Hydrogen Pathways to Zero in Canada

Canada is poised to be an international leader in producing and using clean hydrogen to reduce GHG emissions and displace our reliance on carbon-intensive fossil fuel energy. Canada’s strategy for realizing on this leadership potential is to leverage our natural advantages in the feed stocks and geology needed to produce abundant, clean, low-carbon hydrogen, while also capitalizing on our established expertise in hydrogen end-use technologies and systems.

But while the pathway to large scale production of clean hydrogen for domestic use and export is arguably becoming clearer in Canada, the pathways for identifying and developing domestic hydrogen end-use markets remains murky. So far, the federal government has focused on modest tax credits and limited direct funding to promote hydrogen end-use adoption. By contrast, many other countries in Europe and Asia, and closer to home in the USA, are taking more aggressive steps through public and private investments and direct subsidies to foster domestic hydrogen use and support deployment of their own hydrogen innovations and end-use market applications.

In this context, what does Canadian leadership in hydrogen mean? And how will Canada fully realize the benefits of this hydrogen leadership?

This bulletin provides a short overview of an emerging Canadian hydrogen policy and program framework, that includes the national Hydrogen Strategy, being developed to support Canada’s leadership aspirations[1]. And, based on the premise that any major energy transition is driven by consumer demand and the usefulness and pervasiveness of end-use technologies, this bulletin concludes by identifying the most promising clean hydrogen end-use applications most likely to foster early adoption of hydrogen technologies in Canada to catalyze the creation of domestic hydrogen markets and help realize Canada’s potential for global hydrogen leadership.

Hydrogen is poised to play a key role in the world’s clean-energy transition. And Canada has the potential to play an outsized role, for the size of its population and economy, in leading this global hydrogen revolution. To chart a course that it hopes will secure Canada’s leadership status, and like many other national governments around the world, the federal government launched its “Hydrogen Strategy” in December 2020. It was presented as a national “call to action” for “seizing the opportunities for hydrogen” in Canada. At more than 100 pages, the strategy is wide-ranging and detailed, but the key opportunities identified can be summarized into two main categories: 1) capitalizing on Canada’s capacity for clean hydrogen production and distribution (supply), and 2) leveraging Canadian expertise and ingenuity for new, hydrogen end-use applications and technologies to displace our (and the world’s) reliance on carbon-intensive fuels (demand).

Successfully developing domestic clean hydrogen supply and demand will lead, according to the Hydrogen Strategy, to approximately 350 thousand new “green” sector jobs and direct revenues for Canadian companies of over $50 billion per year by 2050. The principal reasons for this optimism are two unique, natural advantages that Canada has over most other nations.

Firstly, Canada is rich in the resources needed to produce clean hydrogen. Canada has abundant freshwater and low-carbon electricity from hydro, wind, solar and nuclear power that can support low-carbon hydrogen production. Canada also has abundant fossil fuel reserves and is endowed with a geology that can support significant carbon capture and storage critical to the production of low carbon ‘blue’ hydrogen.

Second, Canada has long experience with and developed expertise in hydrogen systems and technologies and is home to some of the worlds leading hydrogen and fuel cell companies. Canada has been a leader in standardized vehicle fuel cell stack production pioneered in Vancouver BC. Today, more than half of the worlds fuel cell buses in operation use Canadian developed fuel cell technology. And hydrogen-powered trains operating in Germany are using Canadian-made fuel cell powertrains.

With the launch of the Canadian Hydrogen Strategy, the federal government is moving forward with the development and announcement of a suite of hydrogen and clean technology initiatives intended to spur investment in both clean hydrogen production and the adoption of hydrogen end-use technologies and systems.

To drive investment and growth in Canada for clean hydrogen production, the federal government has taken multiple steps.

Net Zero Accelerator (NZA) is an $8 billion program that supports projects that enable the decarbonization of large-emitters, clean technology, and industrial transformation.

Clean Fuels Fund is a $1.5 billion fund established in 2021 to de-risk capital investment required to build new or expand existing clean fuel production facilities, including facility conversions. The Clean Fuels Fund covers many renewable fuels, such as advanced biofuels and sustainable aviation fuel, but also includes support for clean hydrogen projects in its mandate.

