There is a buzz around hydrogen. It comes in many iterations—geological, low-carbon, and conventional, and everything in between—and has seen billions of dollars of investment across the world. Depending on how hydrogen is made, it is labelled green when manufactured using renewable power, and blue when using natural gas and capturing the emissions, although several other ways of producing hydrogen exist. Its properties as an energy carrier and a chemical feedstock promise to make significant contributions to decarbonizing the world.

Canada can play a role here to meet continental, perhaps even global, demand.

For now, the country’s hydrogen production remains modest: we produce about 3,500 tonnes of low-carbon hydrogen, several orders of magnitude less than the three million tonnes of fossil-based, carbon-emitting hydrogen it consumes to service its oil and gas, petrochemical, and fertilizer sectors. Scaling up low-carbon hydrogen production to replace this would help Canada achieve its Net Zero goals, but it has a long way to go—in technology, regulations and application—before it can emerge as a formidable alternative to conventional hydrogen and fossil fuels.

The good news is that progress is already underway. Since the federal government published its hydrogen strategy in 2020, 80 low-carbon hydrogen projects valued at over $100 billion in investment have been announced or are under consideration or development. Provincial strategies are taking shape and pilot projects, across applications from steel to space heating, are demonstrating hydrogen’s potential to replace fossil fuels and lower emissions in areas where it has not traditionally been applied. And with at least 13 known partnerships between hydrogen proponents and Indigenous communities already established, a hydrogen-fueled future in Canada could be built on a strong foundation of Indigenous engagement.

Hydrogen could be one of the pillars of a decarbonized Canada. Canada’s 2020 hydrogen strategy projected production trebling to 21 Mt per year by 2050, accounting for a third of Canada’s final energy consumption—an ambitious growth trajectory.

In theory, hydrogen could flow through natural gas distribution lines, fuel heavy-duty trucks that are the backbone of inter-regional trade, and burn in power plants to keep the lights on in homes, all while lowering emissions if produced cleanly. It could also form part of a new export industry, transporting energy from the East Coast’s best-in-class wind resources to Europe and support the continent’s energy independence from natural gas.

But as the federal government’s May 2024 strategy update shows, a lot hinges on which applications see uptake of hydrogen in favour of other solutions. Demand could vary significantly, from 3 to 20Mt/year—that’s a 17Mt/y spread, suggesting uncertainty around hydrogen’s potential.

This uncertainty stems from hydrogen’s innate complexities and the competition it faces from other clean technologies. Here are some hurdles the industry must overcome:

1. A question of logistics

Hydrogen is inefficient to make and difficult to transport. Converting renewable power into hydrogen results in 30% to 40% less energy than if the electricity was used directly, such as through a heat pump for space heating. And once manufactured, moving hydrogen to its destination is challenging because of high energy requirements for compression, limited hydrogen pipelines in the country, and the inability of natural gas pipelines to channel high concentrations of hydrogen without risking damage.

2. Footing clean hydrogen’s energy bill

Canada’s rich hydroelectric and nuclear generation resources and strong methane regulations are an advantage, but will only take us so far in an age of increasing energy demand and rising costs. Hydrogen’s efficiency challenges mean that Canada will need a lot more renewable energy generation to make green hydrogen, and strong carbon capture, utilization and storage (CCUS) infrastructure to lower the CO2 emitted from making blue hydrogen. Blue hydrogen manufacturing will also need Canada to step up methane leak monitoring and mitigation. These measures will allow Canada to manufacture the hydrogen it needs without straining electricity grids or increasing overall emissions because of methane leaks.

3. Competing with the IRA

Lowering hydrogen manufacturing costs will also be key while maintaining an investment environment that’s attractive to global hydrogen companies. The biggest competition comes from the United States, where tax credits under the Inflation Reduction Act (IRA) give hydrogen developers a revenue premium over Canadian incentives. Canada’s Clean Hydrogen Investment Tax Credit (ITC) could offset 15% to 40% of hydrogen costs and help close the gap with the U.S., especially as new, restrictive guidance on IRA credit eligibility makes incentives down south more uncertain. For costs to go down, Canada’s hydrogen ITC must progress through legislation quickly and demand for clean hydrogen must scale.

Hydrogen’s potential applications are as numerous as its varied colours. But prioritizing high-impact early projects will help calibrate the demand hydrogen needs to match supply-side incentives. Canada needs to be tactical in the near term to ensure that existing hydrogen supply is decarbonized quickly, and that the most promising pilot projects and economic sectors receive the support they need to deploy hydrogen at scale.

Vivan Sorab is RBC Climate Action Institute’s Senior Manager, Clean Technology.

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