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HomeMy WebLinkAboutStaff Report 2503-4398 Climate Action and Sustainability Committee Staff Report From: City Manager Report Type: ACTION ITEMS Lead Department: Public Works Meeting Date: April 4, 2025 Report #:2503-4398 TITLE Discussion of Preliminary Sustainability and Climate Action Plan (S/CAP) Funding Study Results; CEQA Status - Not a Project RECOMMENDATION This is a discussion item and no action is requested. EXECUTIVE SUMMARY This report presents some preliminary findings from the Sustainability and Climate Action Plan (S/CAP) Funding Study to inform early discussions of strategies for scaling up climate action in 2026 and 2027. The City intends to communicate key preliminary results from the study, highlight potential strategies the results suggest could be successful, and lay out next steps to develop these potential strategies further in the coming months. The study shows that community electrification of buildings and vehicles (along with Vehicle Miles Traveled (VMT) reduction) is a net benefit at a community level. Building electrification is a net cost to the community, on average, while reducing vehicle use and adopting Electric Vehicles (EVs) yields a much larger net savings. The net benefits tend to be on a lifecycle basis, with electrification having a higher up-front cost than just replacing aging gas equipment with new gas equipment. The costs and benefits also accrue unevenly, with some parts of the community seeing greater benefits and some seeing greater costs. This means that the pathway the community takes to an electrified future makes a difference. A strong pathway will include compelling programs that support a clear community message along with a funding and financing strategy that matches costs to benefits. This report outlines potential strategies that staff can explore and next steps in that exploration. Staff will seek Committee feedback on the insights, potential strategies, and planned next steps. BACKGROUND The City is working to achieve the community’s greenhouse gas (GHG) emissions goal of 80% reductions from 1990 levels by 2030 (80x30). The goal was included in the Sustainability and Climate Action Plan (S/CAP) adopted in June 2023 along with the 2023-2025 S/CAP Work Plan.1 Work Plan Work Item 5.B (Funding Alternatives) focuses on assessing the funding needed to achieve 80% reductions in emissions from 1990 levels and identifying potential sources of funding. After the City completed a solicitation process in fall of 2023, Council approved a contract with E3 (a Willdan company) in January 20242 to complete a funding study, a survey of potential funding sources, an EV charger needs assessment, and studies of electrification opportunities in non-residential and multi-family buildings. These studies are nearing completion. E3 used the best data available in regional databases, tailored to fit Palo Alto as much as possible, to do their estimates of the community costs to electrify. They supplemented this with on-site equipment surveys and planning-level engineering estimates for a sample of multi- family and non-residential buildings. But as with any analysis, uncertainties remain and a sensitivity analysis will need to be done to assess the largest financial risks to any potential strategy (for example, the risk that costs are higher than assumed in this model or benefits lower). ANALYSIS E3 analyzed three potential electrification scenarios: a “Low Local Action” scenario that involved moving at the pace of State and Regional building and vehicle electrification mandates, a “High Local Action” scenario involving a pace of electrification that meets the 80x30 goal, and one scenario at a pace between those two. Only the High Local Action scenario meets the 80x30 goal. Staff and the consultants anticipate that even with high adoption rates there are limits to how quickly the vehicle fleet can electrify, meaning there is a high value to building electrification and VMT reduction in achieving near term emissions reduction. In fact, to achieve 80% reductions in the High Local Action scenario, nearly an 80% reduction in building gas use from current levels is needed. Among the technologies studied, vehicles represented a net lifecycle savings for emissions reduction on a dollars per metric ton of carbon dioxide equivalent ($/MT CO2-e) basis, as did commercial HVAC. Most building electrification measures had a net lifecycle cost to the community, at least to some extent, with the lowest cost measures being residential building electrification and the highest being commercial water heating. However, most of these uses were only a net cost compared to methane gas and would show much more favorable results 1 2023-2025 S/CAP Work Plan; https://www.cityofpaloalto.org/files/assets/public/v/1/sustainability/reports/2023-2025- scap-work-plan_final.pdf 2 Staff Report 2308 1939, January 16, 2024: https://cityofpaloalto.primegov.com/meetings/ItemWithTemplateTyp e?id=3834&meetingTemplateType=2&compiledMeetingDocumentId=8890 compared to biogas. Large industrial uses were estimated to have a high cost on a $/MT CO2-e basis, but more research is needed on these uses. The study found that community electrification combined with reductions in vehicle miles traveled (VMT) was a net lifecycle benefit in all