On May 25th, 2021, British Columbia amended its Greenhouse Gas Reduction Regulation (made under BC's Clean Energy Act) to authorize regulated gas utilities to produce, purchase and distribute specified types of hydrogen (the "Amendments"). The Amendments represent one of many strategies that legislators and regulators have adopted to facilitate the introduction of cleaner forms of technology to the highly regulated energy sector. The reduction of existing regulatory hurdles, coupled with increased legislative prescriptions to reduce Greenhouse Gas ("GHG") emissions, are creating an environment that is conducive to investment and M&A in the hydrogen sector.
In December 2020, the federal government published a policy document entitled A Healthy Environment and a Healthy Economy which provided aggressive targets for Canada to reduce its greenhouse gas emissions and to ultimately become carbon neutral by 2050. Subsequent developments are further transitioning Canada's GHG reductions policy to a binding legal regime. Notably,
- the Supreme Court of Canada approved the constitutional validity of the Greenhouse Gas Pollution Pricing Act earlier this year; and
- Bill C-12: An Act Respecting Transparency and Accountability in Canada's Efforts to Achieve Net-Zero Greenhouse Gas Emissions by the Year 2050 received royal assent on June 29, 2021.
Hydrogen is widely viewed as an emerging technology that will assist Canadians to achieve GHG reductions targets as it is a zero-carbon emission fuel source when combusted. The federal government published a Hydrogen Strategy for Canada (the "Hydrogen Strategy") in December 2020 that provides a framework to harness hydrogen's potential as a tool to achieve the transition to cleaner sources of energy and achieve GHG reduction targets. Furthermore, various provincial governments have published similar policy documents, including Ontario's Strategy Discussion Paper, and more recently, the B.C. Hydrogen Strategy.
The Hydrogen Strategy states that regulatory incentives to drive hydrogen adoption are an important step to unlocking hydrogen's potential to enable Canada to become carbon neutral by 2050. The Amendments further this objective.
The Amendments add the production, purchase and distribution of specified types of hydrogen as a new "prescribed undertaking" under section 18 of the Clean Energy Act.
Section 18 of the BC Clean Energy Act provides gas utilities with the regulatory authorization and rate recovery to participate in prescribed projects, programs, contracts or expenditures that are aimed to reduce GHG emissions in the province, and to recover the costs up to a prescribed amount that are incurred from such undertakings.
Notably, the Amendments allow public gas utilities to participate in the following activities for eligible types of hydrogen:
- the production or purchase, and distribution of hydrogen through the natural gas distribution system to the customers of that public utility or of another public utility; and
- the purchase and provision of hydrogen outside the natural gas system to the customers of that public utility if it is to be used to replace, at least in part, natural gas derived from fossil fuels.
The relevant undertaking is limited to the following types of hydrogen:
- that is primarily derived from water using electricity that is generated primarily from clean or renewable resources (often known as green hydrogen); and
- that is waste hydrogen purchased by the public utility, as will be defined by regulation.
Broader regulatory context
Due to the highly regulated nature of Canada's power sector, the capacity to unlock the commercial potential for hydrogen in Canada will be substantially influenced by commercial entities' abilities to clear existing regulatory hurdles. In this respect, the Amendments represent one of the many policy tools that different jurisdictions are introducing to facilitate innovation and the introduction of greener technologies such as hydrogen.
A prevailing view is that hydrogen will be best positioned for commercial viability by creating local hydrogen hubs where a full hydrogen value chain is developed in suitable locations. Commercial entities will be largely dependent on public utilities to purchase, transport and deliver the commodity to customers. However, public utilities are inherently risk averse and operate in regulated environments where innovation is challenging, as they are typically only able to recover the costs of activities that are proven to be prudently incurred.
In a recently published article "Canadian Energy Regulators and New Technology: The Transition to a Low Carbon Economy"1, Gordon Kaiser discusses how Canadian energy regulators have historically been reluctant to fund new technology through rates, which has served as an obstacle to innovation in the energy sector. Kaiser identifies measures that have been adopted by various energy regulators in response to this challenge, which include:
- pilot programs to introduce new technologies for test periods, for example, the pilot program approved by the Ontario Energy Board to study the effects of hydrogen blending in the natural gas distribution system;
- collaborative platforms between industry actors and regulators such as the Ontario Energy Board's Innovation Sandbox initiative;
- rate-payer funded innovation funds; and
- amendments to the regulators' statutory objectives "to facilitate innovation in the electricity sector."2
While many of the above measures provide regulators and public utilities with tools to facilitate the introduction of greener technologies within their respective regulatory environments, the Amendments go a step further in providing regulatory certainty: the Amendments constitute explicit legislative directions that permit gas utilities to acquire and supply specific types of hydrogen, and to recover specified costs of such undertakings. It will be interesting to see if other provinces introduce similar legislative changes.
Conclusion: Increased Investment and M&A
Legislative directions and social incentives for industry to reduce their GHG emissions, coupled with the regulatory treatment that is adapting to facilitate the introduction of greener technologies, are creating conditions favorable to increased investment in the Canadian hydrogen sector. Furthermore, international cooperation - such as the memorandum of understanding signed between Canada and Germany to establish an energy partnership that supports the production, usage and trade of clean hydrogen - is signaling government support for developing a robust hydrogen industry, and is also laying the framework for Canadian hydrogen to reach foreign markets. As such, we expect Canada to follow global trends of increased M&A activity in the hydrogen sector.
The authors would like to acknowledge the support and assistance of Aaron Koch, summer student.
1. Gordon E. Kaiser, "Canadian Energy Regulators and New Technology: The Transition to a Low Carbon Economy" (2021) 9:2 Energy Regulation Quarterly.
2. Ontario Energy Board Act, 1998, S.O. 1998, c. 15, Sched. B, s. 1(1)(4)
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