HomeMy WebLinkAboutStaff Report 14733
City of Palo Alto (ID # 14733)
Utilities Advisory Commission Staff Report
Meeting Date: 11/2/2022 Report Type:
City of Palo Alto Page 1
Council Priority: Climate Change: Protection & Adaption
Title: Staff Recommendation That the Utilities Advisory Commission Review
and Recommend the City Council Affirm the Continuation of the REC
Exchange Program
From: Director of Utilities
Lead Department: Utilities
Recommendation
Staff recommends that the Utilities Advisory Commission (UAC) recommend that the City
Council:
1) affirm the continuation of the “REC Exchange Program,” whereby the City exchanges
bundled RECs from its long-term renewable resources (Bucket 1 RECs) for Renewable
Portfolio Standard (RPS) eligible, unbundled RECs (Bucket 3 RECs),1 to the maximum
extent possible, while maintaining compliance with the state’s RPS regulations, in order
to provide additional revenue for local decarbonization efforts; and
2) direct staff to return to the UAC and City Council in 2027 to provide another review of
the program’s impacts.
Executive Summary
In August 2020, the City Council approved amendments to the electric utility’s Carbon Neutral
Plan that clarified and modified policies regarding the sales and exchanges of renewable energy
credits (RECs) (Staff Report 11556). The amendments permitted the exchange of Bucket 1
(primarily in-state) RECs for Bucket 3 (primarily out-of-state) RECs, provided the City maintains
compliance with State Renewable Portfolio Standard (RPS) regulations. A portion of the
earnings from the program were directed to be used to offset electric operational costs and
mitigate the economic impacts of the coronavirus pandemic, and the remainder were reserved
for local decarbonization programs.
Since then, staff has purchased and sold RECs for Calendar Years (CYs) 2020 through 2022 in
accordance with the Carbon Neutral Plan amendments, resulting in net earnings of $6.73
million, or about $2.24 million per year. These actual earnings are slightly lower than the
1 See Attachment A for a more detailed description of the different types of RECs.
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amounts that staff projected at the time the program was approved (about $3 million per year)
due to a narrowing of the Bucket 1 vs Bucket 3 price spread.
If the REC Exchange Program authorization is continued, staff projects that it will yield net
earnings of about $1.9 million per year over the next five years (CYs 2023-2027). Over time, the
REC Exchange program net revenue is projected to gradually decline, due to: (a) the gradual
ramping up of RPS requirement levels, which reduces the volume of supplies the City is able to
sell, and (b) some of the City’s older renewable energy contracts expiring. To date, $3.38 million
of the Program’s net earnings have been allocated toward local decarbonization efforts (with
the balance being used to offset operational costs and provide for general customer rate
reduction; going forward, all of the Program’s net earnings are planned to be directed towards
local decarbonization initiatives.
Background
In order to achieve the aggressive greenhouse gas (GHG) emissions reduction goals it has set, in
March 2013, through Resolution No. 9322, the City adopted a Carbon Neutral Plan for the
electric supply portfolio, with a goal of achieving carbon neutrality by 2013. The City has
achieved its Carbon Neutral Plan objectives each year starting in 2013, and due to its pursuit of
these objectives, the City’s electric supply portfolio currently far exceeds the procurement
requirements of the state’s Renewable Portfolio Standard (RPS) mandate, and all of the City’s
current RPS resources are classified as Bucket 1 RECs.
In August 2020, the City Council adopted a resolution allowing for REC Exchanges2 to take
advantage of the significant cost difference between Bucket 1 and Bucket 3 RECs3 to generate
additional revenue for the City’s electric utility (Resolution 9913, Staff Report 11556) and for
local decarbonization. The Council also directed that for 2020 and 2021, the earnings from this
program would be split, with two-thirds of the proceeds going to electric operating cost
reductions and one-third toward local GHG emission reduction programs, and that thereafter
all of the earnings would be devoted to emission reduction programs.
The Council authorized these REC Exchanges without a specific end date; however, they
directed staff to return prior to the end of 2022 to provide a review of the policy. That program
review is the focus of this report.
