HomeMy WebLinkAboutStaff Report 14606
City of Palo Alto (ID # 14606)
City Council Staff Report
Meeting Date: 9/27/2022 Report Type: Action Items
City of Palo Alto Page 1
Title: S/CAP Update and Initial Council Action: Acceptance of Sustainability
and Climate Action Plan (S/CAP) Goals and Key Actions; Review of Proposed
Reach Code Changes; Adoption of Resolutions Adopting Advanced Heat
Pump Water Heater Program Guidelines, Creating and Funding Electrification
Reserves and Adopting a Carbon Neutrality Goal; and Approval of Budget
Amendments in the Electric Fund, Gas Fund, and General Fund
Council Priority: Climate Change: Protection & Adaption
From: City Manager
Lead Department: Public Works
Recommendation
Staff and the Sustainability/Climate Action Plan (S/CAP) Ad Hoc Committee recommend that
Council:
1. Accept the proposed S/CAP Goals and Key Actions (Attachment A) as a summary of the
City’s workplan under the S/CAP Framework;
2. Direct staff to implement the Advanced Heat Pump Water Heater Program by:
A. Adopting a resolution (Attachment C) approving the Advanced Heat Pump Water
Heater Program Design Guidelines;
B. Adopting a resolution (Attachment D) creating an Electrification Reserve,
establishing reserve guidelines, and transferring $4.5 million from the Electric
Special Projects Reserve to the Electrification Reserve;
C. Adopting a resolution (Attachment E) amending the City’s Policy on the Use of
Freely Allocated Allowances Under the State's Cap-and-Trade Program and
authorizing the City Manager to use $1.25 million from the Gas Utility Cap and
Trade Reserve for the Advanced Heat Pump Water Heater program; and
D. Amending the Fiscal Year 2023 Budget Appropriation (requires a 2/3 vote) by:
(i) For the Electric Utility Funds:
a. Increase Electric Resource Management Operating Expenses for
Contract Services by $4,763,000
b. Decrease Electrification Reserve by $4.5 million
c. Decrease Electric Supply Operations Reserve by $150,000
d. Decrease Electric Distribution Operations Reserve by $86,000
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(ii) For the Gas Utility Funds:
a. Increase Gas Resource Management Operating Expenses for
Contract Services by $1.25 million
b. Decrease Gas Cap & Trade Reserve by $1.25 million
(b) For the General Fund:
a. Increase Planning & Development Operating Expenses for Contract
Services by $250,000
b. Increase Planning and Development Services Revenue for
Inspection Fees by $250,000
3. Adopt a Resolution Adopting a Carbon Neutrality Goal to Further the Climate Goals of
the Sustainability and Climate Action Plan (Attachment F)
4. Direct staff to amend the 2022 Utilities Legislative Guidelines (Attachment G) to include
an Electrification Workforce Development guideline
Executive Summary
Consistent with Council’s adoption of “Climate Change – Protection and Adaptation” as one of
the four priorities for calendar year 2022, staff is updating the Sustainability and Climate Action
Plan (S/CAP) to help the City meet its sustainability goals, including its goal of reducing
greenhouse gas (GHG) emissions 80 percent below 1990 levels by 2030 (the “80 x 30” goal).
The S/CAP Ad Hoc Working Group Teams have been pursuing a deeper dive into four areas that
will advance the City’s residential building electrification goals: Engagement, Technology,
Finance, and Community Scale. Their work was incorporated into the S/CAP Goals and Key
Actions and the new proposed Advanced Heat Pump Water Heater Program.
This report discusses the insights that led the Council Ad Hoc S/CAP Committee to focus the
work of the Working Group and Teams on building electrification, specifically heat pump water
heaters in single-family homes. It gives an overview of an Advanced Heat Pump Water Heater
Pilot that could be launched upon Council confirmation of these priorities, one that would
ideally become scalable to all water heaters in Palo Alto without using Electric reserves or Cap
and Trade program revenues in the future. The program could be launched in late 2022 or early
2023.
A parallel and related effort is the 2022 Green Building and Energy Reach Code update taking
place as part of the local adoption of Building Codes for the 2023 through 2025 code cycle.
Several amendments related to building and vehicle electrification by property owners are
proposed, as well as other climate-related amendments. These are discussed in the report. Staff
is expecting to propose the code updates to Council for adoption in October and
implementation in January 2023. The tentative date for City Council consideration of these
actions is October 17, 2022.
Combined, the Advanced Heat Pump Water Heater Pilot and code amendments are expected to
result in 1.3% to 1.8% of the emissions reductions needed to meet the 80 x 30 goal (1.7% to
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2.5% if upstream emissions from fuel use are taken into account).1 The goal of the pilot,
however, is to successfully scale up to convert all individual gas water heaters in Palo Alto to
heat pump water heaters. If that effort becomes successful, staff estimates it would result in an
additional 4% to 5% emissions reduction (5% to 7% if upstream fuel emissions are taken into
account).
Lastly, this report includes recommendations from the S/CAP Committee and staff to set a goal
to achieve carbon neutrality by 2035 and a legislative priority on electrification workforce
development.
In summary, staff is seeking Council input and consideration of the following key actions:
• Accept Council S/CAP Goals and Key Actions which will initiate CEQA review
• Review Energy Reach Code and Green Building Ordinance proposed changes in
preparation for the October 17 City Council consideration and action
• Support the recommendation to launch an Advanced Heat Pump Water Heater Pilot
Program and related necessary budget actions
A fuller timeline of steps the City Council and community can expect as part of consideration of
the proposed recommendations and next steps, is noted in the staff report. To summarize, for
City Council and public awareness, the following strategy is set out over the next three Council
meetings to seek City Council input and gain public comment on various items associated with
sustainability and climate action goals:
• September 27: Discuss and Consider Sustainability/Climate Action Plan (S/CAP) Ad Hoc
Committee recommendations (Part 1, Council discussion with public comment)
• October 3: Sustainability/Climate Action Plan (S/CAP) Ad Hoc Committee
recommendations (Part 2, potential Council action and public comment for those that
did not speak on September 27)
• October 17: 2022 Green Building and Energy Reach Code Updates (City Council action
and public comment)
Staff appreciates the leadership and focus of the S/CAP Ad Hoc Committee and S/CAP Working
Group and Teams over the last seventeen months, leading up to the actions presented as part
of this report for City Council consideration. This work will not only further Palo Alto’s
sustainability and climate action goals through its direct impacts on greenhouse gas reductions,
but will lead to progress on other critically important sustainability items that will contribute
overall to climate action, and have public health and safety, regional, resource conservation,
and equity benefits.
Background
1 Upstream emissions from fuel use include emissions involved in collection, processing, and transportation of
fuels, including leakage. These estimates use the 20-year global warming potential of fuels.
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In April 2016, City Council adopted the ambitious goal of reducing GHG emissions to 80 percent
below 1990 levels by 20302 (the “80 x 30” goal) - 20 years ahead of the State of California 80 x
50 target, and an interim step towards California’s new statewide goal of achieving carbon
neutrality by 20453. In November 2016 the Council adopted the S/CAP Framework4, which has
served as the road map for achieving Palo Alto’s sustainability goals. In December 2017, Council
accepted the 2018-2020 Sustainability Implementation Plan “Key Actions” as a summary of the
City’s work program5.
In early 2020, the City launched an S/CAP update to determine the goals and key actions
needed to meet its sustainability goals, including the 80 x 30 goal. While GHG emissions
reduction is not the only goal of the S/CAP, it is the major one. As a result of various City-led
initiatives, programs, and activities focused on climate change and sustainability, by the end of
2020 Palo Alto reduced GHG emissions an estimated 50.4 percent from the 1990 baseline,
despite a population increase of 21.8 percent during that same time period.
On April 19, 2021, Council directed the Mayor to form an S/CAP Ad Hoc Committee, which held
several public meetings with City staff6. On November 17, 2021 the S/CAP Ad Hoc Committee
held the first meeting of its S/CAP Working Group, which assembled knowledgeable members
of the community to consult with Council members and City staff on S/CAP implementation
priorities. The Committee has provided multiple updates to Council since then, described
below.
Concurrent with the S/CAP update, staff has been working to update Palo Alto’s green building
regulations with a target effective date of January 1, 2023. The State of California’s building
standards, as codified in Title 24 of the California Code of Regulations, are referred to as the
California Building Standards Code. These building standards cover green building standards,
building energy standards, as well as other construction standards including plumbing,
electrical, and mechanical codes. Local jurisdictions can enact more stringent green building
standards based on the local climatic, geologic, and topographic conditions. Cities can also
adopt building energy standards that are more stringent than California’s Building Energy
Standards; such local energy reach code must demonstrate cost effectiveness and not preempt
federal appliance efficiency standards. Since 2008, Palo Alto has adopted green building
regulations and building energy standards that exceed the state’s requirements; these are
collectively referenced as “Reach Codes” in this staff report.
