The Federal Government has Released its Long-Awaited Hydrogen Strategy: Here’s What’s in Store for Industry

The Federal Government has Released its Long-Awaited Hydrogen Strategy: Here’s What’s in Store for Industry

By: Connor O’Brien, Jamie Gibb, Will Horne, Lama Kahiel, Seán O’Neill , and John Osler

December 21, 2020

On December 16, 2020, the Government of Canada released its long-awaited Hydrogen Strategy for Canada (the “Strategy”).

The Strategy arrives not a moment too soon for industry stakeholders, as energy systems worldwide evolve to meet the growing demand for premium low-carbon energy sources in the fight against climate change. Last Wednesday’s announcement comes on the heels of the Canadian Net-Zero Emissions Accountability Act and the federal government’s pledge to achieve net-zero emissions by the year 2050.

The three-year project behind the Strategy involved consultations with over 1,500 stakeholders and industry groups. The final document outlines various potential roles for hydrogen to play in achieving Canada’s goal of net-zero emissions by 2050, while simultaneously creating jobs and growing the economy.

What are the Key Takeaways?

The Strategy claims that if Canada can properly leverage its competitive advantages in hydrogen production, the country can create more than 350,000 jobs in the sector by 2050 and contribute direct revenues of $50 billion per year. Leveraging these advantages may also offer transformative opportunities for Canada’s oil and gas sector, improve air quality (and therefore health outcomes), increase energy resilience, and contribute significantly to Canada’s decarbonization commitments.

For the moment, the federal government has not announced any new funding related to hydrogen production apart from the previously released $1.5 billion investment fund for low-carbon fuels announced a week prior. While the Strategy does reference tax credits and subsidies as potential government-led measures, it also targets private sector investment as a major driver of the necessary growth. Compared with some international counterparts and potential competitors, including Germany and France, that have already committed billions to their respective hydrogen strategies, Canada is lagging behind in both public and private investment.

At least for the near term and in order to exploit incumbent competitive advantages, the government has singled out Canada’s vast natural gas reserves as a main fuel source for hydrogen production. This is known as “blue” hydrogen which, when paired with carbon capture and storage (“CCUS”) technologies, can substantially lower the emissions intensity of the process.

At the same time, it is worth noting that the unit cost of “green” hydrogen, which uses a non-emitting power source paired with electrolysis, is projected to be on par with blue hydrogen by 2030 and potentially cheaper thereafter. Although less of a focal point in the Strategy, there is acknowledgment that Canada has outstanding renewable resources (including existing hydroelectric generation in B.C., Quebec, Manitoba, and Newfoundland) that can be used to generate green hydrogen, and can do so in a distributed (i.e. decentralized) manner.

In this way, the Strategy recognizes the relative strengths of Canada’s different regions. For instance, Ontario’s nuclear industry has the potential to work synergistically with hydrogen by using off-peak electricity for electrolysis or by using excess steam from nuclear reactors, possibly including the small modular reactors (“SMRs”) of the future, to improve electrolyzer efficiency. Alberta has a clear advantage in blue hydrogen production owing to its enormous natural gas reserves and well-established industry expertise and infrastructure. Industrial and natural resource variation could well prove to be a key advantage for Canada, allowing the country to hedge its bets, compared to competitors that may be more limited in resource types and overall production scope. For more information on Alberta’s hydrogen strategy, refer to our previous blog post.

How is the Strategy Laid Out?

The government’s plan is broken down into three distinct phases: the near term (next five years), the mid-term (2025-2030), and the long-term (2030-2050). Featuring 32 recommendations across eight pillars, the Strategy has no shortage of ideas for how to transform the Canadian hydrogen industry. The eight pillars of the Strategy are:

  1. Strategic Partnerships: engage with public and private actors to leverage Canadian advantages in the space.

  2. De-Risking Investments: implement policies, funding programs, and business models to encourage investments.

  3. Innovation: further support R&D, helping foster collaboration between stakeholders, ensuring Canada maintains its competitive advantage.

  4. Codes and Standards: modernize and develop new codes and standards to remove barriers to development both domestically and internationally.

  5. Enabling policies and Regulation: integrate hydrogen into energy roadmaps at all levels of government.

  6. Awareness: take the lead nationally to ensure individuals are aware of the uses and benefits of hydrogen into the future.

  7. Regional Blueprints: collaborate with different levels of government to facilitate development that is regionally specific.

