Canada’s new renewable energy investment tax credit (ITC), unveiled in the 2023 federal budget, will make the country a global leader in favorable financial conditions for green energy projects. Rystad Energy’s renewable economic modeling shows that these new tax breaks will raise the value of some projects by more than 50% over their lifetime, positioning Canada as the second most attractive place for renewable developers, behind only the US. The ‘made in Canada’ strategy is part of a growing global trend of policies prioritizing domestic production and labor, similar to the US Inflation Reduction Act. The ITC – a refundable incentive that offers up a percentage of the cost of capital investment – will provide a 30% tax write-off for renewable technologies deployed through 2034.
Thanks to this reimbursement, a 250-megawatt (MW) project built in Canada will now boast a full lifecycle net present value of $202 million after-tax, up from $131 million before the ITC was announced.* This marks a significant rise in value, which is likely to encourage further developments and revitalize some projects that have been sidelined due to unfavorable economics.
Canada looked at its southern neighbor’s renewable tax breaks and the influx of investment it’s set to trigger and thought: “I want some of that.” And its answer to the Inflation Reduction Act could have wide-ranging implications. In the short term, it will shake loose projects that hit snags due to recent economic conditions. However, in the long term, it could unleash a wave of new investments. Geoff Hebertson, senior renewables and power analyst, Rystad Energy
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*Analysis of a fictional asset in Alberta, with a $45 per megawatt-hour (MWh) power purchase agreement (PPA) that increases with inflation at 2% annually.
Canada is already a global leader in renewable energy power generation, with 83% of its grid power coming from renewable and nuclear sources. We expect that share to hit 97% by 2050, with most of the additional capacity supported by solar project development.
As previously reported, Alberta has emerged as a surprising leader in solar and wind developments. The province’s determination to reach its net zero goals has spurred solar, wind and storage capacity growth through corporate PPAs. Our forecasts show that the region will pass 20 gigawatts (GW) of installed renewable capacity by 2030. The new federal plan will further bolster investments in the province and push projects across the line that struggled in the previous economic environment.
The full ITC applies to geothermal, solar, wind and energy storage projects and will be in effect through December 2033, falling to 15% in 2034 and being phased out after 2034. Hydrogen projects also stand to benefit from a government-backed credit line for new projects. The plan provides up to 40% tax credits for green hydrogen projects emitting less than 0.75 kg CO2e per kg of clean hydrogen. Gray or blue hydrogen projects could see 5% to 25% ITC, depending on labor conditions. Furthermore, the Canadian government has lined up a 30% tax credit to incentivize investment in machinery and equipment used to manufacture clean energy projects, including storage equipment and recycling of critical materials used in electric vehicles (EVs) and batteries.
“While an investment tax credit is not a silver bullet, countries trying to compete for a share of global renewable investments and reach net zero should consider its benefits. Thoughtful policy moves, like an ITC, can support the uptake of renewables and ensure competitiveness with economic rivals,” says Hebertson.
By Rystad Energy
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