2 https://www.cityofpaloalto.org/news/displaynews.asp?NewsID=3534&TargetID=268
3 In September 2018, Governor Brown signed California Executive Order B-55-18, setting the goal of achieving
carbon neutrality as soon as possible, and no later than 2045. The state is to maintain net negative net emissions
after 2045, meaning that GHG sinks must exceed GHG sources. The Executive Order explains that the carbon
neutrality goal is layered on top of the state’s existing commitments to reduce greenhouse gas emissions 40%
below 1990 levels by 2030 (as codified in SB 32), and 80% below 1990 levels by 2050.
4 https://www.cityofpaloalto.org/civicax/filebank/documents/60858
5 https://www.cityofpaloalto.org/civicax/filebank/documents/63141
6 https://www.cityofpaloalto.org/Departments/City-Clerk/City-Council-Committees/Sustainability-and-Climate-
Action-Plan-Ad-Hoc-Committee
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Discussion
A Climate Action Plan, or CAP, is a comprehensive roadmap that lays out the specific activities
that an agency will undertake to reduce greenhouse gas (GHG) emissions. Palo Alto has a
Sustainability and Climate Action Plan (S/CAP) because Palo Alto’s plan includes sustainability
areas that don’t necessarily have a direct impact on greenhouse gas reductions, but have
critically important sustainability, public health and safety, regional, resource conservation, and
equity benefits that contribute to overall climate action.
The Intergovernmental Panel on Climate Change (IPCC), a body of the United Nations,
determined that “we risk severe, pervasive and irreversible impacts” from climate change, and
need “substantial” emissions reductions (of 40-70% or more) by 2030. The overwhelming
majority of independent climate scientists have determined that going above a 2° C (3.5° F) rise
would trigger a series of catastrophic changes to life on Earth that could not be undone.
Warming above 1.5° C (2.7 ° F) risks further sea level rise, extreme weather, biodiversity loss
and species extinction, as well as food scarcity and, worsening health and poverty for millions
of people worldwide. 80 x 30 is the science-based target that represents the global emissions
reduction required to halve emissions by 2030 and reach global net zero emissions by 2050, in
order to limit global warming to 1.5 °C above pre-industrial levels.
Table of Contents:
1. Update on Council S/CAP Ad Hoc Committee Activity and Implementation Priorities
2. S/CAP Goals and Key Actions (Attachment A)
3. Proposed Energy Reach Code and Green Building Ordinance Changes
4. Advanced Heat Pump Water Heater Program (Attachment B)
5. Council Authorizations and Direction Needed (including Attachments C, D, and E)
1. Update on Council S/CAP Ad Hoc Committee Activity
Staff presented a Progress Report on the Sustainability and Climate Action Plan Update and
S/CAP Ad Hoc Committee Work7 to Council on December 13, 2021. Since then, the S/CAP Ad
Hoc Committee convened four additional meetings. The recordings and materials for all of the
S/CAP Ad Hoc Committee Meetings can be found at the S/CAP Ad Hoc Committee webpage8.
Council and the Utilities Advisory Commission (UAC) held a joint study session9 to discuss
sustainability and utility related items on March 7, 2022. Staff presented the Earth Day Report10
to Council on April 11, 2022. The Earth Day Report described the work of the S/CAP Ad Hoc
Working Group teams, which has prioritized residential building electrification. The S/CAP Ad
7 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/reports/city-manager-reports-
cmrs/2021/id.-13765-s-cap-update.pdf
8 https://www.cityofpaloalto.org/Departments/City-Clerk/City-Council-Committees/Sustainability-and-Climate-
Action-Plan-Ad-Hoc-Committee
9 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/city-council-
agendas-minutes/2022/20220307/20220307pccsmamendedfinal-linked.pdf
10 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/reports/city-manager-reports-
cmrs/2022/id.-14174-earth-day-report-2022-edr22.pdf
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Hoc Working Group Teams held a public meeting on June 14, 2022 to discuss their progress on
three areas that would advance residential building electrification goals:
• Engagement. The work of this team included fine-tuning messaging on residential
building electrification and developing a strategy and timeline for engagement.
• Technology. The work of this team included reviewing current and emerging
technologies and their feasibility for meeting the demands of a typical home and
developing a strategy. The team also considered the influence of electrification
technologies that are implemented on the electrical grid improvements that are
needed.
• Finance. The work of this team included prioritizing the most feasible funding strategies
and developing a strategy for financing S/CAP Implementation.
The working group teams also discussed an outline of a proposed Advanced Heat Pump Water
Heater Pilot Program at the June 14 meeting. They agreed to have staff develop the outline into
a more defined proposal. The results of that staff work and subsequent S/CAP Committee
review and input is summarized in Section 3, below.
The decision to focus on heat pump water heaters was informed by several insights developed
through discussions between staff and the Ad Hoc Working Group Teams:
• More technologies are available to electrify single-family homes than multi-family and
commercial buildings, and at a lower price per metric ton of emissions reduced.
• Water heating is one of the two major sources of emissions in a household (space
heating is the other).
• The technology for heat pump water heaters is widely available and improving.
• Replacing gas tank water heating with heat pump water heating requires fewer building
modifications than replacing gas furnaces with heat pumps, except when a building has
air conditioning, which most homes in Palo Alto still do not have.
• Heat pump water heaters have lower electric grid impacts than other building
electrification technologies, such as space heating, which makes them an excellent
technology to promote aggressively while other grid modernization efforts are ongoing.
See Attachment B, Section 11 (Electric Grid Impacts) for more discussion.
• Current programs and mandates to encourage electrification are not adequate to reach
the City’s emissions goals. The Reach Code reaches only about 100 homes per year, and
the heat pump water heater rebate program reaches fewer than that. Well over 1,000
water heaters need to be replaced each year to electrify all single-family water heating
by 2030.
• It is the electrification technology with the most climate benefit compared to the cost.
• Public awareness of the need for climate action and what individual homeowners can
do is low. To spur action, extensive engagement will be needed.
• Barriers to action need to be reduced. Up-front costs of conversion are high, contractors
are challenging to find, and the technology is unfamiliar. Features like turnkey
installation by a City contractor, simple pricing, on-bill financing, permit streamlining,
and a great customer experience can go a long way toward program adoption.
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• A well-run pilot could increase awareness of heat pump water heaters in the
community, increase the market demand and so expand the number of contractors able
to install them, and reduce the challenges to residents associated with the cost and
complexity of installation. This could create conditions for a successful end of life
replacement mandate in the future. Without addressing these issues, a mandate could
potentially be unsuccessful given that only a minority of residents obtain permits for
water heater replacements and many water heater replacements are done in an
emergency.
• A well-run pilot can also create a foundation for similar programs for heat pump space
heating and other electric equipment and appliances in the future.
All the insights above pointed to heat pump water heating as the most likely area the City could
make rapid progress on in the near term.
While heat pump water heaters surfaced as a primary near-term focus, other critical focus
areas included grid modernization (increasing grid capacity to accommodate electric vehicles
and the expanded use of electricity in buildings to replace gas). Discussions also revealed the
importance of outreach and engagement to the community about how to electrify efficiently,
reducing costs to building owners and impacts to the electric system. This includes
consideration of technologies like low-power electric vehicle chargers. Staff is proceeding with
these priorities as part of its routine responsibilities to manage the electric system to
accommodate future development and technologies.
The Committee was clear that the focus on heat pump water heaters does not preclude other
electrification efforts from moving forward, such as multi-family and non-residential building
electrification and promotion of electric vehicles and vehicle charging, so long as these efforts
do not interfere with delivery of the primary areas of focus.
After this pilot is complete, the City would ideally expand it to a large scale citywide program
potentially with an accompanying end of life mandate (if feasible). This will require innovation
and market demand to get costs down, but the Inflation Reduction Act will likely help.
Additional City Council actions will be necessary to expand the program, and staff intends to
seek those actions through the annual budget process.
It is worth noting that a focus on standalone heat pump water heaters instead of central water
heating that serves multiple dwelling units would mean that any pilot would primarily focus on
single-family residences. Water heating in multi-family buildings is frequently centralized, with
equipment that is larger and more difficult to replace with heat pumps while still maintaining
adequate hot water capacity to serve all units. Space constraints contribute to this challenge.
However, a pilot could still serve multi-family dwelling units that have individual water heaters
that can feasibly be replaced without major building modifications.
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2. S/CAP Goals and Key Actions
In addition to studying heat pump water heaters, the S/CAP Ad Hoc Committee reviewed the
proposed S/CAP Goals and Key Actions. Staff drafted proposed S/CAP Goals and Key Actions in
early 2020. The first two versions of the S/CAP Goals and Key Actions incorporated extensive
community feedback and focused on seven areas: Energy, Mobility, Electric Vehicles, Water,
Climate Adaptation and Sea Level Rise, Natural Environment, and Zero Waste. The City’s
consultant, AECOM, performed an impact analysis that estimated the potential GHG reduction
potential of the proposed actions, estimated costs, and additional sustainability co-benefits.