Discussion
REC Exchange Program Results (2020-2022) and Projections (2023-2027)
Since approving the REC Exchange Program in August 2020, staff has sold a total of about
802,000 Bucket 1 RECs for CYs 2020-2022 and purchased an equal number of Bucket 3 RECs for
2 The exchange of bundled RECs from the City’s in-state, long-term renewable resources (Bucket 1 RECs) for RPS-
eligible, unbundled RECs (Bucket 3 RECs), which usually come from out of state sources.
3 Due to limitations on the use of Bucket 3 RECs for compliance with the state’s RPS mandate (only 10% of a
utility’s RPS procurement may consist of Bucket 3 RECs), a significant financial premium currently exists for in-state
bundled renewable energy resources (Bucket 1 RECs).
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that period, as summarized in Table 1 below.4 These REC Exchange transactions have yielded a
total of $6.73 million in net revenue, or about $2.24 million per year.
Table 1: Summary of REC Exchange Transactions and Revenue, CY 2020-2022
CY 2020 CY 2021 CY 2022 (est.)
Bucket 1 REC Sales Volume (MWh) 325,186 287,210 190,000
Bucket 3 REC Purchase Volume
(MWh)
325,186 287,210 190,000
Bucket 1 REC Sales Revenue ($M) $3.59 $4.01 $2.74
Bucket 3 REC Purchase Cost ($M) $1.10 $1.47 $1.03
Net Revenue ($M) $2.48 $2.54 $1.71
RPS Level (%) 20.8% 35.0% 38.5%
When presenting the REC Exchange Program to Council for approval in 2020, staff estimated
that it would generate roughly $3.0 million per year in net revenue for FY 2021-2025, with a
significant tapering off thereafter due to the steady increases in the statewide RPS requirement
level. Actual net revenues have thus far come in lower than this initial estimate due to a
tightening of the differential between Bucket 1 and Bucket 3 REC prices compared to the staff
estimate at the time.
Over the next five years, staff estimates that the Program will yield approximately $9.3 million
in total net revenue, or $1.9 million per year, as shown in Table 2 below. The REC Exchange
Program’s earnings are projected to gradually decline in future years, primarily due to the
ramping up of the state’s RPS requirement levels, which reduces the volume of Bucket 1
supplies the City is able to sell. In addition, some of the City’s older (and smaller) renewable
energy contracts are set to expire, starting in 2026, which further reduces the supply of Bucket
1 RECs the City has available to exchange.
Table 2: Projected REC Exchange Transactions and Revenue, CY 2023-2027
CY 2023 CY 2024 CY 2025 CY 2026 CY 2027
Bucket 1 REC Sales Volume (MWh) 224,000 188,000 174,000 138,000 124,000
Bucket 3 REC Purchase Volume
(MWh) 224,000 188,000 174,000 138,000 124,000
Bucket 1 REC Sales Revenue ($M) $3.81 $3.20 $2.96 $2.35 $2.11
Bucket 3 REC Purchase Cost ($M) $1.35 $1.13 $1.05 $0.83 $0.74
Net Revenue ($M) $2.47 $2.07 $1.92 $1.52 $1.36
4 Staff has purchased additional Bucket 3 RECs and sold additional Bucket 1 RECs during this time period (96,198
additional RECs purchased and 49,814 additional sold); however, these are RECs that would have been bought or
sold anyway—purchased in order to satisfy the City’s Carbon Neutral Plan goals during the ongoing drought (in
2021 and 2022), and sold because the City had a surplus of carbon neutral supplies (in 2020). The analysis in this
report includes only the REC transactions that were the direct result of the approval of the REC Exchange Program.
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RPS Level (%) 41.3% 44% 46% 50% 52%
Impact on Palo Alto’s Supply Portfolio
As discussed in Staff Report 11556, although exchanging in-state RECs for out-of-state RECs has
no real impact on the City’s total electricity-related carbon emissions (see Attachment A for
more discussion on this topic), the downside of this strategy is that it has a negative impact on
the City’s reported portfolio make-up and carbon emissions. California’s RPS law gives
preferential treatment to in-state renewable resources over out-of-state resources, and the
same is true of how such resources are reported to customers on the annual Power Content
Label (PCL). The California Energy Commission’s (CEC’s) PCL regulations require that utilities
report their out-of-state (Bucket 3) REC purchases as “unspecified sources of power” rather
than under the appropriate renewable energy technology category. Furthermore, utilities are
now required to report the annual average GHG emissions intensity of their electric supply on
their PCLs—and again, rather than being treated as carbon-free resources like other forms of
renewable energy, Bucket 3 RECs are treated as having an emissions intensity equivalent to
generic market power purchases (428 kilograms (kg) of CO2 per MWh, which is almost 20%
greater than the average emissions intensity of natural gas generation).
