The need to transition from high carbon-emitting fossil fuels to cleaner, renewable energy remains prominent as the threat of climate change continues. While the focus has traditionally been on solutions such as wind, solar and hydroelectric power generation, it now appears that nuclear power, energy storage and hydrogen may prove to be important tools in achieving Canadian low carbon goals. Our previous piece discussed some of the technical challenges that green hydrogen producers in Canada may face, and the need to establish the legal and regulatory groundwork to facilitate hydrogen production, storage, and distribution (see Challenges in developing the hydrogen industry: More than hot air – Part 1). In Part 2, we discuss ways to overcome some of these challenges and to kick start Canada’s energy revolution.

Hurdles to clear

Some of the hurdles discussed in “More than hot air – Part 1” for hydrogen producers to consider include:

  • Land Acquisition
  • Zoning
  • Permits
  • Regulatory hurdles
  • Production and transport
  • Buyers
  • Offtake Agreements
  • Other Contracts
  • Risk Allocation

How do we overcome some of these challenges in order to introduce more green hydrogen projects in Canada and create a greener future? While various programs and projects have been created to entice hydrogen development in Canada, we propose a few ideas to accelerate this process.

Ways to overcome hurdles

Canadian governments have generally internalized the goal of reducing greenhouse gases and promoting hydrogen development. Canada has implemented the “Hydrogen Strategy for Canada: Seizing the Opportunities for Hydrogen, A Call to Action” (December 2020), and Ontario itself promotes hydrogen development in “Ontario’s Low-Carbon Hydrogen Strategy.”[1] While these initiatives are a great start, there are a number of things Canadian governments could consider doing to accelerate the development of hydrogen projects in Canada:

  • An omnibus approval for projects covering multiple levels of government processes in one condensed approval
  • Introducing a requirement for provinces and/or municipalities to designate a certain amount of land as eligible for green hydrogen projects with reduced approval obligations
  • Using Crown land for green hydrogen projects
  • Making it easier for project developers to take advantage of investment tax credits and other tax benefits

The need to support the creation of the hydrogen industry and induce others to contribute to necessary developments should be at the forefront of the minds of our legislators. Canadian governments can look to past project accommodations, such as including an omnibus approval for hydrogen production facilities similar to the Renewable Energy Approval (“REA”) under Ontario’s Green Energy Act[2] (the “Ontario Act”).  To expand the green hydrogen industry in Canada, the government can also consider what other countries are doing, beyond adopting a tax credit regime like the U.S.

Omnibus approval

Renewable energy projects can be subject to a wide variety of approvals and permits based on the type and size of the project. In addition, a developer may require approvals from a number of regulatory bodies at the federal, provincial and municipal levels. The onus is on the developer to ensure that their project meets all regulatory requirements. Given that green hydrogen projects are relatively new in Canada, this may pose a deterrent for developers so long as the regulatory landscape remains unclear and varies between provinces, and even between municipalities.

A potential solution to this may be to create one omnibus approval for green hydrogen projects that will cover most or all regulatory requirements. This has already been done in Ontario with the REA, which involved one application under the Ontario Act. To cover most provincial and municipal approval processes, the Ontario Act effectively exempted renewable energy projects (the “Projects”) from certain provisions of the Planning Act,[3] which enabled land owners to enter into leases for the siting of renewable energy generation facilities for up to 50 years, and exempted Projects from restrictions arising from official plans, zoning by-laws and any development permit processes.[4]

However, effective January 1, 2019, the Ontario government passed the Green Energy Repeal Act, 2018,[5] which changed the Planning Act to restore municipal authority over siting renewable energy projects.[6] Leases for Projects with a term of 21 years or longer now require Planning Act consent if for less than an entire property, and zoning restrictions are again applying to projects. Developers that want to introduce a large renewable project now need to show demand for the electricity they will generate in order to get an approval, in addition to meeting other requirements, such as under the Planning Act.[7] While some municipalities encouraged green energy project development, many Ontario communities resented the loss of control over the siting of projects, and were pleased to see the repeal of the legislation. The lesson learned should not be that there is an inherent problem with there being only one government approval process for a project, but rather that no level of government or public participation should be excluded from the review process for such an omnibus approval.

Municipal requirements for designating a certain amount of land for green hydrogen projects

As stated, when the Ontario Act was repealed, it restored municipalities’ planning authority related to siting renewable energy generation facilities under the Planning Act. If municipalities continue to have fulsome control over reviewing and approving Projects, then it may be beneficial to have a requirement that a certain amount or percentage of vacant land within a municipality be designated for hydrogen-related facilities. Designating a certain amount of land for green hydrogen facilities could induce municipalities to better work with project developers, but without removing municipal oversight completely. Municipalities could designate areas suitable for project development similar to how they designate land for industrial development.

Using Crown land for green hydrogen projects

Crown land in Ontario is managed by the Ministry of Natural Resources and Forestry[8] and is not subject to the Planning Act. Activities on Crown land must align with land use planning principles and every Crown land-related decision by the Ministry takes into account factors such as socio-economic benefits and environmental ecological impacts.[9] It may be beneficial to develop green hydrogen facilities on Crown land in order to incentivize project development without having to negotiate the process of municipal approvals.

Pre-approvals for certain aspects of green hydrogen production, storage and distribution

If having one omnibus approval that covers all aspects of hydrogen production, storage and distribution is not deemed palatable given the renewable energy experience in Ontario, it may be more realistic to have certain pre-approvals put in place for the hydrogen industry. For example, there could be a blanket approval throughout a province allowing the transport of a certain percentage of ammonia in pre-existing pipelines, with regulations amended to allow for the inclusion of ammonia. There could also be pre-approvals put in place for hydrogen facilities to have the ability to convert hydrogen into ammonia without any further permits or consents.