The third version of the S/CAP Goals and Key Actions added a new Climate action area and
further refined the goals and key actions to better reflect the outcomes needed to achieve the
80 x 30 goal. The first three versions of the S/CAP Goals and Key Actions, as well as the Impact
Analysis, can be found on the S/CAP Website.11 Staff is bringing forth a new version of the
S/CAP Goals and Key Actions that incorporates guidance from the S/CAP Ad Hoc Committee,
S/CAP Working Groups, and S/CAP Working Group Teams. The fourth version can be found in
Attachment A: S/CAP Goals and Key Actions.
The proposed S/CAP Goals and Key Actions are meant to be a high-level road map to achieving
the community’s 80 x 30 goal. More details and specifics will be provided in the S/CAP
Workplan, which will be updated once these S/CAP Goals and Key Actions are accepted by
Council.
Some of the key actions have already undergone CEQA review and are underway. Council
acceptance of this updated version of the S/CAP Goals and Key Actions will allow staff to
commence California Environmental Quality Act (CEQA) evaluation of the full S/CAP. Staff will
return to Council as needed for additional consideration of specific S/CAP projects, policies
and/or budget items which require additional resources and/or CEQA review. Once CEQA
review concludes, and is certified by Council, staff anticipates bringing a complete S/CAP report
for Council adoption by Earth Day of 2023.
3. Reach Codes Updates
Every three years, the State of California adopts new building standards that are codified in
Title 24 of the California Code of Regulations, referred to as the California Building Standards
Code. While the State sets the minimum building standards, local jurisdictions can enact more
stringent local building standards based on unique local climatic, geologic, and topographic
conditions. Energy reach codes that exceed state standards require a cost effectiveness study
and California Energy Commission (CEC) approval.
Staff is currently in the process of developing local green building regulations and energy reach
codes designed to adhere to the state’s local amendment requirements and cost effectiveness
standards, to present to Council in October this year, with a target effective date of January 1,
2023. The proposed all-electric requirement for new buildings will be implemented via the
11 https://www.cityofpaloalto.org/climateaction
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Green Building Code, which does not require cost-effectiveness calculations and simply requires
justification based on local climatic conditions for Palo Alto, in this case because climate change
could put the homes and businesses in the City at risk due to sea level rise and wildfires. The all-
electric requirement can be achieved without strict adherence to the CEC approval process
because the regulation deals primarily with fuel selection, rather than energy usage. Still, all-
electric buildings are cost effective, as the state's building energy standards already use heat
pump space heating and heat pump water heating as baseline technologies for most building
types. The goal of Palo Alto’s Green Building Ordinance and Energy Reach Code (collectively
referred to as “Reach Codes”) is to design, build, and operate a new generation of efficient,
environmentally responsible, and healthy buildings. These local ordinances establish standards
covering the areas of water efficiency, material conservation, resource efficiency, indoor air
quality, and electric vehicle (EV) charging infrastructure. The City’s Green Building Ordinance
applies to new construction projects as well as additions and alterations.
The proposed 2022 Reach Codes (in effect between January 2023 and December 2025) will
carry forward the requirements of the 2019 Reach Codes with additional requirements in the
areas of building electrification, EV infrastructure, water efficiency, and embodied carbon in
building materials. These proposed requirements are summarized at a high level in Table 1
described in detail in subsections A and B below. If adopted and approved by the CEC, they
collectively will avoid over 3,420 MT CO2-e per year, about 1% to 1.5% of the remaining
emissions reductions needed to achieve the 80x30 goal (about 1.5% to 2% when upstream
emissions from fuel use are included).12
Table 1: High-Level Summary of Proposed 2022 Reach Code
and Green Building Ordinance Electrification / EV Requirements
Building type Requirements
Single-family • All-electric design for new single-family homes and ADUs
• Adopt a “substantial remodel” definition to trigger whole home all-electric
requirements
• Prohibit extension of gas lines in existing homes to outdoor amenities such as
fire pits and BBQs.
• Require water heater replacement or addition as part of an addition or
alteration to be a heat pump water heater
• Require one “EV-Ready” space or space with Electric Vehicle Supply
Equipment (EVSE) installed in new homes
Multi-family • All-electric design for new multi-family buildings
• Prohibit extension of gas lines in existing homes to outdoor amenities such as
fire pits and BBQs.
• One “EV-Ready” space or space with EVSE installed per residential unit
Non-
residential
• All-electric design for new non-residential buildings
• New non-residential (except hotels): EV Capable, EV Ready, or EVSE installed
12 Using 20-year global warming potentials.
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for at least 30% of parking spaces, among which at least 15% shall have EVSE
installed.
• New hotels: EV capable, EV Ready, or Level 2 EVSE installed for at least 35% of
parking spaces, among which at least 10% shall have EVSE installed.
A. Proposed Building Electrification Requirements
- Require all-electric design for new construction projects; this applies to low-rise
residential buildings, detached accessory dwelling units (ADUs), multifamily
buildings, and nonresidential buildings. Staff estimates the avoided greenhouse gas
(GHG) emissions of this proposed all-electric mandate at 340 MT CO2-e per year. By
2030, the estimated annual emissions reduction attributed to this proposed
requirement is 2,700 MT CO2-e per year.13
- Currently, alteration projects do not need to be rebuilt to meet the all-electric
requirements. Going forward, staff proposes the following Substantial Remodel
definition that triggers the all-electric building requirements: “For the purpose of
electrification, substantial remodel shall mean the alteration of any structure,
including cumulative projects or additions to the existing structure within any three
(3) year period, that affects the removal or replacement of 50% of the linear length
of the exterior weight-bearing walls of the building, 50% of the wall plate height is
raised, and/or 50% of the roof structural framing.” The 3-year period is measured
between the first building permit issuance to the submittal of the next building
permit application for any remodel or building addition. Staff estimates the avoided
GHG emissions of this proposed substantial remodel definition at 90 MT/yr. By 2030,
the estimated annual emissions reduction attributed to the proposed substantial
remodel definition is 720 MT CO2-e per year 14.
- Prohibit the extension of gas infrastructure in existing buildings to outdoor
amenities such as pools, spas, fireplaces and grills in order to minimize the carbon
footprint of this equipment. The annual GHG savings of a heat pump pool heater is
estimated to be around 1.5 MT CO2-e per year.
- Require heat pump water heater when the existing water heater is replaced, or new
water heater is added as part of a residential addition or alteration project.
Staff has also considered requiring a heat pump space conditioning system when the gas
furnace/boiler is replaced as part of an alteration project. However, the electric demand
of a heat pump space heating system is significantly higher than that of a heat pump
water heater. In discussions this spring the Council Ad Hoc S/CAP Committee
13 This assumes that each year there are 100 new single-family projects, 25 new detached ADU projects, 8 multi-
family dwelling units, and 9 new non-residential projects.
14 This assumes that each year there are 50 single-family projects that meets the substantial remodel definition.
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recommended to focus primarily on water heater conversion in the near term while
electric grid modernization efforts ramped up, and a focus on space conditioning would
be at odds with that prioritization. Also, while a heat pump space conditioning system
offers space cooling which is a desirable feature, it will cost substantially more than
simply replacing the gas furnace. Staff proposes revisiting the proposal to require a heat
pump space conditioning system at a later point when the grid modernization effort is
underway.
B. Proposed EV Infrastructure Requirements
• The City’s proposed EV infrastructure requirements are summarized below. These
requirements exceed State minimums. In the table below the terms “EV-ready” and
“EV-capable” refer to definitions from the State code requirements that require certain
types of infrastructure to support EV chargers in the future (the definitions are included
below the table). “Level 2 EV supply equipment (EVSE)” refers to a 40 Ampere (A) EV
charger, whereas a “Low Power Level 2” refers to an EV-Ready space or EV charger with a
20A electric current capacity. Low Power Level 2 EV infrastructure will be allowed in new
single-family and multi-family residential buildings but not non-residential buildings.
Table 2: Summary of Proposed EV Infrastructure Requirements
Type of building Requirements
New single-family home One (1) EV-Ready or Level 2 EVSE installed per
dwelling unit (Low Power Level 2 ok)
New multi-family
building
One (1) Level 2 EV Ready with Low Power Level 2 EV
Receptacle or Level 2 EVSE installed per residential
unit
EV Capable, EV Ready or Level 2 EVSE installed, for at
least 25% of guest parking spaces, among which at
least 5% (and no fewer than one) shall be Level 2 EVSE
installed.
New hotels EV capable, EV Ready, or Level 2 EVSE installed for at
least 35% of parking spaces, among which at least
10% (and no fewer than one) shall be Level 2 EVSE
installed.
Other new non-
residential structures
EV Capable, EV Ready, or Level 2 EVSE installed for at
least 30% of parking spaces, among which at least
15% (and no fewer than one) shall be Level 2 EVSE
installed.
