Related Expertise: Climate Change and Sustainability

Green Hydrogen is a Golden Opportunity for Quebec—If We Act Now

By Katherine DuffMarc GilbertJason GreenEsben HegnsholtIlana HosiosAndreanne LeducSimon-Pierre Monette, and Christine Wurzbacher

Quebec is ideally placed to lead in the growing green hydrogen market. But we must accelerate investment to avoid ceding advantage to others. 

Green hydrogen (H2) could be a game-changer—both for the climate and for Quebec. This relatively low-cost energy source, produced using renewable energy and electrolysis, is likely to become the leading decarbonization pathway for industries such as steel, ammonia, trucking, rail, and shipping that are among the world’s heaviest emitters.

Quebec has the potential to claim a sizeable share of this market, given our robust hydro resources and proximity to some of the largest expected centers of hydrogen demand in North America. By focusing on high-value applications that build on our natural advantages, Quebec could claim a leading position in the wider green H2 value chain, generating economic and environmental benefits for decades to come.

But Quebec is currently underinvesting in this market. Compared to the USD $9 billion that the German government is pouring into green H2, and the $1.2 billion that Australia is investing in this space, the Quebec government has earmarked just CAD $20 million in the 2021-2022 budget. Strategic planning in Quebec and Canada is also less developed than in many peer geographies. Although the Quebec government is expected to publish an H2 strategy later this year and the federal government released a high-level strategy last year, other countries are already implementing their green H2 agendas.

To avoid being locked out of the rapidly growing green H2 market, Quebec must act thoughtfully and decisively now.

Demand for green H2 is growing

While green H2 currently costs more than grey alternatives (e.g., natural gas, coal, diesel), production costs are expected to drop by 30% to 60% over the next 10 years, driven by declines in renewable energy costs and in electrolyser capex (forecast to fall by up to 66% over the next decade). By 2040, green H2 could be a $290 billion 1 1 Based on $2/kg Notes: 1 Based on $2/kg market globally, with North America representing 21% of total demand, an estimated 40-146 megatonnes (mt) annually. Much of this demand will come from heavy industry and transport.

Many steel producers, for instance, are moving from the blast furnaces production pathway to the direct reduced iron (DRI) - electric arc furnaces (EAF) pathway. Switching to DRI using natural gas can reduce scope 1 and 2 emissions by 45%. But switching to DRI using green H2 would reduce emissions by 92%. Given that potential, steel mills in neighbouring Ontario have already committed to transition to H2-DRI and several H2-DRI pilot projects are underway in Europe. By 2050, steel producers in North America might need up to 2 mt of H2 ($4B 1 1 Based on $2/kg Notes: 1 Based on $2/kg ) annually, with potential for up to 125kt of that demand to come from Quebec alone. By building the needed infrastructure now, Quebec could become a net exporter of H2-produced DRI. Unlike other areas that must rely on intermittent renewable energy sources and expensive storage to achieve continuous production, Quebec has the benefit of continuous clean electricity supply from hydropower. This advantage can be coupled with our extensive reserves of high-grade iron ore to produce H2-based DRI, allowing Quebec to take an important role in decarbonizing the steel industry.

Shippers are also evaluating H2-derivative fuel sources such as methanol and ammonia as they accelerate efforts to decarbonize. By 2040, our estimates suggest that demand for H2 from shipping in North American could be as high as 1.4 mt ($2.8B 1 1 Based on $2/kg Notes: 1 Based on $2/kg ) annually and could reach 4.4 mt by 2050. Boosting Quebec’s H2 production could help us capture greater share of this demand.

H2 is also likely to be of significant interest to heavy transport and rail operators. Because H2 fuel cells weigh less than the typical electric battery, take up less cargo space, and can be fuelled as much as 15 times faster than their electric counterparts they could provide heavy transport and trains with longer ranges and faster refuelling times. As a result, while electric batteries are advantaged for light-duty vehicles in North America, freight vehicles, busses, and other heavy transport are likely to switch to H2 over the next several years. Our estimates suggest demand from heavy-duty transport across Quebec and nearby locales could grow to between 40 and 190kt annually by 2030. (See Exhibit 1). There is also an opportunity for Quebec to support H2 in rail, with multiple companies investing across the value chain, from locomotive engine design to refuelling infrastructure, and train service and maintenance.

Investing in Green H2 can propel long-term prosperity for Quebec

Green H2 can unleash powerful economic benefits for Quebec. Those benefits will become progressively larger as infrastructure, partnerships and the broader ecosystem mature. Quebec can play a role in the full value chain, from producing hydrogen to hydrogen-derived products such as ammonia, methanol, and sustainable aviation fuels as well as developing enabling technology and manufacturing equipment.

