Significant Tax Incentives Announced in Canada to Support Investments in Clean Hydrogen Production

Canada is ramping up its financial support for clean hydrogen with the introduction of two investment tax credits detailed in the Federal Government's 2022 Fall Economic Statement.  The announcement comes on the heels of the adoption of the Inflation Reduction Act in the United States, providing competitive incentives to investors fixed upon Canadian hydrogen opportunities.  

Clean Technologies Investment Tax Credit 

As promised in Budget 2022, an investment tax credit will be available, starting in 2023 until the end of 2034, providing a refund equal to 30% of the capital costs for investments in:

• electricity generation systems;
• stationary electricity storage systems;
• low-carbon heat equipment; and 
• industrial zero-emission vehicles and related charging or refueling equipment.

While adherence to certain labour conditions is required to receive the full 30% credit, those that do not will still remain eligible for a 20% credit.

The scope of the "clean technologies" credit is tailored to support the adoption of technologies where the unique attributes of hydrogen offer the greatest benefit.         

Electricity Generation Systems- "Green Electricity" to Produce "Clean Hydrogen"

While support for renewable generation is covered, the credit also extends to nuclear generation with the express inclusion of small modular reactors.  

Extending the application of the credit to systems generating electricity from renewable sources (wind, solar and hydro) and also to non-renewable sources (uranium), results in the emphasis on "clean hydrogen", as opposed to "green hydrogen".

While "green hydrogen" is understood to be produced from renewable energy, the express and repeated reference to "clean hydrogen" signals the importance of the non-emitting nature of the "green electricity" (generated from wind, solar, hydro or nuclear), which is then used to produce the "clean" hydrogen.          

Stationary Storage Systems- Making Room for Hydrogen        

Much is understood and appreciated with respect to the role and importance of batteries in the development of energy storage systems.  However, hydrogen is an energy carrier and offers distinct advantages as an energy storage medium for certain applications.  

Hydrogen can be compressed (to increase its energy density) and stored as a gas in high-pressure vessels (usually steel where hydrogen embrittlement challenges do not otherwise call for the use of high-density polyethylene).       

Provided the systems do not use fossil fuels in their operation, a range of examples are used to describe the type of storage systems that may qualify for the credit.  For example, "compressed air storage" is included, incentivizing work to develop hybrid energy storage systems using compressed air and hydrogen as the energy carrier.    

Low-Carbon Heat Equipment- A Shout-Out to Hydrogen Boilers 

Delivering electric heat through the use of heat pumps can be an energy efficient way to decarbonize heating.  "Air-source heat pumps" and "ground source heat pumps" are expressly referenced as technology that qualifies for the credit.  

While not expressly referenced, there is a case to be made that a hydrogen boiler capable of burning 100% hydrogen (and replacing natural gas boilers) would also qualify.

While heat pumps can deliver deep cuts in carbon emissions compared to existing natural gas boilers, green hydrogen boilers are predicted to reach the same performance standards as natural gas boilers and heat pumps on timelines which may be fast tracked with the provision of the clean technologies credit.     

Industrial Zero Emission Vehicles-  Hydrogen Powered Heavy Duty Equipment   

Hydrogen's energy density and weight (light given its atomic mass compared to a battery) positions it to move heavy vehicles, not (yet) the cars we use to commute.  Think heavy transportation- trucks, trains, agricultural and forestry machinery and the vehicles used for mining and construction.

The credit will provide recovery of up to 30% of the capital costs of investments in these types of hydrogen powered industrial zero-emission vehicles including related refueling equipment.    

Once these industrial vehicles and refueling equipment are ready, where will the hydrogen fuel to power these fleets come from?  

Clean Hydrogen Investment Tax Credit

The Federal Government of Canada is hopeful the hydrogen will be produced here in Canada and have promised a specific Canadian hydrogen production tax credit, to track similar incentives provided in The Inflation Reduction Act (the "IFA") passed by the U.S. Congress and signed into law on August 16, 2022.  

The IFA made green hydrogen cost competitive with natural gas, providing a 10 year clean hydrogen production tax credit resulting in the reduction in the cost of green hydrogen to approximately USD$3.00 / kg. 

The Canadian proposal tracks the approach taken in the IFA, in which carbon intensity tiers will be used to guide the level of support for production.  Under the IFA, support begins when emissions from production of clean hydrogen are 4.0kg of CO2e or less per kg of hydrogen.  The highest level of support is provided when emissions are 0.45kg of CO2e or less per kg of hydrogen. 

The Canadian Department of Finance is launching a consultation on how best to implement its hydrogen production tax credit, based on the lifecycle intensity of hydrogen for the Canadian context and the level of support needed for different production pathways in Canada.

The Canadian investment tax credit is proposed for eligible investments made in 2023 and phased out in 2030.  

Canada looks to introduce tax credits to support clean hydrogen investments (h2-view.com)