• Adopt the State’s definitions for EV charging requirements in CALGreen, with the
addition of a “Low Power Level 2 EV Charging receptacle” definition to allow for
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lower power (20A) chargers to be installed in residential buildings. These definitions
are provided below (see Figure 1 below for an illustration of these requirements):
EV Capable Space: a vehicle space with electrical panel space and load capacity to
support a branch circuit and necessary raceways, both underground and/or surface
mounted, to support EV charging
EV Ready Space: a vehicle space which is provided with a branch circuit and any
necessary raceways, both underground and/or surface mounted, to accommodate
EV charging, terminating in a receptacle or a charger
Level 2 EV Supply Equipment (EVSE): The 208/240 Volt 40-ampere branch circuit,
and the electric vehicle charging connectors, attachment plugs, and all other fittings,
devices, power outlets, or apparatus installed specifically for the purpose of
transferring energy between the premises and the EV.
Low Power Level 2 EV Charging Receptacle: A 208/240 Volt 20-ampere minimum
branch circuit and a receptacle for use by an EV driver to charge their EV or hybrid
electric vehicle.15
Figure 1: Illustration of different levels of EV Readiness
The proposed EV infrastructure requirements are slightly higher than those in the
current code cycle. In proposing the Low Power Level 2 EV infrastructure requirement in
15 As defined by section the Residential CALGreen Mandatory requirements per CGBC Sections 4.106.4.1,
4.106.4.2.1 and 4.106.4.2.2.
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new residential dwellings, staff acknowledges the need to balance the demand for EV
charging with its impact on the electrical infrastructure to meet this demand. This
includes both utility and customer equipment including the electric panel, the
transformer, and the feeder line serving the building. Because the CALGreen Building
Code requires that panels accommodate a 40A 208/240-Volt breaker to accommodate a
future 40A EV charger, adoption of a 20A 208/240-Volt EV Charger would not
necessarily result in a smaller electric panel or avoid the need for a transformer upgrade
for any individual project. But 20A 208/240-Volt EV chargers would reduce peak loading
on the system when utilized, and could benefit the electric grid in the long term by
reducing the long-term need for transformer upgrades as electrification is more widely
adopted. For an 8-hour charging session, a 40-amp Level 2 EV charger can provide 220
to 240 miles, while a 20-amp low power Level 2 EV charger can provide 110 to 120
miles. While this is more than enough to meet the daily commute needs for most
people, it may be limiting for some when considering occasional peak charging needs
(e.g. recharging after and before long drives).
C. Proposed Water Efficiency Requirements
• Require a vapor retardant cover for all new pools and outdoor spas (heated or not).
The current Palo Alto Municipal Code contains an exception for solar-heated pools,
staff is proposing to remove it because solar heating does not reduce evaporation.
• Require new cooling towers to perform potable water analysis at the project site to
calculate the maximum number of cooling tower cycles, and that the cooling tower
meet the maximum calculated number of cycles.
The proposed pool cover requirement reduces evaporation loss as well as energy loss
for heated pools. The proposed cooling tower requirement can deliver significant water
efficiency savings in a cooling tower project; as an example, increasing from three to
four cycles will reduce make-up water use by 11%16.
D. Proposed Embodied Carbon Limits in Building Materials
• Require that the use of concrete at new construction projects adhere to cement
limits (prescriptive compliance path) or embodied carbon limits (performance
compliance path) based on the Low Carbon Concrete Code developed by
StopWaste.17 In November 2019, Marin County was the first jurisdiction to pass a
low carbon concrete code, although the code requirements have not been enforced
in the past few years due to the pandemic. Based on staff research, all ready-mix
concrete suppliers should be able to meet the proposed code requirements, and
there are at least three large concrete suppliers in the Bay Area that meet these
requirements.
16 Water Efficiency Management Guide for Mechanical Systems, EPA, November 2017
17 https://www.stopwaste.org/concrete
City of Palo Alto Page 14
4. Advanced Heat Pump Water Heater Pilot Program
Staff has developed an Advanced Heat Pump Water Heater (HPWH) Pilot Program that could
potentially be launched by mid-November. If directed by Council, staff would return to Council
seeking approval of an agreement to engage the services of a consultant to launch the HPWH
pilot program largely in line with the terms described in Attachment B, though these terms may
change slightly as the final program details are put in place. The program would require various
Council actions, summarized in Section 5, below, and the Resource Impact section. The Council
actions include proposed design guidelines for the program (included in Attachment C) that are
aligned with the program design. The resolutions in Attachments D and E enable funding of the
program via an Electrification Reserve and Cap and Trade funds. A budget amendment would
also be required, as described in the Resource Impact section.
The goal of the Advanced Heat Pump Water Heater Pilot Program is to replace 1,000 gas water
heaters in residences, primarily single-family homes, with heat pump water heaters by the end
of 2023. If fully subscribed, the program will reduce emissions by about 800 metric tons (MT)
of carbon-dioxide-equivalent (CO2e) per year. It is the first step in electrifying 100% of water
heating in single-family homes in Palo Alto, which, if achieved, would represent about 4% to 5%
of the remaining emissions reduction needed to achieve the 80 x 30 goal (5% to 7% if taking
into account upstream fuel emissions at a 20-year global warming potential).
The program will make it easy for residents to get a water heater installed with one phone call
to the City. The City’s contractor will install the water heater for one flat price18 so participating
residents are spared the hassle of contractor selection and permitting. If the $2,700 up-front
cost is too much, participants can pay $1,500 up front and $20 per month for five years, a 0%
loan. Since most gas water heaters cost over $1,500 to replace, and since participants will save
$5 to $20 per month on their utility bills by switching from gas water heating to efficient
electric water heating using Palo Alto’s low-cost, renewable electricity, the pricing with on-bill
financing is competitive with a gas water heater replacement (which is often $1,500 to $2,500).
And those who prefer to manage their own projects can do so and still get a rebate of up to
$2,300 from the City, an increase from the current $1,500 rebate. The features and terms are
described in more detail in Attachment B, Section 2 (Program Features and Terms).
On-bill financing is an innovative and important part of this program. It allows the City to offer
the simple pricing described above that is competitive with a gas water heater replacement. It
does introduce some operational risks and administrative complexity. For example, offering
zero interest loans to customers will trigger the applicability of certain state and federal lending
laws, requiring specific disclosures designed to protect consumers. If this program is approved
by Council, the City plans to retain outside counsel with expertise in state and federal lending
laws to ensure the City’s compliance with this complex and frequently changing area of law.
The program necessarily involves some financial risks as well, if customers fail to fully repay
their loans. However, staff expects that offering on-bill financing is possible to do without
18 For most homes. Some installations (such as when a panel upgrade is required) may involve additional costs.
City of Palo Alto Page 15
significant financial losses to the City’s electric utility, largely because the switch to heat pump
water heaters will generate additional electric utility revenue (described below) that can be
used to offset the losses. Staff also expects collections activity to be low because this pilot
program is targeted at single-family homeowners, and potential losses will be small compared
to the size of the electric utility. One other utility, Sonoma Clean Power, is already successfully
running a program like this. Staff believes these issues are manageable as discussed further in
Attachment B, Section 3. Complete program details and program alternatives are described in
Attachment B, Section 3 (On-bill Financing), and Section 4 (Alternatives Considered).
The initial cost of the program is expected to be $7.7 million, with $1.7 million paid for by
up-front payments from participants and $1.25 million covered by revenue from the auction of
carbon allowances freely allocated to the gas utility as part of the State’s Cap and Trade
program. $0.2 million will come from the Electric Operating Reserve and Electric Supply
Reserve to fund marketing services and salaries for hourly positions to work on potential
program-related customer service issues related to the billing system. The remaining $4.5
million would come from the electric utility’s Electric Special Projects reserve, which will be
transferred to a new Electrification Reserve and used to fund electrification projects, including
customer loans, rebates, and the up-front pilot program costs. The Electrification Reserve will
be funded from participant monthly payments, new electric net income,19 and Public Benefits
energy efficiency funds.20 This funding plan is described in more detail in the Resource Impact
section below and Attachment B, Sections 5 (Funding Up-Front Costs using an Electrification
Reserve), 6 (Repayment of Electrification Reserve), and 7 (Program Cost and Funding Source). A
resolution creating and funding an Electrification Reserve is included in Attachment D.
Funds in the Electric Special Projects Reserve are managed according to the Council-adopted
ESP Reserve Guidelines,21 which permit funds to be spent on projects of substantial size (over
$1 million) and significant impact that benefit electric ratepayers. The proposed HPWH
Program meets these criteria. The ESP Reserve has also been successfully used for internal
loans and as collateral to satisfy debt service reserve obligations. When the ESP Reserve is used
for internal loans (at lower than market interest rates) that are repaid over time, the
reimbursed funds can benefit future electric ratepayers as well.
