New Clean Energy Tax Credits Bolster Case for Hydropower Investment

This article was originally published by the Ontario Waterpower Association in its 2023 Year in Review publication.

This past year has included significant news about tax incentives and other financial developments designed to facilitate investments in less-carbon-intensive electricity generation in Ontario. The Canadian government’s 2023 budget introduced the Clean Electricity Investment Tax Credit (“CEITC”) and the Clean Technology Investment Tax Credit (“CTITC”). More recently, the Ontario government’s 2023 Fall Economic Statement announced the imminent creation of the Ontario Infrastructure Bank (“OIB”). While many of the granular details of these measures are still pending, taken together, they appear to significantly bolster the financial case for investments in hydropower projects.

Ontario Infrastructure Bank

Beginning with provincial developments, the Ontario government announced the formation of the OIB as a vehicle for raising private capital to support infrastructure projects in the province, alongside public financing.^[1] The limited information regarding the OIB suggests that pension funds, Indigenous communities and other institutional investors will be eligible to invest, while the provincial treasury will provide the initial $3 billion capital.^[2] Although the OIB has not yet been given a mandate or formed a board of directors, many believe it is likely to be modelled on other public infrastructure banks, such as the Canada Infrastructure Bank. Ontario’s 2023 Fall Economic Statement suggests that the OIB will target funding in part toward renewable energy generation projects, including new projects and expansions of existing operations.^[3] In addition, the OIB is anticipated to receive and assess “unsolicited ideas and proposals for infrastructure projects that come from qualified institutional investors, public sector entities, governments or Indigenous communities.”^[4] This presents an opportunity for hydropower project owners and developers to – by themselves or in partnership with such institutions – submit proposals for new projects and expansions of existing operations.

Clean Technology Investment Tax Credit

On the federal side, the Canadian government has now issued draft legislation to govern the CTITC. The draft legislation was published on August 4, 2023, outlining parameters for eligibility. According to the draft legislation, the CTITC will be a refundable investment tax credit of up to 30% of the capital cost of certain technology assets acquired after March 27, 2023.^[5] The CTITC will be reduced to 15% in 2034 and will be completely phased out thereafter.^[6] To qualify for the CTITC, a taxpayer would need to be a taxable Canadian corporation, including taxable Canadian corporations which are members of a partnership.^[7] For clarity, the draft legislation deems “clean technology property” not to have been “acquired” before it is available for use.^[8] In addition, the draft legislation explicitly states that equipment used to generate electricity from water energy would be eligible for the credit, as would equipment used in many types of energy storage, such as pumped hydroelectric energy storage applications.^[9]

However, the draft legislation also contains two key conditions which must be met in order to receive the full benefit of the CTITC. Should a claimant fail to meet these requirements, the available credit would be reduced to 20% of the capital cost for property available for use between March 27, 2023, and before 2034, and would be reduced to 5% for property available for use after 2033 and before 2035.^[10]

The draft legislation describes these requirements as follows:

1. During installation, workers must be compensated in accordance with a collective agreement applicable as appropriate to each worker. Alternatively, labourers involved in installation must be paid, at minimum, in accordance with the most recent multi-employer collective bargaining agreement considered to be the industry standard for a given trade in a given region or in Ontario as a whole; and
2. Reasonable efforts must be made to ensure that apprentices registered in a Red Seal trade perform at least 10% of the total work hours for the year at an installation site.^[11]

The takeaway for hydropower project proponents is that their pro formas will need to consider the marginal tax benefits available pursuant to the CTITC against the potential increased labour expenses associated with projects that are required to meet the CTITC conditions.

Clean Electricity Investment Tax Credit

Concerning the CEITC, while draft legislation is still pending, high-level details were revealed in the 2023 federal budget. According to the budget, the CEITC will be a refundable tax credit of up to 15% of the capital cost for certain investments in technologies necessary for generating and storing (including pumped hydro storage) clean electricity as well as transmission between provinces and territories.^[12] The CEITC would be available to taxable and tax-exempt corporations, including publicly owned utilities, Crown corporations, corporations owned by Indigenous communities, and pension funds. Both new projects as well as refurbishments of existing facilities would be eligible.^[13] While the CEITC is anticipated to be available as of the day of the 2024 federal budget, there is a “political issue” that will need to be resolved first: namely, according to the budget, that access to the CEITC for expenditures in a given province will be contingent on the appropriate provincial authority making commitments “that the federal funding will be used to lower electricity bills, and … to achieve a net-zero electricity sector by 2035.”^[14] In addition, the CEITC is anticipated to have prevailing wage and apprenticeship requirements^[15] which will presumably be in line with the CTITC requirements. According to the budget, if these requirements aren’t met, the tax credit would be reduced to a maximum of 5%. Finally, it appears that it will not be possible to claim both the CTITC and the CEITC in relation to the same expenditures, and the CEITC will also be fully phased out after 2034.^[16]

The Energy Group at Aird & Berlis LLP advises a wide range of clients involved in Canadian and global projects. Please contact the authors or a member of the group if you have questions regarding hydropower projects or require assistance with any matter relating to sector-specific tax incentives.

[1] Ministry of Finance, 2023 Ontario Economic Outlook and Fiscal Review (November 2023) at pp. 36-37, online: <https://budget.ontario.ca/2023/fallstatement/pdf/2023-fall-statement-en.pdf>.