Hydrogen: A rocky road to acceptance

Although now widely deployed as an alternative energy carrier across the world, hydrogen is still having trouble finding its feet.

By Peter Ion

A world leader in fuel cell development, Ballard Power Systems, sold its automotive sector interests to Ford-Daimler in order to streamline its efforts into hydrogen infrastructure developments. This did not go unnoticed. Likewise, the scrapping of the fuel cell transit bus trials in Perth, Australia was a major blow to the hydrogen image across the world (especially when the parallel European city fleets were broadly regarded as a success).

As Ballard announced its divestment, neighbouring B.C. Transit revealed it was commissioning a fleet of 20 fuel cell buses (at a cost of C$43 million) to be introduced as part of the Olympic infrastructure — visitors will be transported by hydrogen from their hotels in Vancouver to the slopes of Whistler in 2010. Refuelling systems are already in place across the Lower Mainland of Vancouver and the embedded technical knowledge in operating and maintaining them has been building to the critical point (a major factor in the problems of the Australian bus trials). Decentralizing hydrogen production is still the key hurdle to overcome in offsetting the delays to wider vehicle adoption. Ballard is concentrating some of its research efforts on small-scale devices for converting natural gas to hydrogen. Home-based conversion and refuelling could be closer to reality than anticipated.

Paving the way to change

CMAs and corporate strategists with responsibility for Kyoto-related issues might be wise to take note that the Accord is not going away. Hydrogen (typically touted as the “zero emission option”) is still part of the mix and will continue to be. Australian Prime Minister Kevin Rudd has pledged to sign up, leaving the U.S. isolated as a developed nation non-signatory. Prime Minister Stephen Harper is also a non-signatory; however, Canada is well placed to lead by example in specific areas. B.C.’s “Hydrogen Highway” is taking shape, Ontario’s “Hydrogen Village” is gradually gaining momentum and the Edmonton-Calgary route is a candidate for a hydrogen corridor.

The Europeans have demonstrated some leadership in the hydrogen transport sector that Canadians should look closely at. Norway, Europe’s “Texas” in terms of oil and gas independence, recently opened up its bus-only lanes to vehicles running as hydrogen-based or any electric-hybrid version.  

For CMAs charged with the responsibility of advising their clients about vehicle fleet options, the taxation situation to date has been something of a curate’s egg — good in part. The U.S. broke the ice in 2007 with the announcement of a $12,000 tax credit available to the owners of the new hydrogen-powered Honda Clarity — the first vehicle to qualify for this incentive. For the driver, the actual gain is less appealing because the Honda vehicle is only available for lease in areas where hydrogen refuelling infrastructure is in place, like California. The tax credit, therefore, goes to Honda rather than the driver.

Unlike the Honda model, the taxation angle can be particularly obscure in city legislation. New York, for example, recently enacted a gradual increased program of incentivization on alternative-fuelled city fleets, with a 60 per cent credit available on the “incremental” cost. The U.S. legislation is characterized by being particularly intricate with relatively unusual stipulations and provisos, such as the requirement for qualifying vehicles to be equipped with “regenerative braking” — designs that transfer the energy created in braking into storage for use in subsequent forward motion.

Ballard’s CEO, John Sheridan, credits the sell-off of the company’s automotive sector interests to its underestimation of the timeline that hydrogen initiatives are being faced with within the transport sector — much longer than initially projected by most industry analysts. Some of the taxation incentives in North America do recognize this. Existing U.S. legislation, for example, has extended the expiry of its tax credit on hydrogen refuelling infrastructure until 2014, five years longer than other non-hydrogen-based alternative energy carriers. Although the overall tax credit regime for hydrogen power is not ungenerous (in the U.S. there is credit for 75 per cent of all capital costs, O&M, R&D, up to a maximum of US$3 million per fiscal year applying to vehicles and fuelling stations and 75 per cent of all capital costs, O&M, R&D, up to a max of US$1.5 million for stationary fuel cells limited to a maximum of $12K per fuel cell ) the figures translate to roughly 50 per cent of the equivalent tax credit available for citizens filing in respect of biodiesel and bioethanol infrastructure. For true comparisons, U.S. tax credits for oil and gas exploration in 1999 were 150 times those of renewable energy tax credits.