The cost allocation described above could be modified through a variety of changes to the
program terms, as shown in Attachment B, Section 7, Table B.2 (also shown below). Staff is
looking for Council feedback on which program terms are preferred. The Council could choose
to implement alternative 1 and/or one of the three other alternatives 2a, 2b, or 2c. For
example, Council could choose a $1800 up-front charge and a $25 per month, five-year term
19 New revenues from sale of electricity to the heat pump water heaters net of the cost of the electricity supplied.
20 Public benefits funds come from a charge that Public Utilities Code 385 requires local publicly owned electric
utilities to collect from customers, which can be used to fund cost-effective demand-side management services to
promote energy efficiency, low-income programs, research and development, and renewable energy. Due to Palo
Alto’s low electric rates and the efficiency of heat pump water heaters compared to their gas counterparts,
switching to a heat pump water heater reduces electricity supply costs and promote energy efficiency.
21 See June 20, 2022 Council Staff Report 13661
City of Palo Alto Page 16
(2a), which would decrease the amount funded by reserves and Cap and Trade revenues by
$570,000. Choosing the lowest cost (to CPAU) options (1 and 2c, equivalent to $1800 up front
and a $25 per month payment for seven years) would result in a total cost to participants of
$3,900 (as compared to $2700 under the staff proposal) and would eliminate the use of Cap
and Trade funds almost entirely. Staff believes these terms would be more difficult to sell to
residents than the original staff proposal, but still manageable.
Table B.2: Alternatives for Reducing Reserve and Cap and Trade Revenue Funding
Funding Reduction
1. Increase customer’s up-front payment to $1,800 $300,000
2. Change term and/or monthly charge:
2a. $25 per month payment (no change to term) $270,000
2b. Seven-year term (no change to payment) $430,000
2c. Seven-year $25 per month term $800,000
Section 7 also discusses the three potential Utilities funding sources considered for the
program, Public Benefits Research and Development funding, Electric Cap and Trade funding,
and Gas Cap and Trade funding. Public Benefits funding is an ongoing funding source, and up to
$400,000 could be deployed from existing budgets without impacting existing energy efficiency,
renewable energy, and income-qualified electricity customer programs.
Electric and Gas Cap and Trade funds come from the City’s participation in the State Cap and
Trade program and must be spent on greenhouse gas emissions reducing activities like building
electrification. Staff chose Gas Cap and Trade revenues as the source because more funds are
available ($6.1 million available in Gas Cap and Trade reserves as opposed to $1.8 million in
reserve for Electric Cap and Trade). Grants were also considered as an option but were not
viable given the short timelines for launching the program. Staff was unable to identify any
other sources of funds for the program. The resolution in Attachment E would enable the use of
Gas Cap and Trade funds for this program.
The program will also require some amendments to the FY 2023 budget for some operational
costs associated with the program (marketing costs, contingency temporary staffing budget for
Utilities Customer Service, and contract building inspection services for Planning and
Development Services). These are discussed in the Resource Impact section below and in
Attachment B, Section 8 (Program Operational Resource Needs).
Ideally this pilot program would provide the City enough experience to expand the program to
enable replacement of 1,100-1,300 gas water heaters per year going forward, the estimated
number of gas water heaters that reach end of life in Palo Alto annually. Using the limited
amount of Cap and Trade funds available along with a low interest rate loan from the ESP
Reserve means that the program is not scalable to all of Palo Alto without changes to pricing or
costs, but some potential pathways to making the program scalable are discussed in
Attachment B, Section 9 (Transition to a Scalable Program). The Inflation Reduction Act, which
City of Palo Alto Page 17
staff is still reviewing, could significantly reduce the cost of HPWH installation, help reduce
costs in the pilot program and help the City transition to a scalable program. The report also
discusses other building electrification programs in the region and the country, how this
program is innovative in offering turnkey installation services to all residents (they are normally
offered only to income-qualified residents) and the use of a flat pricing model combined with
on-bill financing (see Attachment B, Section 10, Selected Programs from Other Agencies).
A critical part of the program would be an extensive marketing and engagement effort focused
on the need for climate action, various tips on how to reduce emissions, the reasons heat pump
water heaters represent a great first action for the City to focus on and for homeowners to
take, and the ways residents can get help from the City to install their heat pump water heater.
More details on this engagement effort are included in the Stakeholder Engagement section
below.
To implement this program, staff requests several Council approvals outlined in the next
section.
5. Council Authorizations and Direction Needed
The attached documents and resolutions contain various Council authorizations and direction
needed for staff to proceed with CEQA analysis of the S/CAP and the launch of the Advanced
Heat Pump Water Heater Pilot:
1. S/CAP Goals and Key Actions (Attachment A): These are the Goals and Key Actions staff
and the Council Ad Hoc S/CAP Committee recommends Council accept. Acceptance of
these will allow staff to proceed with CEQA analysis of the S/CAP.
2. Resolution Adopting Design Guidelines for an Advanced Heat Pump Water Heater
Program (Attachment C): These guidelines would provide Council direction on the
general features of an Advanced Heat Pump Water Heater Program and would enable a
pilot design consistent with that described in Section 4 above and Attachment B,
Sections 2 through 4.
3. Resolution Establishing and Transferring Funds to a New Electrification Reserve
(Attachment D): This resolution creates an Electrification Reserve that will be used for
$4.5 million of the $7.7 million in projected up-front costs for the pilot. The $4.5 million
would be transferred from the electric utility’s Electric Special Projects Reserve and
repaid over 30 years using a combination of new electric utility revenues from the
added heat pump water heater electricity use (net of the cost of the electric supply),
Public Benefits funding, and monthly payments of on-bill financing program
participants. Of the remaining $3.2 million in up-front costs, $1.7 million would come
from up-front payments from participants, and the remaining $1.25 million would be
covered by gas utility Cap and Trade revenues, as described in number four, below. $0.2
million will come from the Electric Operating Reserve and Electric Supply Reserve to
fund marketing services and salaries for hourly positions to work on potential customer
service issues related to the billing system.
City of Palo Alto Page 18
4. Resolution Amending the City’s Policy on the Use of Freely Allocated Allowances
Under the State's Cap-and-Trade Program and Authorizing the City Manager to use
$1.25 million from the Gas Utility Cap and Trade Reserve for the Advanced Heat Pump
Water Heater program (Attachment E): This resolution authorizes the use of $1.25
million in revenues related to the gas utility’s participation in the State Cap and Trade
Program for the Advanced Heat Pump Water Heater Pilot. These revenues are from
prior years and are currently held in the Gas Utility Cap and Trade Reserve. The
resolution also amends the Council’s policy on the use of these revenues to explicitly
allow them to be used for fuel switching. This is likely already permitted by the policy,
but this amendment removes any doubt.
5. Amendment to the FY 2023 Budget: An Advanced Heat Pump Water Heater pilot would
have a variety of operational needs, some of which are not accommodated in the
existing budget. These operational needs and associated budget amendments are
described in the Resource Impact section below.
6. Adopt a Resolution Adopting a Carbon Neutrality Goal22 (Attachment F): The “80 x 30”
goal is an interim step that supports California’s statewide goal of achieving carbon
neutrality by 2045. The basic definition of carbon neutrality is taking action towards the
goal of achieving net zero emissions, which means removing as much greenhouse gas
from the atmosphere as we emit. Greenhouse gases can be removed using methods like
new forest growth and carbon removal (processes that remove carbon from the air and
store it underground). Because of the cost and limited availability of carbon removal
measures, deep emissions reductions are needed to achieve net zero emissions. The
IPCC stated in its sixth assessment report that the world must reach global net zero
emission by 2050 to limit global warming to 1.5 °C above pre-industrial levels. Staff and
the S/CAP Committee recommend Council approve a goal to achieve carbon neutrality
(as defined by the California Air Resources Board) by 2035. And then, as established in
Climate Action Key Action C7 (see Attachment A), staff will evaluate how we would
meet the goal.
7. Direct staff to amend the 2022 Utilities Legislative Guidelines (Attachment G) to add
an Electrification Workforce Development guideline: There is a critical shortage of
building electrification contractors, line workers, and power supply engineers necessary
for electrification. Staff and the S/CAP Committee recommend adding a guideline to the
City’s adopted 2022 Utilities Legislative Policy Guidelines23 to support electrification
workforce development:
“13. Support government action to expand the workforce in trades and technical
disciplines necessary to support building and vehicle electrification and grid
modernization.”
22 This should not be confused with the City’s Carbon Neutral Electric or Gas Portfolio goals. The carbon neutrality
goal proposed in this staff report would cover a wider range of emissions sources.
23 As adopted on February 7, 2022 (Staff Report 13904)
City of Palo Alto Page 19
Timeline
• September/October 2022: Council acceptance of proposed S/CAP Goals and Key Actions
and proposed Advanced Heat Pump Water Heater Program Framework
• October 2022:
o Start California Environmental Quality Act (CEQA) evaluation of S/CAP
o 2022 Green Building and Energy Reach Code Adoption
• Late 2022 / Early 2023: Launch the Advanced Heat Pump Water Heater Program
• January 2023: Green Building and Energy Reach Code becomes effective
• March 2023: CEQA review completed
• April 2023: Council certification of CEQA and adoption of S/CAP
Resource Impact
Initiatives will be managed and funded by various departments Resources for some of the
S/CAP initiatives are funded as part of the FY 2023 Adopted Operating Budget; however, it is
anticipated that significant investments will be needed to pursue the expansion of S/CAP work
across the City. S/CAP Climate Action Key Actions C4 and C5 (see Attachment A) involve staff
studying resource needs and potential revenue sources to implement the S/CAP.
