BC regulatory barrier reduction will help investment and M&A in hydrogen sector: Stikeman lawyers

With major investor interest in nascent sector, a lot of development expected in next decade

BC regulatory barrier reduction will help investment and M&A in hydrogen sector: Stikeman lawyers
Eric Bremermann | Glenn Zacher

Changes to British Columbia’s Greenhouse Gas Reduction Regulation that will authorize regulated gas utilities to produce, purchase and distribute specified types of hydrogen should help create a clean energy regulatory environment conducive to investment and M&A in that sector, say lawyers at Stikeman Elliott.

“The large pension funds, energy players and other large pools of capital, domestically and internationally, are paying attention to this nascent [hydrogen] sector,” says Eric Bremermann, partner and member of the mergers & acquisitions and project development & finance groups. He is also co-chair of the energy group in the Toronto office.

“There’s a lot of developments that are going to [probably] happen over the next decade,” he says, so seeing a regulatory change in Canada, like the one in B.C. “is of great interest.”

He adds that legislative directions and social incentives for industry to reduce greenhouse gas emissions, coupled with regulatory treatment adapting to facilitate the introduction of greener technologies, are creating conditions favourable to increased investment in the Canadian hydrogen sector.

In this respect, Bremermann says the amendments in B.C. represent one of the many policy tools that different jurisdictions are introducing to facilitate innovation and the introduction of greener technologies such as hydrogen.

Furthermore, international cooperation — such as a recent memorandum of understanding signed between Canada and Germany to establish an energy partnership that supports the production, usage and trade of clean hydrogen — is “signalling government support for developing a robust hydrogen industry and is also laying the framework for Canadian hydrogen to reach foreign markets.”

Glenn Zacher, a partner at Stikeman and co-head of the firm’s energy group, says the highly regulated nature of Canada’s power sector means unlocking the commercial potential for hydrogen is influenced by the ability to clear regulatory hurdles.

He notes that B.C. is at a more advanced stage than other provinces regarding hydrogen, thanks to being rich in “feedstocks” such as water. It also has a “well-developed” energy infrastructure and is relatively close to important export markets, like South Korea, Japan, California, and China.

Zacher says the amendments are welcome because “any nascent industry needs government support, whether it is tax incentives or subsidies, in particular in the energy space, because it is so heavily regulated.”

Adds Zacher: “It’s really important to unlocking investment opportunities and development in this area to make sure that utilities are participating and that you’re removing regulatory barriers.” He notes that investors are, by nature, conservative.

The B.C. amendment, which came in May, added specified types of hydrogen as a new “prescribed undertaking” under s. 18 of B.C.’s Clean Energy Act.

Section 18 provides gas utilities with the regulatory authorization to participate in prescribed projects, programs, contracts, or expenditures to reduce greenhouse gas emissions in the province and recover the costs up to a specified amount 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 hydrogen that is:

  • primarily derived from water using electricity that is generated primarily from clean or renewable resources (often known as green hydrogen);
  • and is waste hydrogen purchased by the public utility, as will be defined by regulation.

Zacher says these sorts of initiatives are ways of communicating to utilities and investors, “don’t worry, you will recover your costs, if you invest in hydrogen distribution.” He adds that these changes allow utilities “to start to play and compete in spaces where they haven’t played and competed before.”

As background, both lawyers point to the increasing conviction that hydrogen on a large scale could be an emerging technology that will assist Canada in meeting its GHG reduction targets. That is because it is a zero-carbon emission fuel source when combusted.

In December 2020, the federal government published “A Hydrogen Strategy for Canada,” which provides a framework to harness hydrogen’s potential to help transition to cleaner sources of energy. Various provincial governments have published similar policy documents, including Ontario’s Strategy Discussion Paper, and more recently, the B.C. Hydrogen Strategy.

Such policies aim to provide a roadmap for meeting aggressive targets for Canada to reduce its greenhouse gas emissions, with the goal being “carbon neutral” by 2050. Along with this, the Supreme Court of Canada recently approved the constitutional validity of the Greenhouse Gas Pollution Pricing Act earlier this year. As well, 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.

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 largely depend on public utilities to purchase, transport and deliver the commodity to customers.

Bremermann points to the Quebec City-Windsor corridor as a good location for such hubs, not only because of the number of trucks on highways like the 401, but for the large industries with heavy energy uses that run along the corridor. There’s also an opportunity to blend hydrogen into the pipeline transmission system in Canada to use those assets.

However, public utilities are inherently risk-averse and operate in regulated environments where innovation is challenging. Utilities 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,” Gordon Kaiser discusses how Canadian energy regulators have historically been reluctant to fund new technology through rates. This reluctance has served as an obstacle to innovation in the energy sector, and measures adopted in response to this challenge 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;
  • amendments to the regulators’ statutory objectives “to facilitate innovation in the electricity sector.”

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 in B.C. “go a step further” in providing regulatory certainty.

The amendments constitute explicit legislative directions that permit gas utilities to acquire and supply specific hydrogen types and recover specified costs of such undertakings.

Such changes could provide a template for other provinces hoping to introduce similar legislation, with features encouraging investment in projects for hydrogen export. Developing so-called “green” hydrogen, from non-fossil sources, rather than “blue” hydrogen, using fossil sources, would be an import commodity to develop.

“Canada is on the map as a destination for capital,” says Bremermann. “But you know, there are other nations competing as well. So, from an export opportunity the push towards green hydrogen is important.”

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