More recently, the Government of Canada has introduced three tax credits meant to encourage the transition towards a net-zero economy in its 2023 budget. Of most direct relevance to hydrogen is the Clean Hydrogen Investment Tax Credit, a refundable tax credit that incentivizes clean hydrogen production, with credits ranging from 15-40% depending on the carbon intensity of the hydrogen.

This tax credit can be used to offset the cost of buying and setting up eligible equipment for projects that produce hydrogen through the process of electrolysis or natural gas. However, if natural gas is used, emissions must be reduced using carbon capture, utilization, and storage.

The available tax credit rate varies based on the carbon intensity of the hydrogen produced:

Additionally, eligibility for the full Clean Hydrogen Investment Tax Credit rate is available based on a particular project's carbon intensity will be dependent on the project's adherence to certain prescribed labour requirements. Specifically, an organization must:

The introduction of these tax credits that support clean hydrogen production in Canada follows on and has been seen in part as a response to, the USA Inflation Reduction Act (“IRA”) signed into law by the Biden administration in 2022, which created a generous clean hydrogen production tax credit to encourage the production of clean hydrogen in the United States, among other incentives. The IRA sets up the USA to be a major competitor for Canada in the supply of global hydrogen markets.

Russia, which has the largest proven natural gas reserves in the world, has been using energy supply to Europe for leverage in support of its invasion of Ukraine. Consequently, Canada and its NATO partners have been working together to reduce the West’s dependence on Russian oil and gas imports and using this disruption as an accelerator for the adoption of clean energy from reliable sources.

It is against this backdrop that Canada and Germany announced a joint declaration of intent in August 2022 in respect to the export of clean Canadian hydrogen to Germany. Through this bilateral collaboration the first hydrogen shipments are expected to arrive in Germany by 2025.

Canada previously signed a memorandum of understanding with the Government of the Netherlands in 2021 to jointly promote investment in clean hydrogen projects and work together to set up export-import corridors for clean hydrogen between Canada and the Netherlands as a gateway to Europe.

More recently, European Commissioner, Ursula von der Leyen, stated during a March 2023 visit to Canada that the EU wants to buy hydrogen from Canada and views Canada as a “prime potential partner.”

Beyond Europe, Canadian hydrogen is enjoying ongoing demand from Asia, as it was recently reported that Calgary-based ATCO Group is engaged in advanced talks with Japanese utility Kansai Electric Power to ship hydrogen from Canada’s west coast to Japan.

These initiatives represent important steps in Canada’s plan to establish itself as a top global exporter of hydrogen, as described in the Canadian Hydrogen Strategy.

According to the Canadian Hydrogen Strategy, global demand for clean hydrogen is increasing at a rate of a projected “tenfold” increase anticipated by 2050. And while Canada may be well positioned to capitalize on this growth through export, there is an acknowledgement that the creation of domestic Canadian markets for hydrogen use “must lead”.

Major changes to energy systems are driven by consumer demand, and that demand is driven by the usefulness and pervasiveness of end-use technologies. To power an energy transition, society needs to focus on supporting new end-use technology through public investment, policy incentives and novel ways for using these technologies.

Several federal initiatives have been launched to support the adoption of hydrogen end-use technologies and systems.

Greenhouse Gas Pollution Pricing Act is the cornerstone of the federal government’s climate change legislation, establishing a national price on carbon, thus driving demand for zero-carbon fuel sources such as hydrogen.

Emissions Reduction Plan 2030 has set a target of 35% of total medium- and heavy-duty vehicle (“MHDV”) sales being zero-emission vehicles by 2030, thus creating a significant strategic opportunity for manufacturers of hydrogen fuel cell-powered MHDV.

The 2022 federal budget contained the following measures to encourage hydrogen use:

The federal government also supplied further guidance in the 2023 federal budget regarding the Clean Technology Investment Tax Credit announced in the 2022 Fall Economic Statement. This tax credit is relevant to hydrogen because included on the list of eligible property are industrial zero-emission vehicles and related charging or refuelling equipment, including heavy-duty hydrogen trucks.

The budget provides that the Clean Technology Investment Tax Credit is equal to 30% of the cost of eligible property that is acquired and becomes available for use on or after March 28, 2023, and before 2035. The tax credit rate will fall to 15% in 2034 and will be eliminated in 2035.

Finally, the federal government is introducing a new 30% refundable investment tax credit for clean technology manufacturing and processing. The Investment Tax Credit for Clean Technology Manufacturing is available in respect of the capital cost of eligible property associated with certain manufacturing and processing activities.