The resource needs for the Advanced Heat Pump Water Heater Program are presented in detail
in Attachment B, but in summary:
• Per Attachment B Section 5 (Funding Up-Front Costs using an Electrification Reserve)
and Section 7 (Program Cost and Funding Source), about $5.7 million is needed for an
estimated 900 heat pump water heaters installed via the turnkey program plus 100
rebates. The funding sources for this would be:
o $1.25 million from Gas Cap and Trade Revenues.
o A $4.5 million Electrification Reserve funded from the electric utility’s Electric
Special Projects Reserve. The Electrification Reserve would be repaid over time
at an interest rate equal to the City’s investment reserve rate of return.
• Per Attachment B Section 6 (Repayment of Electrification Reserve), repayment of the
Loan Reserve would come from:
o $70,000 per year from new net electric sales associated with the newly installed
heat pump water heaters (new sales revenues net of the cost of new electric
supply)
o $144,000 per year from monthly customer on-bill financing repayments
o $70,000 per year from existing Public Benefits budgets (Energy efficiency). See
Attachment B, Section 5 for more discussion of this funding source.
• Staff is requesting budget amendments for various operational needs to run the
program:
o $250,000 in the General Fund in the Planning and Development Services
Department for contract building inspection of approximately 1,000 water
heaters offset by $250,000 in revenue from inspection fees
o $150,000 in the Electric Fund in the Utilities Department for program marketing
o $86,000 in the Electric Fund in the Utilities Department for hourly position
City of Palo Alto Page 20
salaries as a contingency budget for Utilities Customer Service, to be used in case
call volumes or billing system issues related to the on-bill financing program
exceed expectations. This funding is equivalent to a customer service
representative position. This is an ongoing request that would be included as
part of the FY 2024 annual budget cycle and subject to Council appropriation.
o A budget amendment for consulting services for updating the utility customer
portal to accommodate on-bill financing is expected to be requested in
December 2022 and will accompany a contract amendment for the City’s portal
provider, though the funding source is yet to be determined. Work will begin on
the customer portal using existing budgets. The amount is still being estimated
as requirements are defined, but it is expected to be about $50,000.
o A budget amendment for S/CAP-related legal expenses may also be needed.
Staff is evaluating the need and potential funding sources.
An Advanced Heat Pump Water Heater pilot has a variety of operational needs, some of which
are not accommodated in the existing budget. If starting this program staff recommends
amending the FY 2023 budget to reflect the costs, revenues, and new resource needs of this
program. The budget amendment includes the items listed in Table 3, below.
City of Palo Alto Page 21
Table 3. Recommended Amendments to the FY 2023 Budget
Electric Fund Rev Exp
Cost of turnkey HPWH installation $0 $4,500,000
This action increases operating expenses to cover the contractual cost of HPWH
installation, less the upfront payments.
Marketing $0 $150,000
This action increases operating expenses to cover one-time marketing and
outreach costs. Achieving 1,000 installations on a rapid time frame will require
expanded City marketing in addition to partnerships with local nonprofits.
Temporary Salaries $0 $86,000
This action increases the temporary salary expenses to provide additional
customer service support which may be needed to manage various customer
service and billing issues related to the HPWH program, particularly the on-bill
financing.
Adjustments to Electric Operations Reserve $0 $(86,000)
This action decreases the fund balance in the Electric Operations Reserve to
offset adjustments recommended in this report.
Adjustments to Electric Supply Reserve $0 $(150,000)
This action decreases the fund balance in the Electric Supply Reserve to offset
adjustments recommended in this report.
Adjustments to Electrification Reserve $0 $(4,500,000)
This action decreases the fund balance in the Electrification Reserve to offset
adjustments recommended in this report.
Electric Fund Subtotal $0 $0
Gas Fund Rev Exp
Cost of turnkey HPWH installation $0 $1,250,000
This action increases operating expenses to cover the contractual cost of HPWH
installation, less the upfront payments.
Adjustments to Gas Cap and Trade Reserve $0 $(1,250,000)
This action decreases the fund balance in the Gas Cap and Trade Reserve to
offset adjustments recommended in this report.
Gas Fund Subtotal $0 $0
City of Palo Alto Page 22
General Fund Rev Exp
Increased contract building inspection $250,000 $250,000
This action increases expenses to cover the costs of additional building
inspections needed during the pilot period, with a commensurate offset from an
anticipated increase in revenues from increased building permits.
Adjustments to General Fund Reserve $0 $0
This action increases the fund balance to offset adjustments recommended in
this report.
General Fund Subtotal $250,000 $250,000
The impact to the Gas Cap and Trade and Electric Special Projects reserves is shown in Table 4.
The impact to other reserves is negligible or none:
Table 4. Impact of Expenditures on Reserves
Reserve Balance, FY 2022 Year-End Proposed Adjustment
Electric Special Projects $29.6 million24 - $4.5 million
Gas Cap and Trade $6.7 million - $1.25 million
Policy Implications
The S/CAP Goals and Key Actions and proposed Advanced Heat Pump Water Heater Program
align with one of the top four Council Priorities for CY 2022: “Climate Change – Protection and
Adaptation”.
Stakeholder Engagement
Stakeholder engagement on the S/CAP Update is wide-reaching and coordinated with multiple
Departments. Efforts include direct engagement, webinars, social media and other digital
marketing/outreach, website updates, public signage, Ad Hoc Committee meeting participation,
leveraging the City communication platforms, and more. Staff developed, and is implementing,
an S/CAP Engagement Plan which identifies relevant stakeholders, proposed materials, and
desired meeting milestones and outcomes. Stakeholder engagement is an integral part of the
S/CAP Ad Hoc Committee’s mission and one of the four areas of focus of the Working Group
Teams. Since July 2021, when the S/CAP Ad Hoc Committee first convened, the City's
engagement efforts have included the following summary of actions:
• Held nine S/CAP Ad Hoc Committee meetings, with public participation
• Produced or partnered on 11 in-person events and 18 virtual events
• Issued 13 digital newsletters25 and 12 blog postings26 related solely to the S/CAP
24 This level accounts for an outstanding internal loan of $10 million to the Electric Supply Operations reserve to be
repaid by the end of FY 2027.
City of Palo Alto Page 23
• Developed a brand-new web ‘hub’ to consolidate all our S/CAP-related information,
provide public resources, and inspire community engagement
• Updated existing webpages27 to better reflect the on-going work on the S/CAP
• Created an S/CAP Ad Hoc Committee Webpage28
• Created new S/CAP Frequently Asked Questions29 to disseminate more information on
our activities
• Launched an on-line survey30 to help inform climate and sustainability conversations
taking place with the S/CAP Ad Hoc Committee and City Council
• Met with local community, advocacy, and environmental groups; and
• Communicated extensively on a one-on-one basis with numerous residents on matters
related to everything from sea-level rise to GHG emissions.
To continue providing various engagement efforts, the S/CAP Ad Hoc Committee and staff will
hold a community workshop on October 15 with a theme of “Making Better Choices in your
Home.” This workshop will focus on home electrification with staff providing information about
our existing programs, electric panels, the S/CAP generally, and our proposed Advanced Heat
Pump Water Heater Program. Staff is working with stakeholders such as Acterra who will
provide induction cooktop demonstrations and staff will bring in e-Bikes and EV chargers to
display. Palo Alto residents with experience electrifying their homes will attend to provide
testimonials and speak with other residents.
For the Advanced Heat Pump Water Heater Pilot Program specifically, staff will increase our
already significant stakeholder engagement efforts. In addition to the communication methods
described above, staff will leverage an existing Utilities Department contract with Marketing for
Change, a vendor providing communication, outreach, and marketing services. Marketing for
Change is developing a marketing plan and outreach campaign based on program goals and
incorporating our existing resources. The marketing plan and outreach campaign will focus at a
high level on taking action on climate change, with the Advanced Heat Pump Water Heater
Program as one possible action to take.
Environmental Review
Council’s acceptance of the proposed S/CAP Goals and Key Actions as a summary of the City’s
workplan under the S/CAP Framework is exempt from review under California Environmental
Quality Act (CEQA) Guidelines Section 15061(b)(3) because the action would accept a work
program that is subject to change (i.e. it is non-binding) and requires further actions prior to
implementation. Council’s acceptance will allow staff to commence CEQA evaluation of the
25 https://www.cityofpaloalto.org/City-Hall/Sustainability/Get-Involved/Sustainability-News
26 https://medium.com/paloaltoconnect/tagged/sustainability
27 https://www.cityofpaloalto.org/sustainability
28 https://www.cityofpaloalto.org/Departments/City-Clerk/City-Council-Committees/Sustainability-and-Climate-
Action-Plan-Ad-Hoc-Committee
29 https://www.cityofpaloalto.org/City-Hall/Sustainability/SCAP/SCAP-Frequently-Asked-Questions
30 https://www.opentownhall.com/portals/5/Issue_11175
City of Palo Alto Page 24
S/CAP for Council approval. Once CEQA review concludes, staff will be able to bring a complete
S/CAP report for Council adoption.