  8. International Markets: push for hydrogen at an international level to ensure Canadian industries thrive.

Why Canada?

BloombergNEF estimates that clean hydrogen could meet up to a quarter of the world’s energy demand by 2050. Canada has a number of unique features that could offer a competitive edge in the global hydrogen market over the next three decades. These advantages include:

  • Canada’s rich feedstocks of hydroelectric generation, fossil fuel reserves with CCUS, and freshwater resources that can be used to produce hydrogen;
  • Renowned expertise and innovation in hydrogen and fuel cell technologies that produces over $200 million in revenue while employing more than 2,100 people across over 100 companies;
  • Canada’s strong energy sector and skilled labour force that, combined with strategic infrastructure assets, can allow Canada to pivot to hydrogen more quickly;
  • Canada’s well-established international collaborations;
  • Existing export channels, particularly to markets in Japan, South Korea, California, the UK, Germany, and all of Europe. These export channels combined with assets like deep water ports and established pipeline networks will enable Canada to be an exporter of hydrogen to the world; and
  • Canada’s unique starting point as already being one of the top 10 hydrogen producers in the world, with an estimated 3 million tonnes produced per year from natural gas processes. Canada is also home to the largest clean hydrogen production facility in the world that combines natural gas hydrogen production with CCUS for the resulting CO2 emissions.

What Markets are Being Targeted?

Numerous end-use markets for hydrogen have been identified and are on the rise, including transportation, industrial heating and feedstock, and heating for buildings. One of the key advantages of hydrogen is its potential to penetrate traditionally difficult-to-decarbonize market segments, including heavy trucking, aviation, and chemical and steel production. The Strategy appears to be broadly aligned with existing industry priorities in this regard.

Transportation

The federal government has set targets for zero-emission vehicles to make up 30% of sales of light-duty vehicles by 2030 and 100% by 2040. Zero-emission vehicles include battery electric vehicles, fuel cell electric vehicles, and plug-in hybrids.

Fuel cell electric vehicles can use hydrogen directly as a fuel and British Columbia and Québec have already begun deploying hydrogen fueling infrastructure to support its use. Public transit around the world has begun the shift to fuel cell electric buses, with over 2,000 in operation globally, half of which are powered by Canadian technology.

In Canada there is currently a zero-emission bus initiative underway that encourages school boards and municipalities to purchase 5,000 zero-emission buses over the next five years. Fuel cells are also projected to play a vital role in ships, rail, and heavy-duty and medium-duty trucks. The high energy density and fast filling capabilities of fuel cells remove the need for several large batteries and reduce refuelling times.

Industrial & Commercial Heating

Hydrogen can be used for industrial applications where high heat is needed (e.g. metals and chemical production), and hydrogen is garnering attention as a low-carbon heating option for buildings by blending it with natural gas or as a stand-alone alternative. A number of operations internationally and domestically are running pilot projects to determine the feasibility of blending hydrogen with natural gas systems.

As a result, there is real potential for hydrogen to become the new heating fuel of choice in Canada, which would require investment in hydrogen pipelines. This could be accomplished through a combination of retrofits to petroleum pipelines and new builds.

Refining Crude Oil

Currently the largest use of hydrogen around the world is in the refining of crude oil. The majority of hydrogen used in the process is produced on-site either as a by-product or from dedicated facilities. The potential for hydrogen to have a decarbonizing effect on this market segment relies on the incorporation of CCUS technology, which is rapidly evolving in Canada and internationally.

The Bottom Line

The Strategy is a step forward for Canada in realizing the economic and environmental benefits of a thriving hydrogen industry. Although the path ahead shows enormous potential, Canadian governments and stakeholders will need to meet a number of challenges head-on, including the need to make hydrogen cost-competitive with other energy sources in the near-term, meeting substantial infrastructure needs, and increasing certainty for investors.

Overcoming these challenges will require a coordinated effort by the federal government in close cooperation with its provincial counterparts (recognizing their regional differences), alongside ambitious investment from industry.

Our team at McCarthy Tétrault continues to closely follow the development of Canada’s hydrogen industry, as well as international market trends and developments. If you would like more information about the Strategy and what it could mean for your business, we are here to help.

Please contact John Osler, Seán O’Neill, Will Horne, Jamie Gibb or any other member of Power Group or Oil & Gas Group at McCarthy Tétrault with any questions or for assistance.

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