In March 2022, after publishing a Hydrogen Roadmap in late 2021 and identifying Alberta as being well-positioned to participate in the global hydrogen economy, the Government of Alberta directed the Alberta Utilities Commission (the "AUC") to open an inquiry into hydrogen blending into natural gas distribution systems (the "Inquiry").1
The Inquiry
The scope of the Inquiry included:
- The role of regulated natural gas distribution systems and unregulated competitive markets for hydrogen blending into natural gas distribution systems.
- The impacts of blended hydrogen into low-pressure natural gas
distribution systems, including:
- Impacts on the delivery of services to municipal and rural natural gas consumers;
- Competitive retail impacts;
- Potential rate impacts; and
- Impacts on utility cost recovery for hydrogen blending, with reference to Section 37 of the Gas Utilities Act and any other relevant legislation, including the Public Utilities Act.
- The safe and reliable delivery of blended hydrogen through natural gas distribution systems, including potential harmonization with municipal or other relevant safety standards.
- Addressing regulatory ambiguity, removing unnecessary regulatory barriers, and improving certainty as required to enable hydrogen blending into natural gas distribution systems.
- Areas for future study relating to hydrogen blending into natural gas distribution systems.
Various parties participated in the Inquiry including, municipalities, natural gas and hydrogen producers, transmission and distribution companies, storage operators, retailers, consumer associations and industry associations.
On June 30, 2022, the AUC submitted a report on the Inquiry to the Minister of Energy. On September 6, 2022, the AUC publicly released this report (the "Report").
The Report
The Report addresses enumerated issues and in doing so summarizes the various participant submissions. The conclusions and observations of the AUC fall broadly into seven areas, each is addressed below.
1. Changes to Legislation
In the Report, the AUC considers: whether the Gas Utilities Act and the Gas Distribution Act should explicitly mention hydrogen; the potential implications of legislative amendments on existing gas distribution franchises; whether hydrogen should explicitly be excluded from the Public Utilities Act; and considers whether hydrogen should be included in the definition of "gas" in the Roles, Relationships and Responsibilities Regulation.
In recognizing the need for amendments to the existing legislative schemes so as to remove barriers to hydrogen blending at the gas distribution level while minimizing the risk of broadening the scope of regulation, the AUC concludes targeted amendments to the definition of "gas" in the Gas Utilities Act, and by reference the Gas Distribution Act, to include "up to 20 per cent hydrogen by volume blended within a low-pressure natural gas distribution system" would be the most efficient way to enable hydrogen blending and provide clarity to stakeholders.
The AUC also concludes that significant changes to existing franchise rights should be avoided until the implications of hydrogen blending are better understood. More specifically, the AUC concluded that the Gas Distribution Act could be amended to clarify that the definition of "gas" does not expand the exclusive rights and duties of existing franchise area approval holders, thus maintaining existing franchise area rights, while leaving open the question of franchise rights and regulation for pure hydrogen systems. Notwithstanding this latter point, the AUC further concludes that there may be instances where hydrogen systems may need to be regulated as a "public utility" and the Public Utilities Act in its current form provides sufficient flexibility should such a need arise.
Lastly, the AUC's general view is that in the longer-term competitive retailers should be responsible for procuring hydrogen where an adequate competitive market for hydrogen exists. However, in the shorter-term, in absence of a competitive market for hydrogen, requiring procurement to be performed by distributors, the function of a gas distributor in the Roles, Relationships and Responsibilities Regulation could be amended to include such procurement.
2. Agencies and Regulation
The Report outlines that various parties are involved in the regulation of hydrogen in Alberta, including, Alberta Municipal Affairs; the Safety Codes Council; the Alberta Boilers Safety Association; the Rural Utilities Branch; Alberta Environment and Parks; the Alberta Energy Regulator; the AUC; distribution utilities; and the Canadian Standards Association and American Society of Mechanical Engineers. The AUC concludes that the current allocation of responsibilities amongst these agencies is capable of accommodating hydrogen development and its integration into the distribution system but that areas for improvement - to avoid regulatory uncertainty - exist. To reduce any uncertainty or ambiguity created by the multitude of agencies regulating various aspects of hydrogen, the AUC concludes a government-initiated review of agency roles and responsibilities in respect of hydrogen regulation could be considered so as to identify opportunities for co-ordination or consolidation of responsibilities.
3. Safety Standards and Maximum Blending Threshold
There are key differences between hydrogen and natural gas that may have safety impacts on pipelines; gas properties; safety systems; metering equipment; end-use equipment; and appliances. This may require existing federal and provincial standards to be updated for hydrogen blending. Additionally, distribution utilities may be required to perform an engineering assessment of their pipeline systems to consider potential risks of blending hydrogen into the natural gas stream.
Recognizing that safety is a critical issue in respect of hydrogen blending in distribution systems, the AUC concludes that a Canadian standard specific to hydrogen piping and blending would be beneficial. Additionally, the AUC concludes that safety and engineering assessments should be conducted before hydrogen is blended and introduced into any distribution system. In this regard, the establishment of a process for approval of these engineering assessments could be considered.
The AUC also concluded that the Government of Alberta's goal of a maximum threshold for hydrogen blending of up to 20 per cent by volume in gas distribution streams to be reasonable - with no minimum threshold and that pilot blending projects should start at lower levels than the maximum 20 per cent.
