day of liquefaction capacity in the United States.  If fully utilized year-round, that equals roughly 75,000 metric tons per year.  Against a 10 million metric ton U.S. hydrogen market, that is well under 1 percent of total production.  That tiny slice of the market is carrying an outsized logistical burden because it is the channel through which hydrogen reaches smaller, distributed users.

And that burden is expensive.

DOE’s hydrogen liquefaction program record says today’s industrial liquefiers typically require 10 to 20 kilowatt hours of electricity per kilogram of hydrogen.  That is a massive energy penalty before the molecule ever gets onto a truck. DOE’s infrastructure analysis also notes that, because there are so few liquid hydrogen plants, interstate liquid deliveries of over 1,000 miles are common.  Thus, the merchant market is not only dependent on liquefaction. It is often dependent on long distance liquefaction-based trucking from a very small number of production nodes.

That is where the economics become especially damaging.

The direct cost of the liquid and trucked system is meaningful even before anyone talks about missed innovation.  Argonne’s hydrogen delivery analysis estimates that liquid hydrogen transport and delivery costs are around $2.5 to $3.0 per kilogram.  This means that a delivery of liquid tanker load costs between $9,000 and $11,000.  Using the current U.S. liquefaction footprint of roughly 75,000 metric tons per year, that implies something like $190 million to $225 million per year in direct transport and delivery cost associated with this liquid merchant layer alone.  That is not the total cost of all merchant hydrogen.  It is simply the logistics burden created by having to move this small but critical slice of the market through a liquid hydrogen chain.

There are also losses built into the system.  DOE’s hydrogen delivery roadmap notes that liquid storage tanks lose hydrogen by boil off, and that boil off represents both a cost and an energy penalty.  The delivery analysis literature likewise emphasizes that liquid hydrogen pathways suffer losses during storage, handling, and delivery.  In practical terms, a distributed customer is not just paying for production.  That customer is paying for liquefaction energy, cryogenic handling, long haul transport, storage losses, unloading losses, and the capital intensity of a sparse national liquid network.  Typically, a liquid delivery volume is the weight difference between the tanker arrival and departure.

Then there is the opportunity cost, which may be even more important than the direct cost.

When a distributed hydrogen market depends on excess supply from a centralized system built for refineries, it inherits all the wrong incentives.  Smaller customers are not the anchor tenants.  They are not the design center.  They are an afterthought.  They get what is available when it is available, at a price shaped by distance, handling, concentration, and the economics of someone else’s infrastructure.  That does not just make hydrogen expensive.  It slows adoption.  It discourages experimentation.  It makes new business models harder to finance.  It suppresses the trial and error that usually creates new industrial demand.

You can see hints of that distortion in EIA’s manufacturing price data.  EIA reported a widespread in hydrogen purchase prices across manufacturing industries, with average costs in some sectors far above the lowest industrial benchmarks.  Those differences reflect purity, volumes, and delivery conditions, so they should not be read as apples to apples comparisons.  But they do show a central truth.  Smaller and more specialized users do not live in the cost world of giant legacy consumers.  They live in a much more expensive one.

That is why the hydrogen economy should be divided in two.

The first economy should remain what it already is.  Large centralized production for large, centralized users.  Refineries, fertilizer manufacturers, and other major industrial consumers can continue to be served by the infrastructure that was designed for them. That system has its own logic.  It has its own economics.  It has its own installed base.  It will continue to matter for a long time.  There is no need to pretend otherwise.

But the second economy should be severed from it.

Merchant hydrogen, regional distributors, specialty gas channels, and smaller industrial customers should stop depending on the leftover structure of big hydrogen.  Instead, they should be served by a new supply architecture built specifically for distributed demand.  That architecture should be based on local electrolyzers producing hydrogen near the customer base, feeding into the existing industrial gas distribution model, and eliminating the need for long range hydrogen movement as a default operating assumption.

This is not a futuristic vision. It is a practical one.

The alternative model is straightforward.  Build a network of local electrolyzer systems in regional markets.  Place production close enough to demand that hydrogen never needs to travel more than 200 miles.  Keep it gaseous.  Do not liquefy it.  Feed it into the existing supply chain that distributors already use to serve customers today.

That last point matters more than many people realize.

One of the weaknesses in hydrogen thinking is the assumption that every serious proposal requires a completely new ecosystem.  New fueling corridors.  New national networks. New customer behavior.  New logistics models. New infrastructure from the ground up.  But the distributed hydrogen economy does not necessarily need a brand-new downstream supply chain. In many cases, the downstream framework already exists.  Regional distributors already have customer relationships.  They already have delivery operations.  They already understand route density, inventory management, cylinder handling, trailer logistics, service expectations, purity requirements, and local market demand.  What they often lack is not a route to market.  What they lack is a local source of hydrogen that is aligned with the economics and geography of the market they serve.

That is what local electrolysis can provide.

This is where the argument for splitting the hydrogen economy becomes especially powerful.  It is not an argument that every hydrogen user should abandon the old system.  It is not an argument that centralized production has no role.  And it is not an argument that the entire country needs to bet everything on one technological pathway.  It is much more grounded than that.

It is simply an argument that the distributed hydrogen economy deserves infrastructure designed for distributed demand.

