Federal government launches first call for proposals under the Clean Fuels Fund

On June 21, 2021, the federal Minister of Natural Resources launched a first call for proposals[1] to build new domestic production capacity for clean fuels[2] under the $1.5-billion Clean Fuels Fund (the Clean Fuels Fund or the Fund). The Fund will be administered by Natural Resources Canada (NRCan) to support the production and distribution of low-carbon and zero-emission fuels across Canada and around the world.

The Clean Fuels Fund and Clean Fuels Program

The Clean Fuels Fund operates as a constituent part of Canada’s emission reduction plans under the Strengthened Climate Plan: A Healthy Environment and a Healthy Economy [PDF] by further buttressing the Clean Fuel Standard and the Hydrogen Strategy for Canada [PDF], both of which were announced in late 2020.

A “clean fuel”, or low-carbon fuel, is a fuel with reduced carbon intensity throughout its lifecycle and is substantially non-petroleum. Typical examples of clean fuel include hydrogen, biofuels, liquid synthetic fuels and renewable natural gas. The impetus on clean fuels is intended to help industry, freight and other similar carbon-intensive sectors shift towards greater decarbonization.

Practically, much of the $1.5 billion earmarked for the Clean Fuels Fund operates to minimize inherent risk flowing from the substantial capital investment required to build or expand clean fuel production facilities or to convert existing facilities. To this end, there are three separate components of the Fund:

• $1.38 billion to support the build-out of both new — as well as the expansion of existing — production capacity and facility conversions or associated feasibility, engineering and front-end engineering and design (FEED) studies;
• $30.4 million to support the establishment of biomass supply chains and associated feasibility assessments (the first two components comprise what NRCan terms the Clean Fuels Program (the Program)); and
• $19.4 million to support the first two components through the development of critical codes, standards and regulations associated with clean fuel technologies.

First call for proposals — increasing clean fuels domestic production capacity

The call for proposals for projects increasing domestic production capacity for clean fuels opened on June 21, 2021, and closes on September 29, 2021. Eligible proponents may submit an individual application for each eligible project via the online application. In order to qualify as an eligible project, proponents must demonstrate that investments will be used to undertake projects in Canada that meet certain mandatory criteria, depending on whether the project qualifies as a production project or a feasibility project.

Production projects

In order to be eligible for funding, production projects must use fuel production technologies with a Technical Readiness Level of 9 (as specified by Innovation, Science and Economic Development Canada[3]) that are designed for commercial deployment. The call for proposals outlines a non-inclusive list of eligible fuel types, including hydrogen, ethanol, renewable diesel, co-processing of bio crude, sustainable aviation fuel and renewable natural gas. In addition, to be eligible as a clean fuel, the fuel’s lifecycle must have a carbon intensity of less than 50 gCO2e/MJ for liquid fuels and 36 gCO2e/MJ for gaseous fuels.

Production projects include the expansion or conversion of existing facilities and buildout of new facilities. Funding for eligible production projects is up to a maximum of 30% of total eligible project costs, to a maximum of $150 million per project, and is conditionally repayable.

At the time of application, applicants must demonstrate that a minimum of 30% of the total project costs have been secured through firm financing and that only a maximum of up to 40% of project costs have not yet been secured. Total Canadian government contributions from all levels of government, including funding from the Program, may not exceed 75% of total project costs except in limited situations.

Conditional repayment obligations occur over a period of 10 years after the Official Commissioning Date[4] and once the project begins to generate revenue. While specific triggers for repayment will be included in the contribution agreement between the proponent and NRCan, annual repayment amounts will be determined based on a profitability assessment — including the value of credits generated through offsets and other regulations from all levels of government — and will represent a percentage of annual profit commensurate with the percentage of NRCan funding received for the project.

Production projects also must meet minimum production capacity thresholds specific to the form of clean fuel produced by a project. Specific production capacity thresholds can be found in Applicant’s Guide [PDF] produced by NRCan.

Finally, eligible production projects must demonstrate separate, documented, feedstock supply and fuel off-take plans, including carbon-dioxide off-take where applicable. Eligible production projects must prove an Official Commissioning Date of no later than March 31, 2026. As many of the eligible production projects take several years to build, this requirement evidences that the funding is designed to promote nascent projects rather than fuel the long-term runway of those which are not yet conceived.

Feasibility projects

Eligible feasibility projects include feasibility, basic engineering and detailed FEED studies for new facilities, facility expansions or facility conversions. Guidance from NRCan also expressly indicates that such projects may include feasibility studies to assess the techno-economic feasibility of blending hydrogen into natural gas systems.

Funding for feasibility projects is up to 50% of total eligible project costs, to a maximum of $5 million per project, and is non-repayable.

At the time of application, applicants must demonstrate that a minimum of 30% of the total project costs have been secured through firm financing and that only up to a maximum of 20% of project costs have not yet been secured. As with the production projects discussed above, funding may not exceed total Canadian government stacking limits of 75% of total project costs.

Eligible feasibility projects must be completed no later than March 31, 2026.

Second call for proposals – establishing biomass supply chains

A second call for proposals is anticipated in summer 2021 to support sustainable biomass supply chains while making Canadian biomass feedstocks more competitive. Current guidance provides that this process will aim to establish regional hubs for feedstock-gathering infrastructure. In addition to traditional feedstock products, funding will also target stranded or underused biomass resources for producing advanced clean fuels. More information will be forthcoming upon official announcement of the call for proposals.

Anticipated Indigenous-led call for information for clean fuel projects

NRCan anticipates running a dedicated Request for Information (RFI) for Indigenous businesses and communities for the development of clean fuel projects. The RFI will allow Indigenous proponents to collect information, assess project readiness and gauge interest, and is anticipated to be followed by a formal call for proposals. To date, no timeline has been established for the commencement of the RFI nor have any specifics in respect of eligibility or funding been released.

Codes, standards and regulations

The third component of funding under the Clean Fuels Fund is to ensure codes and standards are created or modernized and are in alignment with the developing clean fuel infrastructure and end-use technologies across jurisdictions. The aim is to address gaps in codes and standards, assist the certification process of new production facilities, eliminate barriers to new end-uses or technologies entering the market place and deliver on a comprehensive multi-year work plan for harmonization of such codes and standards under the Canada/US Regulatory Council.

Conclusion

The Clean Fuels Fund and the Program provide an opportunity for private proponents developing clean fuel projects to obtain much-needed up-front capital to assist in project buildout under the Program, as well assessing the feasibility of future projects.