4. Markets and Role of Distribution Utilities
The AUC agreed with the submissions of many participants that hydrogen blending is less practical in smaller municipalities and rural utility systems. As such, the AUC concluded that the initial focus for hydrogen integration in distribution systems should be within larger municipal systems.
In this context, the AUC considered what aspects of the hydrogen market could be regulated or unregulated. These aspects include hydrogen production facilities; above ground and underground hydrogen storage facilities, both for hydrogen production and distribution utility purposes; pure hydrogen transmission (high-pressure) pipelines; blending stations; existing or new distribution pipelines (low-pressure) used to transport blended hydrogen; and whether the commodity of hydrogen should be procured and provided to customers by retailers in a manner similar to the current natural gas market.
The AUC concludes that natural gas distribution utilities should have authority over the blending function and be permitted to seek recovery of blending facilities costs through distribution rates. The AUC also concluded that although further study is likely required, there were no obvious impediments to the production, storage and transportation of hydrogen being provided by the competitive market. The AUC was also of the view that over the longer-term procurement of hydrogen should be the responsibility of retailers. However, the AUC was express that there is merit to distribution utilities either procuring hydrogen on a shorter-term basis or producing hydrogen through pilot projects - with the ability to seek recovery of those costs in rates - so as to facilitate the early introduction of hydrogen blending in distribution systems. However, the AUC was express that these actions should be interim only, as it considers the function of regulated distribution utilities should be limited to blending and distribution functions.
5. Hydrogen Blending Costs
The AUC agreed with participants that it is important for regulators to consider public interest factors when assessing hydrogen blending projects and associated costs, including assessments relating to cost-benefit analysis; safety; reliability; environmental impacts; emissions targets and carbon tax considerations; economic efficiency; and rate impacts to consumers.
The AUC recognizes that shorter-term adoption and support for hydrogen blending faces costs and rate impact challenges, noting that hydrogen blending costs are not expected to be at parity with carbon tax savings in the near future and that hydrogen blending will result in incremental costs to customers.
As such, the AUC is of the view that the Alberta government may want to consider supports for customers such as credits, tax rebates or subsidies as mechanisms to reduce the burden on ratepayers until the costs of hydrogen blending reaches parity with expected carbon tax savings in 2030. Absent such government subsidization or policy direction, the benefits of emission reductions and carbon tax savings of hydrogen blending may not be sufficient to outweigh the cost burden in the short-term, therefore making the inclusion of these costs in customers' rates harder to justify based on the public interest factors. The AUC also suggested that the Government of Alberta may need to establish clear policy to allow the AUC to place a greater emphasis on social and environmental factors when assessing the merits of hydrogen blending costs for inclusion in distribution rates.
6. Pilots and Future Studies
The AUC identifies possible areas for future studies. These areas include: pure hydrogen distribution systems; renewable natural gas; establishing emissions targets; appliance safety; the blending of hydrogen in high-pressure natural gas utility pipelines; and pure hydrogen pipelines serving industrial customers.
While not specifically discussed in the Report, numerous hydrogen projects exist in Alberta for both the production and use of hydrogen. The following are a small sample of projects currently underway.
- The first of its kind in Alberta, the Fort Saskatchewan Hydrogen Blending Project by ATCO will deliver a blend of natural gas with 5% hydrogen into the Fort Saskatchewan natural gas distribution system. Hydrogen will be produced through electrolysis and first production is expected in the fall of 2022.2
- Air Products has announced the construction of a hydrogen liquefaction facility in Edmonton, the first in Western Canada. It is expected to come on-stream in 2024.3
- Canadian Pacific also has a Hydrogen Locomotive Program, which tests hydrogen-powered trains.4
7. Government Incentives and Policy Development
While not identified in the Report, Alberta's innovation agencies such as Emissions Reduction Alberta and Alberta Innovates have provided over $61 million in funding to 14 hydrogen projects. Alberta Innovates now hosts the Hydrogen Centre of Excellence, and provides funding for early phase and industry growth programs. Alberta also offers the Alberta Petrochemicals Incentive Program. Under this program, when a project becomes operational, up to 12% of eligible operational costs will be returned in a grant to attract investment in the province's hydrogen production facilities equipped with Carbon Capture, Utilization and Storage.
The Associate Minister of Natural Gas and Electricity, Dale Nally, issued a statement following the release of the Report which indicated a commitment to stakeholder engagement in the development of a hydrogen blending framework. Additionally, Mr. Nally committed to clarifying the responsibilities of different organizations in the regulation of the various parts of the hydrogen blending market.5
Comment
The Report identifies and discusses the key challenges to the introduction of hydrogen blending in gas distribution systems in Alberta. It does so while outlining a preference for minimal change to the existing legislated framework for natural gas utilities and retail markets and while suggesting that a slower phased approach to hydrogen blending in Alberta is reasonable. In the view of the AUC, before full-scale hydrogen blending is implemented in Alberta, the issues discussed in the Report and a clear regulatory framework is likely required. Such observations are at odds with the Government of Alberta's want, under the Hydrogen Roadmap, to both exploit Alberta's position as one of the world's largest hydrogen producers and to rely on large scale hydrogen integration to lower Alberta's greenhouse gas emissions by 2030. In the face of these key challenges, and as noted in our earlier blog post, Alberta is well-positioned to begin to execute on its hydrogen goals.
Footnotes
1. The Inquiry was conducted as AUC Proceeding 27256.
2. Fort Saskatchewan Hydrogen Blending Project (atco.com)
5. Hydrogen blending: Associate Minister Nally | alberta.ca
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