A local electrolyzer serving a regional market is not trying to outcompete a giant SMR plant on the terms of a refinery.  It is solving a different problem.  It is reducing the distance between production and use.  It is removing layers of transport cost and handling complexity.  It is improving resilience by decentralizing supply.  It is allowing hydrogen to be produced where it is needed instead of being treated as an overflow product from somewhere else.  And it is fitting that supply into the channels that already move gases to customers every day.

That is a very different value proposition from the one that dominates most hydrogen discussions.

Much of the public conversation around hydrogen still revolves around huge headline projects.  Gigawatt scale ambitions.  Massive export terminals.  National buildouts.  Grand predictions about future demand.  But the distributed hydrogen economy does not need to wait for any of that.  It does not need a trillion-dollar reinvention of everything.  It needs a more sensible production footprint.

It needs hydrogen to become local.

Local production changes the economics in ways that matter.  It reduces transport exposure.  It lowers dependence on bottleneck infrastructure.  It cuts vulnerability to disruptions originating far outside the served market.  It allows capacity to be added incrementally.  It aligns production with actual regional demand rather than speculative national narratives.  And perhaps most importantly, it creates a system that can grow with the market instead of forcing the market to depend on the leftovers of someone else’s system.

This is how abundance actually gets built in distributed hydrogen.  Not by asking ever more customers to crowd onto a fragile centralized chain, but by replicating supply close to demand until the market is no longer structurally dependent on distant sources.

There is also a strategic advantage here that should not be ignored.  The current merchant hydrogen model is fragile not just because of cost but because of concentration.  When production is heavily centralized, outages matter more. Maintenance matters more.  A disruption at a major source can ripple through entire regions.  Smaller customers, who were never the first priority to begin with, are often the ones who feel the consequences most acutely.  A distributed network of local electrolyzers changes that risk profile.  It does not eliminate operational problems.  No real industrial system ever does.  But it spreads risk across more nodes, shortens supply lines, and reduces the number of ways one distant event can destabilize many local customers at once.  DOE’s own analysis of liquid hydrogen distribution underscores the concentration problem by noting the very small number of liquid plants and the resulting long interstate deliveries.

That is what resilience looks like in practice.

It is also a much better foundation for growth in new applications.  If hydrogen is going to expand into more distributed use cases, whether in light industrial settings, regional mobility, backup power, material handling, or other emerging markets, it cannot do so on the assumption that all demand will somehow be absorbed by an infrastructure built for refineries.  The geography is wrong.  The logistics are wrong.  The economics are wrong. The future distributed market needs a distributed source.

This is where many hydrogen strategies become confused.  They assume that growth in demand will automatically justify growth in the existing supply model.  But scale alone does not fix architectural mismatch.  More demand does not make a bad logistics structure good.  More customers do not make long distance dependence more resilient. More use cases do not magically make liquefaction and long-haul transport less burdensome.  If anything, trying to force a larger distributed customer base through the old, centralized model only amplifies the problem.

A better approach is to acknowledge that the old model and the new market are not the same thing.

The traditional hydrogen economy should continue to serve traditional hydrogen users.  It can evolve over time.  It can decarbonize where appropriate.  It can improve efficiency and reduce emissions.  But it should not be mistaken for the right backbone for every other hydrogen application in the country.

The distributed hydrogen economy should be built differently from the start.  Local production.  Regional delivery.  Existing distributor relationships.  Existing customer channels.  No default reliance on liquefaction.  No assumption that hydrogen should travel vast distances before it becomes useful.  No expectation that smaller customers should remain permanently dependent on excess molecules from giant industrial systems.

That is not a radical proposition. It is common sense.

In fact, one of the most attractive features of this vision is how unglamorous it is.  The future of merchant hydrogen should not have to be dramatic.  It should not have to depend on heroic infrastructure.  It should not require customers to bet their operations on distant megaprojects or fragile logistics chains.  It should be local, repeatable, modular, and boring. Hydrogen should arrive the way industrial gases are supposed to arrive.  Reliably.  Regionally.  Without unnecessary complexity.  Without being hauled across half the map because that is the only way the molecule can be sourced.

The industry talks constantly about making hydrogen more affordable and more available.  But those goals will remain elusive for a large portion of the market unless we recognize a simple truth.  Merchant hydrogen is expensive and scarce not merely because hydrogen is costly to produce, but because the system that serves distributed demand is built on dependence, distance, and mismatch.

That is why splitting the hydrogen economy matters.

It creates conceptual clarity.  It allows us to stop applying one set of assumptions to two completely different markets.  It allows legacy infrastructure to keep serving the users it was designed for, while opening the door to a far more practical model for everyone else. It shifts the conversation from abstract scale to appropriate architecture.  And it offers a path toward a hydrogen market that is capable of becoming more resilient as it grows rather than more fragile.

There is not one hydrogen economy in America.  There are two.

One is centralized, concentrated, and designed for giant industrial demand. The other is distributed, regional, and still trapped inside someone else’s supply chain.

The first can continue. The second should break away.

If hydrogen is ever going to become abundant, dependable, and economically workable for the broader industrial market, it cannot remain a secondary output of infrastructure designed for refineries and fertilizer plants.  It needs its own backbone.  It needs its own logic.  It needs its own local production base.

We should stop pretending one hydrogen economy can do both jobs.

It is time to split the hydrogen economy in two.

Our next article will explain the use of hydrogen in generation of electricity and the alternatives facing the utility companies.