Eligible activities for this tax credit that you will find relevant include:

Assessing the potential of hydrogen as a clean fuel that will help Canada achieve its decarbonization goals is challenging, in part, because hydrogen can be applied to diverse end-uses that are at varying states of technological development, but also because commercial deployments are only at nascent stages of market-readiness.

Unlike most fuels that are primarily used in only two or three distinct applications, hydrogen can be used as a substitute for many fuels - diesel, gasoline, natural gas, and kerosene. This versatility underscores hydrogen’s promise for decarbonizing Canada's economy, but it also poses a basic challenge of where and how best to get started.

What follows is a list of the 5 most promising end-use applications that could help to catalyze early demand for clean-hydrogen production in Canada, while also preserving Canadian experiential leadership in hydrogen end-use technologies, developing, and incorporating systems integration and know-how, skills development, and training in new, emerging commercial hydrogen markets.

Like any ‘best of’ list, there is a measure of subjectivity involved here. But the basis for this list is a consideration of technical feasibility and economic practicality, as well as the availability of other decarbonization pathways that may be more attractive than hydrogen for early adoption in the market.

Canada has a robust and growing movie and television production industry from coast to coast, including production hubs in Vancouver, Toronto, Montreal, Calgary, and Halifax. Major studios and production companies are all committing to reduce GHG emissions significantly in the coming years. Today, productions in Canada, like those in Hollywood and internationally, often rely on carbon-intensive diesel fuelled mobile power generation, to supply power on location.

Hydrogen is a practical solution to eliminating emissions for movie and TV productions. While hydrogen energy comes at a small cost premium compared to diesel, the total additional cost of power generation is extremely low relative to production budgets. Hydrogen systems can provide more energy at a lower cost than battery-based systems when the power demand is relatively high (e.g., >80 kW, >1,500 kWh/day). Energy production from hydrogen is clean, quiet, and free of carbon emissions, all attributes that the star talent and the viewing public want.

In construction, many large-scale projects require on site power within a time frame, or for a duration, that makes it impractical or impossible to serve the site with a connection to the electrical grid. Most projects rely on diesel fuelled mobile power generation, to supply power in remote locations, along highways, and even in cities.

To be of use, hydrogen gen sets can provide a suitable level of power output (150 – 500 kW) and be equipped with user friendly controls and suitable interfaces. In addition, the hydrogen fuel must be packaged to be compact enough to be easily located and moved around on the construction site, while also providing enough energy to last a full day.

These equipment configurations and supply options are not currently offered in a commercial manner, but they could be. As with motion picture and TV production, hydrogen provides a practical solution to significantly reduce emissions at construction sites, with broad based scale up can occur within 3 – 7 years.

In Canada there are many warehouses and other facilities with heavy material handling requirements that must be located indoors for protection from the elements, or to ensure cleanliness. Many of these facilities rely on battery electric forklifts, however this solution is often impractical for larger operations due to duty cycle performance issues, grid supply issues, and recharging space and procedure issues.

Although the fundamental technologies required exist, many locations with mid-sized fleets (10 – 30 trucks) operating three shifts per day are too small to justify the investment in on-site hydrogen production and many others lack the space to accommodate large tube trailers of gaseous hydrogen. Although hydrogen energy comes at a premium compared to gasoline and propane, the total additional cost of fuel is relatively low relative to operational budgets. Hydrogen systems can provide consistent power levels over the full duty cycle (as compared to battery-based systems), and refuelling is fast. Energy production from hydrogen is clean, quiet, and free of carbon emissions.

Hydrogen powered forklifts are already in use in Canada, but their deployment remains limited. Properly sized and configured delivery and refueling systems are currently in advanced development and should be ready for accelerated deployment in Canada before the end of 2024. Broad based scale up can occur within 3 – 7 years.

The vast majority of freight and passenger locomotives in North American already use electric motors for propulsion, and the electricity is generated onboard using diesel-fuelled generators. CP Rail is currently converting several of its locomotives to run on clean, zero-emission hydrogen fuel, by swapping out the diesel generator for fuel cells and replacing the diesel fuel tanks with cylinders that carry compressed hydrogen onboard. The first locomotives that CP Rail is converting are road switchers, commonly used to shunt railcars between railyards within a region. By beginning with regional service in (and between) Edmonton and Calgary, CP Rail will be able to refuel their converted locomotives in their own railyards in Alberta.

