The Government of Alberta issued an Order-in-Council 70/2022 directing the AUC to inquire into and report to the Minister of Energy on matters relating to hydrogen blending into natural gas distribution systems. The Hydrogen Inquiry Final Report contains the steps taken by the AUC and its findings. After contextualizing the characteristics of hydrogen, the natural gas distribution system in Alberta, and the competitive retail supply of natural gas to customers, the report proposes that:
1. the definition of “gas” in the Gas Utilities Act be amended to reference “up to 20 percent hydrogen by volume blended within a low-pressure natural gas distribution system” and include this definition in the Gas Distribution Act;
2. if no competitive market for hydrogen exists (to be determined by further study), hydrogen procurement could be performed by distributors;
3. a government-initiated review of agency responsibilities, with input from hydrogen proponents, be conducted;
4. federal and provincial hydrogen regulations are harmonized to support the development of national and provincial codes and standards for safety purposes; and that safety and engineering assessments be conducted prior to hydrogen blending into distribution systems;
5. a maximum hydrogen blending threshold of 20 percent by volume, with no minimum threshold, is reasonable, but pilot projects should start at lower levels;
6. the initial focus should be on hydrogen integration within larger municipal systems but there likely should not be a regulatory requirement for rural utilities, nor for any gas utility or gas co-operative, to blend hydrogen;
7. a slow, phased approach should be taken to regulating hydrogen blending:
(a) natural gas distribution utilities should have authority over the blending function and be permitted to recover blending facility costs through its revenue requirement and rates;
(b) all other hydrogen market segments (production, storage, and transportation) likely require further study and a better understanding of the impact on customers; and
(c) a regulated natural gas utility should, absent the exceptions listed above, be limited to hydrogen blending and distribution functions;
8. with respect to the factors that regulatory agencies should consider, the AUC is of the view that it is important for regulators to take into account public interest factors when assessing hydrogen blending projects and the respective costs, including assessments of cost-benefit analysis, safety, reliability, environmental impacts, emissions targets, carbon tax considerations, economic efficiency, and rate impacts to consumers. The AUC considers it reasonable to move forward with targeted pilot projects to better ascertain the impact of hydrogen blending, emissions reductions, carbon intensity of various hydrogen options and resulting carbon offset, and cost information. Moreover, in respect of increased costs and cost recovery:
(a) The AUC is of the view that it is premature to consider the allocation of capital and commodity costs for hydrogen blending;
(b) The AUC recognizes that the short-term adoption and the support for hydrogen blending face cost and rate impact challenges. The inclusion of the incremental costs that customers would be required to bear should be balanced against the affordability of utility service for customers; and
(c) The AUC recommends that the Alberta government consider providing support for customers such as credits, tax rebates, or subsidies as mechanisms to reduce the burden on individual citizens during the early stages of hydrogen blending when costs are greater than carbon tax savings.
The report concludes that further study is required to assess the technical and economic feasibility of different types of hydrogen (e.g., green, grey, blue) to properly allocate costs and apply the proper offset to carbon tax based on lower carbon emission intensity.