The imposition of available tax credits is being “refined” in the Hydrogen Tax Incentives Act 2007, currently proposed as a bill and in front of the U.S. finance committee. Significantly, there are plans to increase the levels of credit to reflect the greater power-generating capacity of fuel cells — the greater the output the greater the credit — finally some recognition of reward for performance efficiency. There has been recognition for a mix of incentive measures incorporating a production tax credit for the first time. If enacted, the bill will also provide tax credit incentives to a new breed of hydrogen-burning internal combustion engines (in which hydrogen is injected as part of the fuel source).

Canada’s scorecard

In international terms, how does Canada score in all of this? Unlike the U.S., Canada parallels the EU nations in providing a tax deduction (rather than a credit) on investment in renewables — fully 100 per cent on hydro/solar/wind installations. No other nation exceeds 35 per cent. Canada is also a leader in the provision of tax credits on renewables RD&D projects (research, development and demonstration), to the tune of 35 per cent. Hydrogen-based projects receive a 100 per cent tax credit on RD&D. Only the UK scores higher in providing a 150 per cent tax credit for this sort of research.

Canada is a leading nation in providing tax holidays on renewable energy projects — up to 10 years. Trading greenhouse gas emissions have proven viable for businesses in the EU over the last five years. Canada should also be looking at the idea of implementing tradable tax credits (between corporate entities that are able, or not able, to take advantage of these) — Oregon and Oklahoma operate this system already. A “hybridized” tradable emissions right/tax credit instrument could serve as a trigger for marginal hydrogen-based projects in Canada.

The emissions angle, however, is clearly proving not enough to trigger the average consumer to switch to hydrogen. Natural Resources Canada commissioned Ernst and Young’s tax policy group to undertake a series of sensitivity analyses into the viability of the overall hydrogen economy concept. Together with vehicle sales and fuel excise tax exemptions, emissions tax measures were found to make light-duty and heavy-duty vehicles “competitive” with gasoline-based vehicles. While the notion of a hydrogen pipeline infrastructure was almost entirely determined by the size of the fleet that would use it for refuelling — still a long country mile away from reality — no manufacturers are mass-producing vehicles to the scale required, nor are they likely to in the near term. Interestingly, it was proposed that the competitiveness of hydrogen-powered vehicles was conditional upon them being part of a privately-operated (e.g. a trucking company) rather than a publicly-run operation (e.g. a municipal transit fleet). The potential for a tax credit to apply to GST incurred as part of a private enterprise could swing the balance. This may have had a bearing upon the failure of the Australian bus trial.

Further, Canadian success can be heralded in the introduction of hydrogen into private sector transport. Targeting the commercial trucking sector exclusively, Bowmanville Ontario-based Canadian Hydrogen Energy Company Ltd. boasts the largest distribution network for any hydrogen product (with over 140 North American distributors/dealers). They produce a hydrogen-on-demand unit that converts distilled water into hydrogen and oxygen to boost fuel efficiency and engine performance by 10 per cent. Theirs is a bolt-on aftermarket product that is retrofitted to the vehicle. Likewise, HydrogenX Corp. designed a supplemental oxy-hydrogen device that can be installed into non-commercial passenger cars, also converting water into hydrogen that feeds straight into the engine air intake of a standard car.

This year, North Vancouver will see the completion of a three-year trial in which by-product hydrogen from a chlorine manufacturing plant has been piped for use in refuelling a small fleet of transits (and a car wash facility). The upcoming Olympics have provided the impetus to this city initiative and perhaps provide the key to how the transport sector should be using hydrogen — systems integration with existing traditional industry.

The most abundant element on earth, hydrogen, is not going to go away anywhere fast. With the right fiscal framework and the political will in place, a troublesome industry could still grow into a real prospect for the future. 

Peter Ion (pete-van@hotmail.com) is a Vancouver-based technical author specializing in alternative energy technologies. He qualified for R&D tax credits through ownership of the fuel cell start-up company Ion Scientific Ltd. in the UK. He works closely with hydrogen economy interests in and around Vancouver.

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