Q4 | Torys QuarterlyFall 2023

How government action is boosting hydrogen projects

When the federal government released its hydrogen strategy in late 2020, there was a huge amount of optimism that hydrogen would play a leading role in the energy transition and the decarbonization of the Canadian economy. However, in the years that followed, that optimism was not always matched by actual progress. Now three years later, hydrogen investments are gaining traction. And while the precise shape of the future remains unclear, we are starting to see concrete progress on a number of fronts.

Reaching the next level of hydrogen adoption will require government support, particularly financial. Ottawa has responded with both government funding (e.g., Canada’s pledge of $1.5 billion to hydrogen and other clean fuels) and tax credits (e.g., the clean hydrogen investment tax credit).

From source-specific to source-agnostic

Stakeholders have adjusted their focus from the specific energy source used to produce hydrogen to the carbon intensity of its production. This is supported by the tax credit regimes available in Canada, which have incentivized the market to focus on this metric. These new tax credit regimes will allow hydrogen generated through a combination of fossil fuels paired with carbon capture technology and nuclear power to play a larger part in the development of the hydrogen market. They will also ensure that hydrogen produced using renewable energy can be cost-competitive sooner than the market previously anticipated.

Canada’s hydrogen advantage

Canada is well-positioned to participate in the growing hydrogen market. The country enjoys several natural advantages: abundant renewable energy (primarily hydro, wind and solar), low-cost natural gas and sequestration resources, and existing utility-scale nuclear generation capacity (and the announced development of small modular nuclear reactors).  

For example, Ontario has supported the installation of a 20 MW electrolyzer at the Sir Adam Beck Generating Station—this will produce green hydrogen using hydroelectric energy generated from Niagara Falls. The Ontario government is maximizing the province’s advantage by funding projects through the Hydrogen Innovation Fund. The fund was announced in February; the first six projects to be funded were announced in mid-October.

The Atlantic provinces are working to create a green energy hub where hydrogen and ammonia production would feature prominently. It is a crucial step in the region’s transition from an economy that has historically focused on shipments of coal and other fossil fuels. The region’s access to the Atlantic Ocean and existing port infrastructure give it a unique advantage.

Challenges to scale

Notwithstanding the upward trajectory of new hydrogen projects, the market faces challenges on its road to maturity.

On a micro level, there are issues around procuring equipment and finding available construction labour. 

On a macro level, significant work remains to develop the infrastructure to deliver hydrogen to end-users and match demand with the future supply. For example, hydrogen could offer an alternative to fossil fuels for hard-to-abate industries, such as heavy-duty transport (trucking, shipping and aviation) and production of cement, steel and petrochemicals, where electrification is not feasible. However, potential off-takers may be hesitant to enter the market without greater certainty on reliable long-term supply and delivery networks. The development of mid-stream distribution networks (pipelines and trucking-based transport), refueling stations and depots will be key to opening these markets.

Transportation industry to lead?

We believe that transportation may be the first segment of the economy to adopt hydrogen use in large-scale fashion.

Ahead of the federal government’s ban on petroleum-powered vehicles in 2035, some Canadian cities and provinces are eschewing electric vehicles and instead exploring the use of hydrogen-powered vehicles. While EVs possess first mover advantage, they suffer from poor performance in cold weather and grid constraints. 

Alberta, for one, recently commissioned an analysis into the potential conversion of the government's 3,400-vehicle fleet to hydrogen—from sheriffs' cruisers to Alberta Forestry and Parks ranger trucks. Meanwhile, the City of Winnipeg has begun purchasing hydrogen buses and is currently running a competitive procurement for the development of its own hydrogen generation and dispensing facility to support these assets.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

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