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The White Rose offshore oil production platform at the Argentia Port Authority in Placentia Bay, Newfoundland is the site of a proposed hydrogen production facility.GREG LOCKE/Greg Locke

Canada’s efforts to establish a green hydrogen supply chain with European countries are being delayed by a supply-demand mismatch and the largest wave of global inflation in decades, hurdles that will see it fail in its goal to export hydrogen to Germany by 2025.

Canada and Germany first signed a memorandum of understanding to develop a transatlantic green hydrogen corridor in 2022, as Germany looked to cut its dependence on fossil fuels imported from Russia and decarbonize its heavy industries. But just months before the end of the 2024, no green hydrogen facilities in Atlantic Canada have been completed, financial terms with German companies remain elusive and infrastructure in Europe is far from ready.

The sobering reality of the green hydrogen deal belies the challenge of balancing large-scale infrastructure investments and meagre current demand, a chicken-and-egg problem that’s common with nascent technologies – one that is delaying hydrogen timelines globally.

Without an attractive price and the necessary infrastructure, German offtakers – end users – aren’t ready to sign deals with Canadian firms. But offtake agreements are crucial to demonstrate project viability to investors; without them, Canadian producers, who have high upfront costs, can’t secure final investment decisions and start production. Meanwhile, German pipeline builders, which will finance construction with user fees, won’t start building until these deals are in place.

In a statement, Natural Resources Canada spokesperson Michael MacDonald said the 2025 goal was “ambitious.” The first shipments will be “close to the original 2025 target,” he said, without providing a specific year. Canadian projects are at a range of planning phases, with some having started construction, he added.

“The aim is still to have the first shipments happen in the mid-2020s, probably around 2026, 2027 or 2028,” said Jens Honnen, an energy policy adviser at German consultancy Adelphi. Mr. Honnen is leading the implementation of the German-Canadian energy partnership on behalf of the German Ministry for Economic Affairs and Climate Action.

There are about 10 promising production projects in the Atlantic provinces, but none have secured a final investment decision yet, Mr. Honnen said.

Export Development Canada, on behalf of the Government of Canada, has provided several direct loans to hydrogen companies in Atlantic Canada, including $166-million to EverWind Fuels in Nova Scotia, which expects to start construction early next year and start production by 2027, according to spokesperson Rudee Gaudet. EDC has also given a $128-million loan to World Energy GH2 in Newfoundland and Labrador, which has received provincial approval and is targeting a final investment decision by early 2025.

To bridge the gap between the price at which Canadian producers can sell and what the German market is willing to pay, in July Ottawa announced $300-million in funding for producers in Atlantic Canada, matched by about $300-million from Germany for offtakers. These funds will be distributed through an auction process after the European Commission has completed its review of the agreement.

That’s not the only money on the table. In August, Ottawa finalized the details of its green hydrogen investment tax credit, which provides producers rebates of 15 to 40 per cent on the purchase and installation of eligible equipment. The tax credit is estimated to cost $5.6-billion over five years and an additional $12.1-billion between 2028 and 2035.

And earlier this year, Germany finalized plans to finance the country’s €20-billion core hydrogen network. But with a fragmented pipeline industry, strong energy lobby and fractured political climate, new pipeline construction remains an arduous task that could delay the market.

German companies can’t commit to deals without pipelines, “even if there is funding,” said Stefan Kaufmann, a German member of parliament, former hydrogen commissioner and adviser to World Energy GH2.

“In some areas, no pipelines are planned before 2040, even if the companies are willing and able to buy hydrogen and convert their plants for it,” Mr. Kaufmann said.

Canada is not the only country behind schedule. In a report released earlier this year, the International Energy Agency (IEA) scaled back its expectations for the portion of renewable energy used to make hydrogen fuel between 2023 and 2038 by a third, in light of slow financial dealings and inflation. Only its China forecasts were unaffected.

Already, some major projects have been cancelled in response to inflation, interest rates and lack of demand. In late September, Shell and Equinor each scrapped plans for low-carbon hydrogen plants off Norway’s coast, with Equinor’s product earmarked for Germany in particular.

Germany intends to import as much as 70 per cent of its hydrogen by 2030, and Canada is one of several countries stepping up to meet that demand. But unlike suppliers such as Norway, Algeria and Egypt, which are planning to ship hydrogen in liquid form through pipelines, Canada’s hydrogen must first be converted to ammonia, a process that adds expense. And some experts have suggested that as much as 70 per cent of hydrogen’s contained energy could be lost in the process of transforming and transporting it.

“We’re seeing the difference between hype and reality,” Mr. Honnen said. “People are increasingly realizing that hydrogen, in the end, will not be a magic solution for every sector.”

Despite these challenges, hydrogen exports could help replace a coming drop in German demand for Canadian natural gas, which German diplomats have signalled in recent months.

In July, Karina Häuslmeier, deputy head of mission at the German embassy in Ottawa, told journalists that imports of gas to Germany are projected to drop by 30 per cent by the end of this decade and almost completely disappear by 2050. In late September, Germany’s special envoy for international climate policy, Jennifer Morgan, echoed that German and European demand would fall in the coming decades, in line with Europe’s 2045 net-zero goals.

Canada’s prices could catch up in the long term. In a scenario analysis for the year 2050, the Fraunhofer Institute, Europe’s leading applied research organization, forecast that Canada will be the cheapest location from which to import ammonia by ship.

Editor’s note: This article has been updated to clarify that Export Development Canada provided loans on behalf of the Government of Canada.

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