Safety is paramount in North American’s railway industry, and this means that transformative, technology-based innovation can take time to become fully integrated. However, Canada’s railway safety regulatory framework is accommodating of technological advancement through trials, which is an advantage for Canada’s railway companies to lever towards a low-carbon transportation future under Canadian leadership.

CP’s Hydrogen Locomotive Program has the potential to produce a foundational base of experience in hydrogen conversions, that may support the adaptation to the many thousands of freight locomotives currently operating throughout North America, thus establishing an operationally-feasible pathway to decarbonization. It will also establish an initial network of refuelling stations that have the potential to be expanded outward through Canada’s railways.

Commuter passenger trains usually operate within a contained region along defined routes, and this makes hydrogen refuelling easier, since the storage and dispensing stations can be strategically sited, owned and operated by the rail transit authority. The first passenger commuter train was deployed into revenue service in Germany in 2019. Its success is motivating a spree of “hydrail” procurements by commuter transit authorities worldwide.

Within just 2 – 3 years, the growth of hydrogen freight and passenger rail could be underway. Broad based scale up can occur within 5 – 10 years.

Port facilities (including marine, airport, and rail hub facilities) operate a significant number of heavy-duty vehicles that remain on-site for the purpose of shunting cargo and shipping containers from one “dock” to another 24/7. Many of these facilities rely on diesel fuelled trucks operating on an aggressive duty cycle (stop/start, ramp up, idle) that is relatively inefficient, and produces significant levels of emissions.

There are several factors that make this specific market attractive for hydrogen. The development of appropriately sized and configured delivery supply chains will create hydrogen supply options and lower costs. Although hydrogen energy comes at a premium compared to diesel, the total cost of fuel is relatively low relative to port operating budgets.

Heavy duty hydrogen truck platforms have been demonstrated in container drayage applications, such as in the Port of Los Angeles’ Zero- and Near-Zero Emissions Freight Facilities. More hydrogen-powered heavy duty trucks are under development for other applications and should be ready for use in Canada within the next 2 – 3 years. Properly sized and configured hydrogen production, delivery and refueling systems are in development and should be ready for initial deployment in Canada before the end of 2026. Broad based scale up can occur within 5 – 10 years.

Most of Canada’s remote communities are home to Indigenous peoples. These remote communities that are not serviced with grid-supplied electricity, or only partly so, are often reliant on large diesel-fueled power generators, which are both costly to operate and polluting. Hydrogen-fueled combustion engines or fuel cells can provide a low-carbon alternative, especially if local renewable power is used to produce the hydrogen. Indeed, the production of hydrogen can store large volumes of renewable energy from local wind, solar and hydroelectric projects, thus improving overall resilience and economic performance and allowing Indigenous communities and businesses to become clean hydrogen producers and distributors both for neighboring communities and other remote industries like mining and forestry. With effective consultations, public funding and the requisite political will deployment of clean-hydrogen technologies in remote and Indigenous Canadian communities can occur within the next 3-5 years

Honourable Mention (Next Best) List of Hydrogen End-Use Applications for Early Adoption in Canada

The early success of pilot projects focused on port container drayage shunt trucks is helping to demonstrate the use-case for hydrogen in larger vehicles. Medium and heavy-duty trucks are more difficult to electrify using rechargeable batteries, because the size and mass of the battery packs competes for the available payload capacity of the truck. This can erode the revenue generating potential of a delivery fleet. Hydrogen fuel, by contrast, is a lighter, denser form of stored, onboard energy. Thus, fuel cell-electric powertrains are an attractive alternative. Furthermore, delivery vehicle fleets that return-to-base can be refuelled at a single, fit-to-purpose hydrogen dispensing station. A within-the-fence hydrogen fleet solution can thus help fulfill the zero-emission, decarbonization goals of many commercial fleets in a manner that is rapid, convenient, and independent of any constraints associated with the local grid power supply.

Transit buses are an ideal application for hydrogen systems. Due to their size, transit buses can accommodate larger hydrogen tanks than in most other vehicle types. This extra space allows hydrogen to be stored at lower pressure, which reduces refuelling costs. The return-to-base operating pattern of transit buses also facilitates scheduled refuelling at depots, the efficiency of which further reduces refuelling cost. The fast-refuelling potential of hydrogen makes fuel cell-electric buses more scalable for large fleets at less infrastructure cost compared to the rechargeable battery-electric bus fleets.