Quebec enjoys three competitive advantages that can make leadership in green H2 both attainable and sustainable.

  • The first is cost— Given our abundant hydropower resources, generating green H2 could cost 50% less in Quebec than in neighbouring Ontario and New England. Quebec’s potential production costs are also on the lower end of the global average, which ranges from $3 to $6.5 per kilogram. 2 2 Assuming very large scale Electrolyzer ~250MW Notes: 2 Assuming very large scale Electrolyzer ~250MW By building on our existing strengths, Quebec can take a leadership position across the value chain, growing our expertise in areas such as H2 DRI production, rail-car design and hydrogen-derivative transport fuels, creating multiple avenues of growth even as the cost advantage with other regions declines. 
  • The second is proximity—Ontario, New York and New England are expected to account for up to 150 kt ($300M) per year of H2 consumption by 2030 partially driven by relevant heavy industry (See Exhibit 2.) and heavy-duty transport (See Exhibit 1.). Quebec’s proximity to these potential demand centers gives us an edge over other competitors since transporting pure hydrogen over 1,000 km can increase the cost by over 50%. 
  • The third is scarcity—For many heavy industry and transport businesses in Ontario and New England, green H2 may be the most feasible source of hydrogen energy, given the cost of locally sourced green H2 and limited options for carbon capture usage and sequestration.

This is the time to act

Now is the time for Quebec to play to our strengths, focusing on applications that require a continuous H2 supply and avoid those that are unlikely to pan out, such as fuel cells for passenger vehicles. Funding a mix of near-term and longer-term opportunities and balancing risk-reward is also important. To help Quebec leapfrog other markets that are building comparable access to low-cost renewable energy, we advise the following steps.

  1. Align on a strategic approach and commit the necessary investment resources. Several advanced countries have developed strategic plans for green H2. Japan, for example, has defined targets for H2’s share of the total energy mix, the number of fuel cell vehicles industries should employ, and is using those insights to set H2 import and production goals. Other countries such as Germany are targeting the broader H2 value chain and investing in enabling infrastructure such as hydrogen locomotives and end-use products such as “green steel” in addition to production. The most advanced strategies include supportive regulations and fiscal incentives such as the proposed H2 production tax credit in the US. Quebec’s approach could define the targeted role of H2 to decarbonize our economy, our export opportunity, and additional opportunities along the H2 value chain. Strategic investments in hydrogen production coupled with favourable regulation can give steel and other industries the confidence to back hydrogen and look to Quebec as a key partner and source. This could strengthen Quebec’s foothold in established industries such as DRI production and allow us to gain advantage in newer, high-value industries such as ammonia and methanol for shipping.
  2. Continue to establish demonstration projects and pilot programs across key industries. Demonstration projects across the value chain are crucial investments for both the public and private sectors. Their scale and maturity help to galvanize initiatives across the ecosystem. Demonstration projects can also ensure that Quebec remains competitive with ambitious efforts elsewhere. In early 2021, for example, Germany announced funding for 62 large-scale H2 projects across the value chain, including demonstration and pilot projects, to become a leader in hydrogen technologies. In the US, Breakthrough Energy’s Catalyst Program partners with the Department of Energy and European Union agencies on billion-dollar programs for demo projects in green H2 and other low-carbon technologies. Pilot programs, whether public-sector led, private-sector led or jointly led, are also key. These programs show strategic stakeholders that Quebec is serious about the green H2 opportunity and function as a source of research and development insights—surfacing innovations that result in lower production costs and other forms of competitive market differentiation.
  3. Promote plans and partnerships within and beyond Quebec's borders. Many jurisdictions and companies have already begun to engage in discussions with potential partners internationally. For example, Australia has actively sought and developed export agreements with Northeast Asia. Both Japan and South Korea are developing green H2 hubs in Australia to support their export markets and domestic supply. Quebec’s government and companies could take a similar approach, funding or co-funding projects with other government and business partners. Early promotion is especially important for heavy industry and transport businesses that must plan their capital investments and strategic decisions 10, 20 and even 30 years out.

Green H2 is a golden opportunity for Quebec, but capitalizing on it requires industry, investors, and government to work together on bold bets enabled by a clear strategy, pilots and partnerships. These actions provide crucial market signals, giving ecosystem players the confidence they need to back green H2 as part of their climate transition plans, knowing that they’ll have the infrastructure, partners and resources available to support their needs. There is no doubt that Quebec holds enviable advantages in the race for green H2 leadership. Will Quebec act swiftly enough before others catch up?