Council’s approval of the Advanced Heat Pump Water Heater Program Design Guidelines,
creation and funding of an Electrification Reserve, amendment of the City’s Cap and Trade
Revenue Utilization Policy, budget appropriations, and approval of a carbon neutrality goal are
not subject to CEQA review as administrative government activities that will not result in
any direct or indirect physical change to the environment (CEQA Guidelines section
15378(b)(5)). Alternatively, these approvals are exempt from review under CEQA Guidelines
Section 15308, as actions taken for protection of the environment.
Attachments:
• Attachment A: S/CAP Goals and Key Actions
• Attachment B: Overview of Advanced Heat Pump Water Heater Program
• Attachment C: Resolution Adopting Advanced Heat Pump Water Heater Design
Guidelines
• Attachment D: Resolution Establishing Electrification Loan Reserve
• Attachment E: Resolution Amending Cap and Trade Policy
• Attachment F: Resolution Adopting Carbon Neutrality Goal
• Attachment G: Amended 2022 Utilities Legislative Guidelines
Page 1 of 19
2022 SUSTAINABILITY AND
CLIMATE ACTION PLAN
DRAFT
Goals and Key Actions
Page 2 of 19
Introduction
A Climate Action Plan, or CAP, is a comprehensive roadmap that lays out the specific activities that an
agency will undertake to reduce greenhouse gas (GHG) emissions. In Palo Alto, we have a Sustainability
and Climate Action Plan (S/CAP) because we include sustainability areas that don’t necessarily have a
direct impact on GHG reductions, but have critically important sustainability, public health and safety,
regional, resource conservation, and equity benefits that contribute to overall climate action. The
proposed S/CAP Goals and Key Actions in this document will form the basis of the full S/CAP Report.
The City’s consultant, AECOM, performed an impact analysis that estimated the potential GHG reduction
potential of the proposed actions, estimated costs, and additional sustainability co-benefits, as well as
the outcomes needed to meet the “80 x 30” goal to reduce GHGs 80% below 1990 levels by 2030. This
document outlines proposed S/CAP Goals and Key Actions in eight areas: Climate Action, Energy, Electric
Vehicles, Mobility, Water, Climate Adaptation and Sea Level Rise, Natural Environment, and Zero Waste.
The Key Actions do not capture the breadth and depth of the sustainability and climate action programs
and projects across the City. Rather, they are the Key Actions that we are prioritizing, based on the
outcomes needed and sustainability co-benefits that were identified in the impact analysis to achieve
the “80 x 30” goal. There are additional Supplemental Actions that are being implemented and
developed that contribute towards the City’s climate and sustainability goals but are not highlighted
here. Many of the Supplemental Actions are included in the Climate Change – Protection and Adaptation
Work Plan and will be included in future Work Plans.
Each of the proposed Key Actions falls along a Spectrum of Tools for Achieving Climate Goals, as shown
in Figure 1. The Spectrum ranges from market driven solutions that require low intervention but also low
certainty of achievement, such as voluntary programs, to government driven solutions that require
higher intervention but yield high certainty of achievement, such as city-wide voter-approved mandates.
Figure 1: Spectrum of Tools for Achieving Climate Goals
Page 3 of 19
Strategies to Get Us There
The Goals and Key Actions proposed in this document will work together towards achieving Palo Alto’s
goal to reduce GHG’s 80 percent by 2030, relative to a 1990 baseline. The proposed S/CAP Goals and Key
Actions are meant to be a high-level road map to achieving the community’s 80 x 30 goal. More details
and specifics will be provided in the S/CAP Workplan.
Page 4 of 19
SUSTAINABILITY AND CLIMATE ACTION PLAN GOALS
CLIMATE ACTION Reduce GHG emissions 80% below 1990 levels by 2030
Reduce GHG emissions from the direct use of natural gas in Palo Alto’s building sector by at
least 60% below 1990 levels (116,400 MT CO2e reduction)
Modernize the electric grid to support increased electric demand and to accommodate state-
of-the-art technology
Reduce transportation related GHG emissions at least 65% below 1990 levels (215,696 MT
CO2e reduction)
Develop a public and private charging network to support EV adoption
Reduce total vehicle miles traveled 12% by 2030, compared to a 2019 baseline, by reducing
commute vehicle miles traveled 20%, visitor vehicles miles traveled 10%, and resident vehicle
miles traveled 6%
Increase the mode share for active transportation (walking, biking) and transit from 19% to
40% of local work trips by 2030
Reduce Palo Alto’s potable water consumption 30% compared to a 1990 baseline (subject to
refinement based on forthcoming California water efficiency standards expected in 2024)
Develop a water supply portfolio which is resilient to droughts, changes in climate, and water
demand and regulations, that supports our urban canopy
Develop and adopt a multi-year Sea Level Rise Adaptation Plan including a sea level rise
vulnerability assessment and adaptation plan.
Minimize wildland fire hazards by ensuring adequate provisions for vegetation management,
emergency access and communications, inter-agency firefighting, and standards for design and
development within wildland areas.
Restore and enhance resilience and biodiversity of our natural environment throughout the City
Increase tree canopy to 40% city-wide coverage by 2030
By 2030, achieve a 10% increase in land area that uses green stormwater infrastructure to
treat urban water runoff, compared to a 2020 baseline
Divert 95% of waste from landfills by 2030, leading to zero waste
Implement short- and medium-term initiatives identified in the 2018 Zero Waste Plan
Page 5 of 19
Climate Action
The seven areas of the S/CAP (Energy, Electric Vehicles, Mobility, Water, Climate Adaptation
and Sea Level Rise, Natural Environment, and Zero Waste) are all equally important. However,
three areas – Energy, Electric Vehicles, and Mobility – have the highest potential for the
largest greenhouse gas (GHG) emissions reductions. Each of these three areas has Goals and
Key Actions that are specific to each area, but the overarching 80 x 30 goal and several Key
Actions encompass all three.
GOAL
Reduce GHG emissions 80% below 1990 levels by 2030
KEY ACTIONS
Community assistance
C1. Enable any resident to receive guidance on reducing their building and transportation
emissions via phone consultations, interactive web applications, or communications platforms.
C2. Work with major employers, including Stanford entities, to develop custom emissions
reduction plans that address commute, building, and other emissions on an employer-by-
employer basis.
Staff Analysis
C3. Complete study to identify any additional Energy, EV, or Mobility key actions needed to achieve
80% reduction in greenhouse gas emissions from 1990 levels by 2030, such as electrification of
additional multifamily or commercial end uses, greater electrification of vehicles, or other
emissions reduction actions not already identified in this Plan.
C4. Complete a technical and legal study of the staffing and other resources needed to operate
programs, services, and related City processes at a high enough capacity to accommodate all
necessary emissions reduction activities through 2030.
C5. Complete a technical and legal study of funding alternatives, such as a carbon tax, parcel taxes,
or other community funding mechanisms.
C6. Complete an affordability study to identify vulnerable populations and businesses who may
need help with electrification and the scale of subsidy needed. Develop a Council-approved
affordability policy to guide incentive and program funding design.
C7. Complete a study of carbon neutrality options, including the potential contribution of
expansion of the Palo Alto urban canopy in achieving carbon neutrality goals.
Staff and Council action
C8. Present options for Council consideration to accelerate EV, Mobility, and Energy emissions
reduction activities identified in this Plan through mandates or price signals, such as building
emissions performance standards, carbon pricing, on-sale or replace-on-burnout ordinances,
parking rules in public and private spaces, and withdrawal of gas by a date certain.
KEY PERFORMANCE INDICATORS
• GHG reductions
• Community awareness
• Participation in Climate Pledge
Page 6 of 19
Energy
Building efficiency and electrification are key to achieving Palo Alto’s - and California’s –
greenhouse gas (GHG) reduction goals. Overcoming building electrification barriers at both
the local and regional level will be necessary to increase market adoption in existing
buildings. Electrification and building energy efficiency are important strategies to meeting
the City’s aggressive GHG reduction goal. It is critical to modernize the City’s electric grid
to accommodate the technologies that will enable this transformation.
In California, buildings account for 70 percent of total electricity use1 and 20 percent of total GHG
emissions2. In 2020, buildings in the residential and commercial/industrial sectors accounted for 34.9
percent of total emissions in Palo Alto, with 17.9 percent from residential, 13.9 percent from
commercial, and 3.1 percent from industrial.
In order to reach Palo Alto’s 2030 emissions reduction target, natural gas consumption will need to
decline significantly through a combination of energy efficiency and electrification. Energy efficiency is
simply using less energy to perform the same task; for example, replacing a low-efficiency gas furnace
with a high-efficiency gas furnace. Electrification is the practice of replacing equipment in buildings that
is powered by natural gas, including gas furnaces and gas water heaters, with electric equipment, such
as air source heat pumps and heat pump water heaters.
