Clean electricity grid, tax credits will feature high in federal budget

Canada's push for a zero-emission electricity grid will get a significant funding boost in the federal budget on March 28, including with new tax credits expected to encourage the development of renewable power sources like wind and solar.

Finance Minister Chrystia Freeland has expressed an intention to limit new spending in this budget, amid the inflationary worries and affordability pressures on most Canadians.

But she also has made clear Canada can't hold back too much on clean technology investments because the competition is fierce.

The United States Inflation Reduction Act, with more than US$370 billion promised for clean-tech investments, is chief among her concerns.

During a visit to an electric-vehicle charging manufacturer in Quebec City on Wednesday, Freeland said if Canada does not keep pace, it will lose out on major investments and the chance to create thousands of good jobs.

"Today, and in the years to come, Canada will either capitalize on this historic moment, on this historic opportunity before us, or we will be left behind as the world’s democracies build the clean economy of the 21st century," she said.

And she said the government's role in the budget is going to be "to help the people who are currently in the process of creating this clean economy."

November's fall economic statement made a number of promises on that front that were to be fleshed out in the spring budget. Here's a rundown of what to look for on Tuesday.

1. Clean electricity

Electrifying things like cars and home heating will require Canada to double, or even triple, how much power it makes.

Canada has also promised to have zero-emission electricity production by 2035. Regulations to get there were initially expected in December but have yet to materialize, in part because the promise is extremely complex.

"People should not underestimate the challenge we are facing," Natural Resources Minister Jonathan Wilkinson said last fall.

Canada already generates 87 per cent of its electricity from clean sources, including hydro (61 per cent), nuclear (19 per cent), wind (six per cent).

Getting to 100 per cent will require a bigger share from renewables and mean any continued fossil fuel-based electricity is abated with carbon capture systems. It will also require a significant investment in battery storage systems so power is there as demand rises and falls.

Provinces also control electricity generation, and their grids aren't well connected. Most can send power to the United States but not to each other.

Wilkinson said Wednesday the government is very aware that a clean power grid is "critically important" to its climate plans and people should expect the budget to reflect that.

"I would say that the grid, a clean electricity grid, underpins our ability to meet our emissions reduction targets and to achieve the kind of economy, a clean growth economy that we want to see going forward," he said.

2. Investment tax credits and beyond

Budget day is the deadline Freeland set to begin offering new investment tax credits for clean energy. That includes a refundable credit for 30 per cent of the capital cost of investments in electricity generation including from solar, small nuclear reactors, and wind, as well as battery storage systems, heat pumps, and industrial zero-emission vehicles.

Another investment tax credit, of up to 40 per cent of the capital cost, is coming for the production of low-emission hydrogen. The lower the emissions the higher the credit will be, Freeland promised.

The amount available under both credits was also going to, for the first time in Canada, be tied to the wages paid to workers and whether apprenticeships are created by the company.

There are signals the budget will introduce even more than just those two credits, with the possibility Canada is going to move to some production tax credits for clean electricity, or tax credits earned for every kilogram, or kilowatt hour of energy produced.

The Inflation Reduction Act last year amped up existing production tax credits for companies that make green power in the U.S. It is an expensive policy but one that makes the U.S. more attractive for investing in things such as hydrogen, sustainable aviation fuel, or battery cells.

The Ottawa-based environmental think tank Clean Prosperity recently produced an analysis that said for every kilowatt hour of battery capacity made, a Tennessee battery production plant would get $45.68 from the production tax credit offered by the Inflation Reduction Act, plus $2.73 from state grants. In Ontario, the total of both provincial and federal investment incentives would be $2.36.

A green hydrogen project in Quebec can get about $2.04 per every kilogram of hydrogen produced. In New York, that amount is almost double, at $4.02.

Michael Bernstein, the executive director at Clean Prosperity, said he expects the budget will be selective in the areas where it offers credits. Canada is not as big as the United States and may not be able to match it dollar for dollar, but it can find the most effective places to invest.

"I would expect some meaningful but also targeted responses to a range of areas of the clean energy industry where Canada has reason to believe we can compete effectively," said Bernstein.

"I am hopeful there may be additional strategic tax measures, production tax credits, that support areas where Canada has an outsized economic opportunity in the low-carbon economy."

3. Contracts for difference

The fall fiscal update outlined the beginning of the new Canada Growth Fund, to help spur private investment in low-carbon technology. Among the ways it might do that is with "contracts for difference," which lower the risk of making investments by guaranteeing a certain return.

Canada's industrial carbon-price system includes the ability of companies to generate credits for reducing their emissions more than a minimum required amount, and then sell those credits to other companies that don't reduce their emissions enough.

The credits are supposed to be cheaper than paying the carbon price on those emissions, but because the price of those credits is driven by the supply-and-demand force of the market, it's difficult for companies to know for sure what they could earn from them.

The contract for difference would ensure those credits are worth a minimum amount or the company would be paid the difference. If the credits come in for more than that amount, the company pays the government — or in this case, likely the Canada Growth Fund — back the difference.

Bernstein said the U.S., which has some carbon pricing at the state level but not at the national level, is using direct subsidies as its main incentive. But he said for Canada, which has its national price on carbon, contracts for difference are more cost effective than direct subsidies, because they provide predictability without always having to pay as much for it.

"What will really make this response work effectively and help us compete across a wide range of technologies would be to put in place a carbon contracts for difference program that gives firms across the economy the confidence to spend a large amount of capital to decarbonize," he said.

4. Sustainable jobs

The fall economic statement promised a five-year, $250-million investment for several new programs to invest in the workers and the training they need to take on jobs in the growing clean technology sector.

The programs would include a new training centre to identify the skills needed, and train up to 15,000 workers on-site, as well as support for union-based apprenticeships and government secretariat to help workers find and be matched to training programs they need.

The budget should include some more details on how these programs will roll out.

This report by The Canadian Press was first published March 23, 2023.