scenarios, meaning the savings in natural gas, gasoline, and vehicle maintenance are projected to outweigh the up-front and operational costs of electrifying the community. Reductions to annual household expenses ranged from $400 to $1,750 for the sample customers studied. This suggests that a well-designed strategy that aligns costs with benefits would allow the community to successfully transition with minimal overall impacts. Given the higher up-front investment of electrified equipment, this can seem counter-intuitive, but considering 1) that much of the cost of transitioning (e.g. upgraded electrical systems) is a one-time cost, 2) the community savings and efficiency from only paying the costs of delivering one type of fuel (electricity) rather than three (electricity, natural gas, and gasoline), as well as 3) the lower energy use of electrified equipment, it can seem more intuitive. Designing an efficient pathway that aligns costs with benefits requires addressing that the up- front investment required to electrify is higher than the cost of just replacing existing gas equipment with new gas equipment, even if that higher investment will yield long-term savings. It also means addressing equity issues, renter-landlord split incentives, and differences in the amount of costs and benefits different groups experience within the community. Tools that the City can explore to address those issues and/or to lower City funding and financing sources needed include: o Leveraging customer bill savings via financing or an “Electrification as a Service” charge. o Paying out incentives over time instead of up-front. o Reflecting the cost of decarbonizing the gas system in the gas rates. The purchase of biogas would be one way to do this, and could be structured as a voluntary program. Other approaches may require state-level legal changes unless structured as a voluntary action for interested ratepayers. o Issuing debt to fund up-front incentives, with debt service over a longer time period like 30 years. Since many costs of transitioning to an all-electric community only need to be made one time (e.g. new electric conduit, panel upgrades, condensation drainage), 30 years is an appropriate period to pay off that debt. o Private financing is also a possibility, though the higher associated interest rates could increase the overall transition cost. All the approaches listed above require various types of internal review to determine the feasibility, including legal review and any legislative or regulatory barriers. As approaches are validated, they can be incorporated into new scenarios to be modeled using the S/CAP Funding Model. Staff tentatively intends to pursue the following next steps in the coming months. •Keep validating the underlying model assumptions with stakeholders •Internal review of potential funding approaches followed by modeling of feasible approaches and additional discussions with the Committee. •Explore doing a community survey to understand customer attitudes toward climate action at this moment and willingness to fund programs •Deliver preliminary results from the Gas System Transition Study to inform potential operational savings and costs of abandonment •Complete a sensitivity analysis to assess potential risks (e.g., from costs being higher than assumed in the analysis) and mitigation approaches FISCAL/RESOURCE IMPACT The fiscal impact of pathways for scaling up electrification in Palo Alto will vary depending on how the strategy is designed. Pathways that rely more heavily on incentives would likely require additional City revenue sources, while pathways that involve financing with repayment costs offset by utility bill savings and incentives paid over time will require far fewer City resources and may be achievable without any additional City resource need. The City would prioritize identifying pathways that do not require rate or tax increases. But the study showed that even the most incentive-heavy scenarios, if funded by bonds paid off over 30 years, require new levels of funding that may seem reasonable to some Palo Altans. If collected on an energy basis, E3 estimated a funding need equivalent to an 8% increase in community energy costs. That equates to about a 4% increase in the median residential utility bill, or $15/month, and that would be offset by first-year annual savings (using 2025 utility rates) of $1,250 to $1,750 per household, savings that would only grow over time. The City is developing more specific proposals for pathways the Committee and other stakeholders can consider and will be prioritizing pathways that do not require new taxes or increases in utility rates. STAKEHOLDER ENGAGEMENT Staff had multiple discussions on this topic with the Council Climate Protection Ad Hoc Committee and its Working Group throughout 2024. Recognizing that these discussions are entering a new phase, staff will ensure that communications with the broader community are developed accordingly. ENVIRONMENTAL REVIEW The Climate Action and Sustainability Committee’s discussion of this item is not a project as defined by CEQA because the discussion of preliminary results from the S/CAP Funding Study does not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment. CEQA Guidelines section 15378(b)(4). APPROVED BY: Brad Eggleston, Director Public Works/City Engineer