The Quebec Government is keen on hydrogen, an efficient fuel especially well suited to the transportation sector, one of the largest air polluters. Hydrogen does not emit any greenhouse gases, refuelling is fast, and its only by-product is water. In particular, hydrogen fuel cells obviate the need for batteries in motorized vehicles, which have weight and environmental issues. Produced in large quantities using Quebec’s abundant renewable electricity, hydrogen can be an important step forward to help the province meet its Paris Agreement climate goals.

Since 2019, Quebec is involved in a pilot project using Toyota’s Mirai. The province leased 50 cars and built one fueling station in Quebec City. Another station is planned for Montreal, with the Hyundai NEXO added to the fleet. The project’s purpose is to test the performance of hydrogen cars in North American conditions.

Hydro-Quebec (HQ), the state-owned vertically integrated electric utility and one of the world’s most important hydroelectric producers, is fast becoming agnostic as to how it produces its green electrons.

The Quebec Government would like HQ to go beyond green electrons and examine the production of green molecules, in this case green hydrogen. HQ appears interested. Last January, Eric Martel, the then CEO of HQ, was quoted as saying that HQ would take 5 to 10 years to develop the hydrogen sector.  Sophie Brochu, the newly installed HQ CEO, has not countermanded the initiative.

HQ’s hydrogen production and distribution would raise a number of issues, including:

1. Can HQ conduct such business? Yes, Hydro Quebec’s mandate is broad enough to include hydrogen when used as a fuel (Hydro-Quebec Act, art. 22).
2. What would be HQ’s production, transport and distribution rights? HQ has exclusive electricity distribution rights over nearly all of Quebec (An Act Respecting the Régie de l’énergie, art. 60). The distribution of hydrogen however would not require a network and the high fixed costs associated with it. Hydrogen can be produced in a distributive manner at each refuelling station. Consequently, the case for a natural monopoly does not exist and, similar to gasoline, the sector can have multiple suppliers and distributors.
3. Would HQ’s activities be regulated and, if so, how? Whether and how HQ should be regulated will depend on the nature and scope of HQ’s hydrogen business. But first Quebec, HQ’s shareholder, must decide what role HQ will play in the hydrogen space and whether its role will be complementary, competitive or exclusionary. In making its choice, Quebec will have to be mindful of unintended consequences.

For example, Nikola, the other electric vehicle company named after the famous 19^th-20^th century inventor Nikola Tesla, is testing large trucks with the expectation of producing and selling hydrogen-electric vehicles throughout the United States in 2022. Nikola’s business model is to offer a turn-key solution. Nikola plans to lease trucks, provide maintenance and supply hydrogen from its own network of stations placed along major transportation corridors. Interestingly, Nikola describes itself as an energy technology company and its current business model is to make most of its profits from the sale of hydrogen. What happens if Nikola cannot profitably apply its business model in Quebec? In such a case, Nikola could exclude Quebec from the jurisdictions it services, thereby depriving Quebec from a source of sustainable hydrogen trucks.

The safest — and probably best — play would be for the Quebec government to ensure that HQ makes electricity available to the private hydrogen sector and let the private sector lead the way, with HQ playing a limited supporting role. A recent precedent for this model is Hydro-Quebec International’s joint venture with Innergex, a private power producer that operates throughout Canada, the United States, France, and Chile.