As a result, rather than reporting a supply mix that is over 60% renewable and nearly carbon-
free on average,5 under the REC Exchange Program the City must report a portfolio mix that is
less than 40% renewable and is responsible for a moderate amount of carbon emissions. Figure
1 below depicts the City’s projected electric supply portfolio mix in CY 2022, before and after
accounting for the REC Exchange Program transactions. Meanwhile, the estimated annual
average GHG emissions intensities that the City would report on its PCL for these two portfolios
are 114 and 209 kg CO2 per MWh, respectively.6
5 Although the City’s baseline portfolio mix is entirely comprised of renewables and hydroelectric resources, the
CEC’s PCL regulations assign a small emission intensity to all biomass generation such as landfill gas generation,
which currently accounts for about 10% of the City’s supply mix.
6 For reference, the statewide average GHG emissions intensity for CY 2021 was 207 kg CO2 per MWh. In CY 2021,
the City’s average GHG emissions intensity as reported on its PCL (and accounting for the REC Exchange Program
transactions) was 124 kg CO2 per MWh. The City’s emissions intensity is projected to be significantly higher for CY
2022 than for CY 2021 because of the significant decline in hydroelectric generation this year due to the ongoing
drought.
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Figure 1: Projected Electric Supplies in CY 2022, with and without REC Exchange Transactions
Use of REC Exchange Funds
Of the $6.73 million in net revenue that the REC Exchange Program has brought in since 2020,
$3.35 million of it has been directed towards general electric operating cost reductions (in
accordance with Council’s direction that two-thirds of the net proceeds should be used in this
way for 2020 and 2021, to offset the impacts of the pandemic) and $3.38 million has been (or
soon will be) used towards local decarbonization programs. If the recommendation to continue
the REC Exchange Program is approved, all of the net revenue from the program (whose
estimates are shown in Table 2) would be used for these decarbonization efforts. To date, the
programs that this funding has supported include the Advanced heat-pump water heater
(HPWH) pilot, the Home Efficiency Genie program, and multi-family building electrification
efforts.
Next Steps
Upon the approval of the Recommendation, staff will continue to execute transactions to sell
the City’s in-state renewable resources and purchase out-of-state renewables for 2023 and
beyond. In addition, staff will continue to report on the portfolio’s total GHG emissions under
both an hourly and an annual carbon accounting framework in the annual report to the City
Council on the City’s Renewable Procurement Plan, Renewable Portfolio Standard Compliance,
and Carbon Neutral Electric Supplies (usually presented in Q4 of each year).
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Resource Impact
Staff estimates that continuing the REC Exchange program will generate an average of
approximately $1.9 million in additional revenue per year for the next five fiscal years, which
will be used to support the City’s decarbonization efforts.
Policy Impact
This report supports the Sustainability and Climate Action Plan goals of continuing to lower the
carbon footprint of the community.
Environmental Review
The City Council’s review of the REC Exchange Program does not meet the definition of a
project because it is an administrative government activity that will not result in any direct or
indirect physical change to the environment (CEQA Guidelines section 15378(b)(5), therefore
California Environmental Quality Act (CEQA) review is not required.
Attachments:
• Attachment A: Renewable Energy Credit Background Information
• Attachment B: Presentation
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Attachment A
In-State vs. Out-of-State Renewable Energy Credits
In-state, Bundled Renewable Energy (Bucket 1 RECs) vs. Out-of-state, Unbundled Renewable
Energy (Bucket 3 RECs)
The fundamental difference between bundled renewables (or “Bucket 1 RECs”) and unbundled
(“Bucket 3”) RECs, as the diagram in Figure 1 illustrates, is that with bundled renewables both the
energy and the REC (which represents the environmental value of the energy) are sold together
to the same entity. With unbundled RECs, the energy and the REC are sold separately to different
entities. Practically speaking though, Bucket 1 RECs are almost always produced by in-state
renewable generators, while Bucket 3 RECs are produced by out-of-state renewable generators.
