Know your competition: US IRA vs. Canadian Clean Hydrogen ITC

Context

When US President Joe Biden signed the Inflation Reduction Act (IRA) into law almost a year ago, it set off a race among governments around the world to try and match their incentives for hydrogen and other clean technologies. These incentives include a production tax credit (section 45V) and an investment tax credit (section 48).

Within weeks, Japan announced a revision of its national hydrogen strategy, which was finally published in June 2023, introducing a new Contract for Differences (CfD)-type support scheme for hydrogen and ammonia production. In parallel, the EU began work on the Net-Zero Industry Act, as well as the creation of the inaccurately named European Hydrogen Bank, which is actually a subsidy scheme for hydrogen production.

Canada was not spared by the post-IRA frenzy. In early November 2022, the federal government announced a consultation on its own proposed Investment Tax Credit (ITC) for hydrogen. The 2023 federal budget, introduced late March 2023, clarified most of the details of this support program.

The purpose of this article is to compare the key features of each tax credit program and provide insight into their respective impacts on the North American hydrogen markets.

Canada’s Clean Hydrogen Investment Tax Credit (CHITC)

The CHITC allows clean hydrogen producers to receive a tax credit for a portion of their capital costs, with lower carbon intensity of the hydrogen giving access to higher tax credit rates according to the table below.

Carbon intensity range (kgCO₂e/kgH₂)	Percentage of CAPEX received as tax credit (%)
0 - 0.75	40
0.75 - 2	30
2 - 4	15

The carbon intensity of hydrogen must be assessed using the Environment and Climate Change Canada’s (ECCC) Fuel Life Cycle Analysis Model and reported to the government for verification. This expected carbon intensity is then used to determine the tax credit rate.

In addition, hydrogen producers must meet certain labor and training requirements to qualify for the tax credit.

Crucially for the natural gas industry, facilities that produce hydrogen from natural gas are eligible for the tax credit as long as the resulting CO₂ is captured and stored and/or used. While Carbone Capture, Usage and Storage (CCUS) equipment is not eligible for the CHITC, it is eligible for the Investment Tax Credit for CCUS enacted in 2022, and a project can claim both tax credits for the different types of equipment.

Equipment used to produce ammonia from clean (i.e. < 4 gCO₂e/kgH₂) hydrogen is eligible for the CHITC at the lowest rate of 15%.

The CHITC is available for projects placed in service after the release of the 2023 federal budget and before 2034, with projects placed in operation in 2034 receiving half of the tax credit.

US Production and Investment Tax Credits

The IRA allows hydrogen producers to choose between two exclusive tax credits.

The Investment Tax Credit described in section 48 of the IRA is similar in principle to the CHITC, with lower carbon emissions offering higher tax credit rates, see table below.

Carbon intensity range (kgCO₂e/kgH₂)	Percentage of CAPEX received as tax credit (%)
0 - 0.45	30
0.45 - 1.5	10
1.5 - 2.5	7.5
2.5 - 4	6

The IRA also establishes a Production Tax Credit (PTC), for which Canada has no equivalent, with lower carbon emissions offering higher tax credit rates again, based on the amount of hydrogen produced. The table below shows the credit rates offered.

Carbon intensity range (kgCO₂e/kgH₂)	Production Tax Credit (USD/kgH₂)
0 - 0.45	3.00
0.45 - 1.5	1.00
1.5 - 2.5	0.75
2.5 - 4	0.60

The IRA PTC is available for 10 years after a clean hydrogen production facility is placed in service, and only for facilities that begin construction before 2033.

Hydrogen produced from natural gas with CCUS is eligible for the section 45V PTC, but producers may alternatively elect to receive the IRA 45Q tax credit for CCUS, but not both.

The carbon intensity of hydrogen must be assessed using the Argonne National Laboratory’s GREET model. Similar to the CHITC, there are wage and training requirements, although producers that do not meet these requirements can still benefit from a reduced tax credit.

Comparison of CHITC and US IRA tax credits

As seen on the graph, the Canadian CHITC is significantly more generous than the IRA section 48 ITC. However, Canada does not offer an equivalent to the section 45V PTC, which can be significantly more attractive for hydrogen producers, as the following hypothetical examples show.

Green Hydrogen Example

For a 100 MW electrolysis hydrogen production project, with a 70% electrolyzer efficiency, and a CAPEX of 3000 $/kW, so 300 M$ total, running for 5000 h per year, the amount received from the various support schemes would be as follows, for a few sample carbon intensities:

Carbon Intensity (kgCO₂e/kgH₂)	CHITC		IRA Section 48 ITC		IRA Section 45V PTC
	ITC rate (%)	ITC (M$)	ITC rate (%)	ITC (M$)	PTC rate ($/kg)	PTC (M$)
< 0.45	40	120	30	90	3	312.5
1	30	90	10	30	1	104.2
3	15	45	6	18	0.6	62.5

Blue Hydrogen Example

For a blue hydrogen project, with 160 M$ CAPEX, producing 40 kgH₂/y at a 3.5 kgCO₂e/kgH₂ carbon intensity, the amount received from the various support schemes would be as follows:

Carbon Intensity (kgCO₂e/kgH₂)	CHITC		IRA Section 48 ITC		IRA Section 45V PTC
	ITC rate (%)	ITC (M$)	ITC rate (%)	ITC (M$)	PTC rate ($/kg)	PTC (M$)
3.5	15	24	6	9.6	0.6	240

Note that this calculation is simplified since for example in Canada the CAPEX related to CCUS equipment would not be eligible under the CHITC at a 15% rate, but rather under the 2022 CCUS ITC at a higher rate (between 37.5% and 60% for projects coming online before 2030).

Takeaways

The higher the CAPEX of a project, the more attractive ITCs are compared to the IRA PTC, while higher hours of operation for the electrolyzer make the IRA PTC more valuable.

As can be seen in the graphs above, the CHITC is indeed significantly more generous than the IRA ITC in every case. However, the IRA PTC is competitive with the CHITC over the life of the project in every case, and can be a much larger amount, as in the case of SMR+CCUS, where the credit received is superior to the project’s CAPEX. Note that the IRA PTC is received gradually over the life of the project, whereas the two ITCs are received at the beginning of the project.

These three support programs have different impacts on projects depending on CAPEX and uptime. This can completely change the resulting hydrogen prices and greatly affect the competitive landscape for hydrogen producers.

Pyonnier can support your competitive assessment and project development efforts. Contact us to talk about it!