The Canada-Germany Hydrogen Alliance

Canada has made a heroic effort to keep up with the United States in terms of incentives for low-carbon energy and technology. As we highlight in this report, however, at least one effort to establish Canadian leadership in a new low-carbon industry is unacceptably cavalier: the Canada-Germany Hydrogen Alliance.

The Hydrogen Alliance, entered in the fall of 2022, paves the way for hydrogen export projects in Atlantic Canada that could receive several tens of billions of dollars in subsidies over the next decade. Billed as clean energy projects that promote decarbonization and energy security for our allies, a closer look shows a far more troubling picture.

The Alliance promotes big spending on high-risk, inefficient hydrogen export projects without yet having any firm purchase orders for hydrogen in place. Significant carbon emissions during the production and delivery of the hydrogen risk going uncounted; extraordinary inefficiencies in the hydrogen export process undermine the economics of these projects as more than half of the energy is lost before reaching end-users; and subsidy leakage to foreign companies could leave Canadians with little to show for billions of dollars spent.

Moreover, the output of the proposed Canadian hydrogen-ammonia export projects is a small fraction of what Germany could produce domestically with the restart of its nuclear reactor fleet, making the significant financial sacrifice of Canadian taxpayers an avoidable burden as well as a massive liability if Germany reverses its nuclear energy policy.

The Alliance becomes even more questionable when considering the role that these hydrogen exports will play in German energy planning, as they provide a less efficient, less secure, and higher cost alternative to hydrogen that Germany could produce itself but is choosing not to, instead following a policy of dismantling its own clean, nuclear energy supplies.

We are deeply concerned by the scale of the spending on hydrogen export projects given their large economic risks, environmental hazards, and inefficiencies. There is also a lack of transparency around these projects.

Summary of findings

Energy losses: Steep energy losses make the proposed hydrogen exports economically suspect, as most of the energy spent to produce, export, and deliver hydrogen from planned Canadian projects is lost before reaching end-users.

Fugitive emissions: The carbon intensity of these hydrogen exports is much higher than advertised, as inefficiencies and extra energy inputs to transport and deliver the hydrogen raise its estimated minimum carbon intensity to over 2 kg of CO2 per kg of hydrogen delivered (meriting at most a 15% Hydrogen Investment Tax Credit). However, the current proposed method of counting carbon ignores these emissions, creating significant risk to Canadian taxpayers while failing to incentivize innovation in truly low-carbon solutions.

Avoidable burden: Germany could produce 15 times more hydrogen than the largest proposed Canadian export project using its shuttered fleet of nuclear power reactors, resulting in cheaper, lower-emissions, and more secure supplies of hydrogen without the ecological impact and subsidy spending on Canadian shores.

Local disruption: Local communities remain divided on potentially overstated benefits. Despite the significant ecological impact of these projects, the federal government has refused to offer a federal impact assessment. Moreover, interconnecting major wind-hydrogen-ammonia projects presents risks to the electric grid that are downplayed by project developers.

Subsidy leakage: The primary beneficiaries of subsidy spending on these projects are the subsidiaries of foreign companies and suppliers, while the beneficiary of the end product is Germany (if they decide to buy). Canada stands to capture little if any of the benefit of its generous spending on ammonia exports to Germany, a country that has failed to steward its own low-carbon energy supplies.

Recommendations

Bringing transparency, rigour, and risk mitigation to the proposed megaprojects under the Canada-Germany Hydrogen Alliance should be a priority for Canadian leadership. We recommend that the federal government and provincial governments hosting the proposed hydrogen export projects:

1. Accurately account for all hydrogen exported-related emissions. The 2023 Budget strives to consider the “lifecycle emissions” of Canadian hydrogen exports yet leaves out carbon-intensive processes required to deliver the hydrogen to end customers in Germany. As it stands, the oversight will enable massive quantities of fugitive, uncounted carbon emissions. Accounting for these emissions would:

• Incentivize innovation to meet the 40% tier, rather than inflate the Hydrogen ITC deserved by ignoring major sources of emissions in the export process

• Minimize subsidy leakage to the foreign developers and safeguard against over-awarding subsidies

• Better align the ITC with decarbonization goals

• Improve cost-effectiveness for the government and taxpayers, saving several billion dollars in subsidies

2. Ensure strict oversight of hydrogen export projects. Despite administering potentially billions of dollars in subsidies and granting hundreds of millions of dollars in loans, the federal government has left environmental and other oversight of the hydrogen projects to the provinces. This creates a massive financial risk for Canadian taxpayers, political risk for the federal government, and ecological risk for local communities.

3. Obtain firm hydrogen offtake agreements before offering further financial support. Without firm purchase orders in place, Canada is taking on all the risks of these projects without a guaranteed market for its hydrogen. Given the massive public spending these projects will capture, this is an unacceptable risk for Canadian taxpayers. The Memorandum of Understanding of March 2024 did not go far enough to ensure that Germany will ultimately purchase Canadian hydrogen supplies.

4. Pursue goals of decarbonization and energy security through more effective means, including holding Germany responsible for its irresponsible energy policy and centering Canadian policy around proven solutions.