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Canada has a chance to get a leg up in the increasingly heated global race to produce and sell hydrogen, courtesy of interest from one of the world’s largest emerging markets for the alternative fuel source.

On Tuesday, the federal government will sign a new agreement with Germany to work together on the clean-energy transition, including developing policies and regulations, and integrating large shares of renewables into electricity systems.

Hydrogen is expected to play a central role, with Germany’s ambassador to Ottawa, Sabine Sparwasser, touting it as a “match made in heaven” because of her government’s plan to make hydrogen a centrepiece of its decarbonization strategy.

“Germany is probably the world’s most interesting market for hydrogen right now, and Canada is potentially a very big power in its production,” she said in an interview.

But even as it expresses that sort of enthusiasm, Germany may also call into question the nature of Canada’s strategy to develop its hydrogen industry.

To date, that strategy – which has mostly involved directional signals from Natural Resources Minister Seamus O’Regan, with funding likely to follow – has focused primarily on “blue” hydrogen. That means producing the element from natural gas or other fossil fuels, while using carbon-capture technology to minimize emissions from the process, making it a potential boon for Western Canada’s struggling resource sector.

Germany, however, is more interested in importing “green” hydrogen, which is derived from non-fossil fuel sources and thus considered emissions-free. And a report on Canada’s hydrogen potential and dynamics that was commissioned by the German government – expected to be released this week during the same Berlin virtual energy conference at which the agreement between the two countries will be announced – is implicitly critical of Ottawa’s blue-hydrogen focus.

“How the focus on blue hydrogen will be aligned with Canada’s goal of reaching climate neutrality by 2050 is not spelled out in detail,” says an executive summary of the report by the Berlin-based think tank and consultancy Adelphi. “As a result, the strategy seems to be more of a vision for the future of those provinces with large fossil fuel resources.”

The summary is bullish on Canada’s green-hydrogen potential, particularly in Quebec and Atlantic provinces. “Eastern Canada has optimal conditions for a rapid market uptake of green hydrogen, possibly among the best in the world,” it says.

After pointing out that Quebec in particular has complained about not being consulted for the federal strategy, it suggests “within a future energy partnership … German interest for Canadian green hydrogen could be expressed politically and a future supply route could be tested through concrete demonstration projects.”

In an interview, one of the report’s authors, Adelphi senior advisor Raffaele Piria, said Canada has an advantage over some of its likely competitors for hydrogen exports to Germany, such as Saudi Arabia and Morocco, because of its “geopolitical stability.” He also pointed to the underappreciated proximity of Eastern Canada – especially Newfoundland and Labrador, where he sees great potential to produce green hydrogen from wind energy – to European ports.

Mr. Piria said he does not anticipate public funds in Germany going toward blue hydrogen, due to concern about its environmental impact and incompatibility with the goal of net-zero emissions, even with the carbon-capture technology.

He acknowledged that there is some support in Germany for blue hydrogen as a limited-time transitional fuel. It is environmentally preferable to the “grey” hydrogen – produced from fossil fuels, absent carbon capture – on which that country primarily relies for its current, limited hydrogen usage. And blue hydrogen is currently cheaper than green (although more expensive than grey).

Ms. Sparwasser echoed that thinking. “Obviously in the long run we believe that green hydrogen is going to be the kind of energy that is best for the climate, and that’s the one that we think should be the target,” she said, adding that doesn’t necessarily “exclude” blue hydrogen as a bridge.

Seizing on that transitional opportunity would likely require Canada to move swiftly to get its blue hydrogen to market. Green hydrogen costs have been projected to significantly fall, by some forecasts reaching price parity with grey hydrogen (and becoming cheaper than blue hydrogen) as soon as 2030. That’s because many countries are expected to ramp up green hydrogen’s production through renewable energy sources such as wind and solar.

The report for the German government suggests hydrogen produced by Canada’s oil and gas industry could still find a warmer reception outside Europe. It says Asia and the United States, which are logistically easier than Europe for exports from Western provinces, are likelier markets.

The Canada-Germany agreement will also point to other aspects of decarbonization – including the phase-out of coal power, on which Germany lags well behind Canada, and investment in renewables – on which the countries will explore information-sharing and trade opportunities through the private sector.

The federal government aims to include hydrogen, which it says could lead to $50-billion in exports and as many as 350,000 new jobs by 2050, as a key component of Canada’s clean-economy transition.

That could be difficult to realize without buy-in from a German government that plans approximately $13-billion in hydrogen investment, involving imports to complement domestic production. It’s a leader among European countries also looking to spend large sums on the fuel source.

Mr. O’Regan has said he supports both forms of hydrogen development. However, he has made no secret of most of Ottawa’s immediate focus being on producing it from natural gas. The strategy released by his ministry last December says blue hydrogen is Canada’s cheapest and most easily accessible option for the short term, given it has the lowest-cost production of large-scale, clean hydrogen based on today’s technologies and commodity costs.

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