Taking advantage of investment tax credits and other tax benefits

The federal government introduced new investment tax credits in the 2023 Budget[10] for wind, solar, energy storage and other clean-energy technologies. Most notably, the “Clean Hydrogen Investment Tax Credit” introduced a refundable 40% investment tax credit for investments made in clean hydrogen production. The Clean Hydrogen Investment Tax Credit also introduces a 15% tax credit for equipment needed to convert hydrogen into ammonia in order to transport the hydrogen; although it only applies to the extent the ammonia production is associated with the production of clean hydrogen.[11]

Evan Wilson, Senior Director of Policy and Government Affairs Canada, noted that “[t]he choice to pursue investment tax credits for clean technology, like wind, solar, storage and green hydrogen, will allow Canada to take a competitive lead in accelerating the decarbonization of the energy sector.”

The 2023 Budget reflects a federal government desire to accelerate the decarbonization of the energy sector. However, in order to promote this goal and attract financing for these projects, project developers must be aware of the various tax incentives available to them at both the federal and provincial level. It may also be beneficial for a corporation to structure itself as a Canadian-Controlled Private Corporation (“CCPC”) in order to take advantage of tax incentives only available to CCPCs. Even if a corporation is not Canadian-controlled, it can still be considered a CCPC if it meets certain criteria. In Canada v. Bioartificial Gel Technologies (Bagtech) Inc., 2013 FCA 164, the court found that even though European investors owned 62.5% of the voting shares of Bagtech, Bagtech was considered a CCPC because all of the shareholders entered into a unanimous shareholder agreement with a provision that the Canadian resident shareholders were entitled to elect a majority of the directors, among other considerations.

Furthermore, project developers could take advantage of the accelerated investment credit established through the enhanced first-year allowance for certain eligible property that is subject to the capital cost allowance rules. As proposed in the 2021 Budget, “accelerated capital cost allowance for clean energy equipment was extended to equipment used in pumped hydroelectric energy storage, renewable fuel production, hydrogen production by electrolysis of water, and hydrogen refuelling.”[12]

Under Classes 43.1 and 43.2 in Schedule II of the Income Tax Regulations, “certain capital costs of systems that produce energy by using renewable energy sources or fuels from waste or that conserve energy by using fuel more efficiently are eligible for accelerated capital cost allowance.” In addition, the Income Tax Regulations allow certain expenses to be fully deducted in the year they are incurred if they are associated with the development and start-up of renewable energy and energy conservation projects. These deductions can be carried forward indefinitely and deducted in future years, or transferred to investors under a flow-through share agreement.

Providing clear guidance to project proponents and investors as to how these tax incentives work and allowing them to be allocated flexibly, such as where certain partners in a project are tax-exempt or low-tax entities (for instance, municipalities, government-owned, arm’s length companies or First Nations-related entities), would be valuable in insuring that the incentive programs put in place are utilized to bring projects to commercial operation.

Conclusion

Overcoming hurdles in the Canadian green hydrogen industry will be a team effort that starts with laying the proper legal and regulatory groundwork to facilitate hydrogen production, storage and distribution. To the extent hydrogen is a tool available to help reduce carbon emissions, Canada is well-positioned to reap rewards if it capitalizes on the opportunity to develop a regime for the hydrogen industry that benefits developers, financers, and consumers alike.

Miller Thomson is able to advise on all aspects of a project, from due diligence to legal and regulatory analysis, to advocacy with relevant authorities, to financing, to contract negotiation and drafting.  Please reach out to our national ESG and Carbon Finance group with any questions or to discuss how we can best assist.

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[1] Canada’s Minister of Natural Resources, “Hydrogen Strategy for Canada: Seizing the Opportunities for Hydrogen, A Call to Action” (December 2020); Ministry of Energy, “Ontario’s Low-Carbon Hydrogen Strategy.”

[2] S.O. 2009, c. 12.

[3] RSO. 1990, c P.13.

[4] Paul Manning & Joanne Vince, “Municipalities and the Green Energy Act: Benefits, Burdens and Loss of Power” (January 2010), online: Municipal World https://www.willmsshier.com/docs/default-source/documents-downloads—compliance-enforcement/municipalities-and-the-green-energy-act-update.pdf.

[5] S.O. 2018, c. 16.

[6] https://ero.ontario.ca/notice/013-3800.

[7] Ibid.

[8] Ministry of Natural Resources and Forestry, “Crown land management” (March 2023), online: https://www.ontario.ca/page/crown-land-management#:~:text=Crown%20land%20in%20Ontario%20is,of%20most%20lakes%20and%20rivers.>.

[9] Ibid.

[10] Budget 2023, “A Made-in-Canada Plan: Strong Middle Class, Affordable Economy, Healthy Future” (2023), online: https://www.budget.canada.ca/2023/home-accueil-en.html.

[11] Budget 2023, “Chapter 3: A Made-In-Canada Plan: Affordable Energy, Good Jobs, and a Growing Clean Economy” (2023), online: https://www.budget.canada.ca/2023/report-rapport/chap3-en.html.

[12] “Tax Savings for Industry: Class 43.1 and Class 43.2 and Canadian Renewable and Conservation Expenses” (2023), online: Government of Canada https://natural-resources.canada.ca/science-and-data/funding-partnerships/funding-opportunities/funding-grants-incentives/tax-savings-industry/5147.