The estimation is based on confidential project‑level data obtained from Natural Resources Canada and Finance Canada on current and proposed hydrogen projects in Canada.[^2] Data provided by Finance Canada included the 2021 consultations with stakeholders with detailed information such as annual spending profiles as well as estimated CI for some projects. We also utilized publicly available information, which outlined new hydrogen projects.
Based on these data, we used the annual spending profiles provided by Finance Canada and assumed a one-to-three-year delay in capital spending depending on the status of the project. For projects with missing start and/or end dates, we estimated a capital spending timeline based on the project’s status, the average durations of similar projects by province, and publicly available updates. We also assumed a constant annual spending for some projects and aligned capital spending timelines to the Canadian Energy Regulator hydrogen production forecasts[^3].
We used various published studies to determine the share of total project spending that will be devoted to materials and equipment and therefore eligible for the credit. For projects using electrolysis, we estimated that 40 per cent of the total capital expenditures would be eligible, which was based on the average ratio of electrolyser cost to capital cost from the Lazard’s Levelized Cost of Energy Analysis (2023)[^4] and adjusted to account for other minor costs. For projects using natural gas with CCUS, we used detailed cost breakdown from Finance and academic studies[^5] to estimate that approximately 30 per cent of production spending would be eligible.[^6]
The ITC will also extend a 15 per cent tax credit to equipment needed to convert hydrogen into ammonia for the purpose of transportation.[^7] We assume that only 5 per cent of the total project spending would be eligible for the credit. This assumption is based on the 2019 International Energy Agency (IEA)’s report on the future of hydrogen.[^8] We also assumed that the additional 15 per cent ammonia rate will apply after a minimum of two years of spending; this is based on projects with a detailed construction schedule.
For projects where no capital spending data was provided, we estimated the capital spending using other detailed information (electrolyser’s capacity, total hydrogen production), when available. For projects using electrolysis with available electrolyser’s capacity, we used assumptions from Lazard’s Levelized Cost of Energy Analysis (2023) to estimate the corresponding equipment costs. For projects using natural gas with CCUS and those using electrolysis without electrolyser’s capacity, we used the average capital spend to total production ratio as per production technology based on other projects.
We received the estimated carbon intensity (CI) of some projects from Finance Canada. For projects where no CI was provided, we used the 2023 Global Hydrogen Review and Hydrogen Strategy for Canada[^9] to estimate the CI. We assumed that projects using electrolysis with renewable electricity will receive the highest rate. For projects with an electricity source that is from grid,[^10] their rate was estimated based on their province. Projects using natural gas with CCUS with a capture rate greater than or equal to 95 per cent would also receive the highest rate. When the capture rate is less than 95 per cent but greater than 90 per cent, the middle rate would apply. Lastly, when the capture rate is not available, we assigned the lowest rate to the project.
The ITC per project is derived from the estimated eligible investments under the project, the expected CI, and the applicable capital cost allowance rates.