The wheels on large mining trucks are often driven by electric motors, and this electricity is typically produced onboard using diesel generators. AngloAmerican is currently demonstrating the use of hydrogen fuel cells to generate onboard electrical power, providing an off-diesel solution for mining trucks. Over-the-road ore haulers can also be powered by hydrogen fuel, using the same fuel cell powertrains being demonstrated by many Class 8 semi truck manufacturers.

Coal is traditionally used to reduce iron ore into pure iron (referred to as Direct Reduced Iron, DRI), which is then used to make steel. Carbon from the coal bonds with the oxygen in the iron ore, releasing carbon dioxide to atmosphere. Hydrogen can also serve as a DRI agent, which eliminates the carbon dioxide emissions from the consumed coal, leaving only water emissions in its place. Heat from the combustion of hydrogen can also be used in parts of the steelmaking process to further displace coal and, in some cases, use of natural gas, for example in integrated steel mill blast furnaces.

Cement plants are established around supplies of water and electricity, and the cement-making process also generates a significant amount of waste heat. These are resources that can power water electrolysis, which yields pure oxygen and hydrogen. The pure oxygen can be used in an oxy-fuel combustion process to generate additional heat that improves the efficacy of carbon capture from the plant flue gases, which can reduce the overall cost of decarbonizing cement production. Potentially, the use of pure oxygen instead of air (which is only one-fifth oxygen) for fuel combustion could also reduce the volume of gas flow through the system, further reducing cost of cement production. The hydrogen from electrolysis can be used as a fuel alternative for cement plant operations, including displacing diesel used by cement trucks and ready-mix concrete trucks.

Recharging the batteries of electric vehicles takes time and can place significant demands on the local power distribution grid. For light-duty vehicles operations that run all day, ever day, such as in taxi and limousine service or in ridesharing, removing electric vehicles from service to recharge may not be practical. However, refuelling with hydrogen can take less than five minutes and yield more than 500 km of driving range before the next refuelling for a typical fuel cell-electric vehicle.

Fuel cell electric vehicle models can thus provide a pathway to electrify light-duty vehicle fleets in commercial service, thus achieving zero-emissions performance.

Hydrogen is commonly used in the production of petrochemical fuels and synthetic fuels. By using hydrogen produced from low-carbon feedstocks, the carbon-intensity of both conventional and synthetic fuels can be significantly reduced. Indeed, some processes for producing synthetic fuels can rely on low-carbon hydrogen as well as carbon captured from streams of industrial carbon dioxide emissions to produce liquid hydrocarbon fuels that are functionally equivalent to petrochemical fuels but approaching levels of carbon intensity that are net-zero.

Sustainable aviation fuel (SAF) is an example of a synthetic fuel made using low-carbon hydrogen. As a liquid, SAF retains the energy density of conventional jet fuel, and can be blended into supplies of aviation fuel, enabling the decarbonization of air transport with optimal convenience.

To support a population of 9.7 billion by the year 2050, as estimated by the United Nations, agriculture production will have to increase by 70 per cent over the next three decades. This trend will drive a dramatic increase in the global demand for fertilizers and ammonia.

Canada is the third largest producer of the primary fertilizers globally, supported by the strength of our potash and nitrogen production facilities. Canada ranks in the top ten of countries producing ammonia used to make nitrogen fertilizers. The traditional method of producing ammonia involves taking hydrogen from natural gas and combining it under pressure with nitrogen in the air to produce ammonia. This process, however, generates significant GHG emissions.

Using clean hydrogen to decarbonize the production of ammonia and fertilizer manufacturing process will help reduce the carbon footprint of food production and farming in Canada.

[1] This bulletin is focused on federal initiatives, policies and programs. There is a growing list of provincial programs being developed and deployed to support clean hydrogen production and adoption that are beyond the scope of this bulletin, but will be covered in Fasken hydrogen-related publications to follow.

[2] Special thanks to Rymal Smith of Change Energy Services and Bob Oliver from H2GO Canada for their expertise and assistance in curating this list of the top clean hydrogen end-use applications for Canada.

Contact Dan Brock, Co-Lead of Fasken’s Hydrogen Energy Advisory Group to learn more about Canadian policies and programs to support clean hydrogen or to discuss how the growing list of hydrogen end-use applications might be right for your business.

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