Also, because of limitations placed on the use of Bucket 3 RECs for compliance purposes in the
state’s RPS legislation, and because of strong demand for Bucket 1 resources as Community
Choice Aggregators (CCAs) ramp up their energy purchases, Bucket 1 RECs currently carry a
significant price premium relative to Bucket 3 RECs, in spite of the fact that these two resources
represent equivalent amounts of renewable energy.
Figure 1: Bundled (Bucket 1) vs. Unbundled (Bucket 3) RECs Diagram1
1 Source: Pinkel, D., and Weinrub, A., “What the Heck is a REC?” October 2013.
http://www.localcleanenergy.org/files/What%20the%20Heck%20is%20a%20REC.pdf
BundedRECs
I
Load Serving
Erffly
Electrlc
Gerwating
Facllty
Unbu died RECs
Enmgy REC.
\
L..oad Sining
Entity
Load SeM,g Entity
(for RPS compliance)
01'
REC Consumer
(for renew bragging
rights)
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November 2, 2022 www.cityofpaloalto.org
REC EXCHANGE PROGRAM: CYs 2020-2022 REVIEW & CYs 2023-2027 PROJECTIONS
•
CITY OF
PALO ALTO
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PART 1: REC Exchange Program Results (2020-2022)
November 2, 2022 www.cityofpaloalto.org
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REC EXCHANGE SUMMARY (CYs 2020-2022)
CY 2020 CY 2021 CY 2022 (est.)
Bucket 1 REC Sales Volume (MWh)325,186 287,210 190,000
Bucket 3 REC Purchase Volume (MWh)325,186 287,210 190,000
Bucket 1 REC Sales Revenue ($M)$3.59 $4.01 $2.74
Bucket 3 REC Purchase Cost ($M)$1.10 $1.47 $1.03
Net Revenue ($M)$2.48 $2.54 $1.71
Bucket 1 RPS Level 20.8%35.0%38.5%
Total Net Revenue: $6.73M
$3.35M for supply cost reduction
$3.38M for local decarbonization programs
~CITY OF
~PALO ALTO
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PART 2: REC Exchange Program Projections (2023-2027)
November 2, 2022 www.cityofpaloalto.org
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REC EXCHANGE PROJECTIONS (CYs 2023-2027)
CY 2023 CY 2024 CY 2025 CY 2026 CY 2027
Bucket 1 REC Sales Volume (MWh)224,000 188,000 174,000 138,000 124,000
Bucket 3 REC Purchase Volume (MWh)224,000 188,000 174,000 138,000 124,000
Bucket 1 REC Sales Revenue ($M)$3.81 $3.20 $2.96 $2.35 $2.11
Bucket 3 REC Purchase Cost ($M)$1.35 $1.13 $1.05 $0.83 $0.74
Net Revenue ($M)$2.47 $2.07 $1.92 $1.52 $1.36
Bucket 1 RPS Level 41.3%44%46%50%52%
Projected Net Revenue: $9.34M (all for local decarbonization programs)
~CITY OF
~PALO ALTO
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PART 3: Supply Portfolio Impact
November 2, 2022 www.cityofpaloalto.org
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ELECTRIC SUPPLY PORTFOLIO IMPACT (CY 2022)
Net CO2e Emissions:
114 kg/MWh (Baseline)
vs.
209 kg/MWh (REC Exchange)
• CITY OF
PALO
ALTO
1,000,000
800,000
700,000 -.c ~ ~ 600,000
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~ 400,000 --t----------,
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CY 2022 Baseline CY 2022 w/ REC Exchanges
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8
RECOMMENDATION
Staff recommends that the UAC recommend that the City Council:
1)affirm the continuation of the “REC Exchange Program,” whereby the City
exchanges bundled RECs from its long-term renewable resources (Bucket
1 RECs) for Renewable Portfolio Standard (RPS) eligible, unbundled RECs
(Bucket 3 RECs), to the maximum extent possible, while maintaining
compliance with the state’s RPS regulations, in order to provide additional revenue for local decarbonization efforts; and
2)direct staff to return to the UAC and City Council in 2027 to provide another review of the program’s impacts.
~CITY OF
~PALO ALTO
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Jim Stack, Ph.D.
Senior Resource Planner
james.stack@cityofpaloalto.org
(650) 329-2314
CITY OF
PALO
ALTO
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