In a speech accompanying the release of the Economic Statement, Deputy Prime Minister and Minister of Finance Chrystia Freeland stated “[w]ith major investment tax credits for clean technology and clean hydrogen, we will make it more attractive for businesses to invest in Canada to produce the energy that will power a net-zero global economy.”
Key energy-related incentives in the Economic Statement are summarized below.
Clean Technology Investment Tax Credit
The Economic Statement proposed a refundable investment tax credit (ITC) worth up to 30 percent of the capital cost of investments in:
- Electricity generation systems, including Small Modulator Reactors (SMRs), solar photovoltaic and concentrated solar systems, wind and water (small hydro, run-of-river, wave and tidal). Large-scale nuclear is not expressly included in this proposal, but will be subject of future consultations to determine its eligibility;
- Stationary electricity storage systems that do not use fossil fuels in their operation, including but not limited to batteries, flywheels, supercapacitors, magnetic energy storage, compressed air storage, pumped hydro storage, gravity energy storage and thermal energy storage;
- Low-carbon heat equipment, including active solar heating, air-source heat pumps and ground-source heat pumps; and,
- Industrial zero-emission vehicles and related charging or refueling equipment, such as hydrogen or electric heavy-duty equipment used in mining or construction.
The ITC will be available as of the day of Budget 2023 (the day in the spring when the Canadian Minister of Finance presents the budget), and cease effect in 2035, with a phase-out period starting in 2032.
Clean Hydrogen Investment Tax Credit
The Economic Statement also announced a refundable ITC of up to 40 percent for investments in clean hydrogen production. The ITC will be based on the life cycle carbon intensity of the hydrogen produced. The Economic Statement directs the Department of Finance to launch a consultation on how best to implement the tax credit and points to the IRA, which uses the Argonne National Laboratory’s GREET model for life cycle emissions, as a model for tying credits to emissions. The clean hydrogen ITC will be available for eligible investments made as of the day of Budget 2023 and will be phased out after 2030.
Wage and Apprenticeship Requirements
Similar to the IRA, in order to receive the highest possible credits under the clean technology ITC or hydrogen production ITC, project developers must meet certain labor conditions which will be developed by the Department of Finance. The Department of Finance will consult with a broad group of stakeholders, but especially with unions, on how best to attach labor conditions to the proposed tax credits. While the labor conditions are not fully defined, the Economic Statement provides that for the clean technology ITC, the labor conditions will require a project to pay prevailing wages based on local market conditions and ensure that apprenticeship training opportunities are being created.
For the clean technology ITC, companies that adhere to these conditions will be eligible for the full 30 percent credit, while those that do not will only be eligible to receive a 20 percent credit. This is significantly less restrictive than the IRA, where developers who fail to meet the prevailing wage and apprenticeship requirements lose five-sixths of the available credit. Canada’s clean hydrogen ITC has tougher labor and apprenticeship conditions—there, the maximum 40 percent credit drops to 10 percent if these conditions are not met.
Specific details of the labor conditions will be announced in Budget 2023.
Improving Regulatory Processes for Energy Projects
The 2022 Fall Economic Statement also proposes to provide funding that will improve regulatory processes for major projects, including furnishing up to $1.28 billion over six years (starting in 2022 – 2023), with $0.5 million in remaining amortization and $55.4 million per year to the Impact Assessment Agency of Canada, the Canada Energy Regulator, the Canadian Nuclear Safety Commission, and 10 other federal departments. The Impact Assessment Agency of Canada and the Canada Energy Regulator will continue to recover a portion of their costs from the parties whose applications they are reviewing and assessing.
This funding is designed to ensure that these agencies can increase their capacity and improve the efficiency of assessments in order to respond to a growing number of major projects being proposed.
Future Consultations to Develop the Programs
The Economic Statement directs Canada’s Department of Finance to engage in consultations about these tax credits, including the potential for the clean energy ITC to be available for other technologies, the development of an appropriate carbon intensity-based system for the clean hydrogen ITC, levels of support for different hydrogen production pathways in Canada, and labor condition requirements. Companies located in Canada or doing business with Canada would be advised to monitor these consultations and engage with the Department of Finance on these issues, as the specific framework for the ITCs may impact the economics of future energy projects located in Canada. In addition, clean energy technologies which were not specifically named as eligible for the clean technology ITC—such as large-scale nuclear or commercial fusion energy—may consider engaging with the consultation process to advocate that their technologies be included.
Pillsbury has provided legal support on energy matters for several branches of the Canadian government, Canadian energy producers, suppliers, laboratories and constructors and is a member of the Canadian Nuclear Association. Our team stands ready to support in-bound and out-bound investment in this vibrant and dynamic energy market.