GOAL
Reduce GHG emissions from the direct use of natural gas in Palo Alto’s building sector by at least
60% below 1990 levels (116,400 MT CO2e reduction)
Modernize the electric grid to support increased electric demand and to accommodate state-of-
the-art technology
KEY ACTIONS
Reduce greenhouse gas emissions in appliances and equipment
E1. Reduce all or nearly all greenhouse gas emissions in single-family appliances and equipment,
including water heating, space heating, cooking, clothes drying, and other appliances that use
natural gas.
E2. Reduce greenhouse gas emissions in non-residential equipment, including mixed-fuel rooftop
packaged HVAC units, cooking equipment, and small nonresidential gas appliances.
Reduce natural gas use in buildings
E3. Partner with major facility owners to reduce gas use in major facilities by at least 20%.
E4. Reduce natural gas usage at City facilities.
Make it affordable
E5. Support income-qualified residents and vulnerable businesses with electrification efforts while
ensuring affordability of on-going utility bills.
1 California Energy Commission. (2018). Energy Consumption Database Management System. Retrieved from
http://www.ecdms.energy.ca.gov/elecbyutil.aspx
2 California Air Resources Board. (2019) California Greenhouse Gas Emissions for 2000 to 2017. Retrieved from
https://ww3.arb.ca.gov/cc/inventory/pubs/reports/2000_2017/ghg_inventory_trends_00-17.pdf
Page 7 of 19
E6. Develop electric rate options for electrified homes, EV charging, and solar + storage microgrid
customers.
Paving the road to electrification
E7. Use codes and ordinances - such as the energy reach code, green building ordinance, zoning
code, or other mandates - to facilitate electrification in both existing buildings and new-
construction projects where feasible.
E8. Develop and implement an electric grid modernization plan to increase capacity and resilience.
E9. Seek additional electrification opportunities in commercial and multi-family buildings to
contribute as much as possible towards achieving an additional 8% city-wide emissions
reduction below 1990 levels.
KEY PERFORMANCE INDICATORS
• GHG emissions from natural gas use in buildings (single-family, multifamily, nonresidential)
• Percentage of single-family households with no gas connections
• Percentage of gas use reduction in major facilities and City facilities
Page 8 of 19
Transportation
In California, more than 50 percent of total GHG emissions stem from transportation. The primary driver
of emissions is from cars and trucks. In Palo Alto, 61.9 percent of emissions come from transportation,
with 56.4 percent from on-road vehicles.
Reducing transportation emissions requires addressing three areas: 1) reducing the carbon intensity of
fuels, 2) increasing vehicle efficiency, and 3) reducing vehicle miles travelled (VMT). Each area is
significant, layered, and complex. And while delving into details is not appropriate for this document, we
acknowledge the importance of this sector by creating two transportation-related action areas: electric
vehicles and mobility. The electric vehicle (EV) and mobility plans work in synch to jointly reduce GHG
emissions and VMT.
Transportation trends
As of 2019, electric vehicles made up 7.8 percent of total new car sales in California.3 In Palo Alto,
electric vehicles made up 29 percent of total new car sales in 20174 – the highest rate in the US – with
electric vehicles comprising 10 percent of total registered vehicles in 2020. In September 2020, Governor
Newsom issued an Executive Order directing the state to require that, by 2035, all new cars and
passenger trucks sold in California be zero-emission vehicles. And in January 2021, General Motors
announced it would phase out petroleum-powered cars and trucks and sell only vehicles that have zero
tailpipe emissions by 2035.
While these are all positive trends towards reducing transportation-related emissions, addressing the
third component, reducing VMT, is considerably more difficult. Californians have driven more and more
miles per year over the past five decades, whether for necessity or convenience.
If we all chose to power half of our shorter vehicle trips with our feet instead of petroleum, we would
save about $575 million in fuel costs and about 2 million metric tons of CO2 emissions per year. That’s
the equivalent of taking approximately 400,000 cars off the road annually.5
3 California Air Resources Board. (2019). Sales of electric cars breaking records in California. Retrieved from
https://ww2.arb.ca.gov/news/sales-electric-cars-breaking-records-california
4 International Council on Clean Transportation. (2018) California’s continued electric vehicle market development. Retrieved
from https://theicct.org/sites/default/files/publications/CA-cityEV-Briefing-20180507.pdf
5 United States Environmental Protection Agency. (n.d.). Green Vehicle Guide. https://www.epa.gov/greenvehicles/what-if-
we-kept-our-cars-parked-trips-less-one-mile
Page 9 of 19
Electric Vehicles
More than half of Palo Alto’s emissions come from transportation, making adoption of
Electric Vehicles (EVs) a crucial component to reaching our carbon reduction goals.
Compared to fossil fuel vehicles, EVs are cheaper to drive, have lower maintenance costs,
and produce no emissions. Driving and charging an EV in Palo Alto especially makes sense
given the City’s carbon neutral electricity supply and low electric retail rates. Greenhouse gas
(GHG) emissions are a function of two factors: the carbon intensity (GHG/VMT) of fuels,
addressed here, and Vehicle Miles Traveled (VMT), addressed in the next section. The EV and
Mobility plans work in synch to jointly reduce GHG emissions and Vehicle Miles Traveled.
In order to reach Palo Alto’s 2030 emissions reduction target, strategies to reduce the carbon intensity
of fuels will need to be implemented.
GOAL
Reduce transportation related GHG emissions at least 65% below 1990 levels (215,696 MT CO2e
reduction)
Develop a public and private charging network to support EV adoption
KEY ACTIONS
Education, awareness, and collaboration
EV1. Raise awareness of financial and emission savings of alternative transportation modes,
micromobility (such as e-bikes and e-scooters), EVs, the economics of these transportation
modes compared to gasoline vehicles, and available incentives.
EV2. Collaborate with regional partners, other agencies, and local nonprofit partners to promote
EV adoption regionally to reduce commuter and visitor emissions.
EV3. Partner with employers and business districts to promote commuter EV adoption and EV
charging access as well as alternative commute promotion.
EV4. Facilitate the adoption of EVs, e-bikes and other light EVs.
EV5. When offering programs to facilitate EV adoption, EV charger installation, or building
electrification, promote alternative transportation modes and infrastructure to support
adoption (such as bicycle or micromobility infrastructure) as well where feasible.
Expand EV infrastructure
EV6. Expand access to on-site EV charging access for multi-family residents.
EV7. Improve access to EV charging for income-qualified residents.
EV8. Evaluate mandates or other mechanisms to ensure EV charging capacity is available to
support EV growth.
Electrify fleet vehicles
EV9. Convert all Palo Alto municipal vehicles to EVs when feasible and when the replacement is
operationally acceptable.
EV10. Support state policy efforts to electrify fleet vehicles, including delivery trucks
KEY PERFORMANCE INDICATORS
• GHG emissions from vehicle travel
• Percentage of registered EV vehicles in Palo Alto
Page 10 of 19
• Percentage of new vehicle sales that are EVs
• Percentage of multifamily residents with access to overnight EV charging
• Gasoline sales in Palo Alto
Page 11 of 19
Mobility
Road transportation represents the largest percentage of Palo Alto’s existing carbon
footprint – and a congestion headache. Greenhouse gas (GHG) emissions are a function of
two factors: Vehicle Miles Traveled (VMT), addressed here, and the carbon intensity
(GHG/VMT) of fuels, addressed in the previous section. Reducing GHG/VMT is largely
driven by Federal Standards, state policy, and vehicle offerings (including fuel efficiency
and EVs). However, VMT reduction and EV adoption can be influenced by local programs
and policies, including roadway engineering, land use, and zoning, since these elements
affect travel mode choice.
In order to reach Palo Alto’s 2030 emissions reduction target, strategies to reduce VMT will need to be
implemented.
GOALS
Reduce total vehicle miles traveled 12% by 2030, compared to a 2019 baseline, by reducing
commute vehicle miles traveled 20%, visitor vehicles miles traveled 10%, and resident vehicle
miles traveled 6%
Increase the mode share for active transportation (walking, biking) and transit from 19% to 40%
of local work trips by 2030
KEY ACTIONS
Promote alternatives to single occupancy car trips
M1. Implement transportation and land use infrastructure investments, programs, policies, and
incentives to increase the mode share for active transportation (walking, biking) and transit for
local work trips.
M2. Expand the availability of transit and shared mobility services from 61% of residents to 100% of
all residents, including a bike/scooter shared micro-mobility service to provide last-mile
connections, an on-demand shuttle / transit service pilot, and Neighborhood Mobility Hubs.
M3. Update and implement the Bicycle and Pedestrian Transportation Plan to expand bicycle and
pedestrian infrastructure and establish a Vision Zero data collection and analysis program to
target safety improvements.
M4. Improve Transportation Demand Management for employees and residents, including adopting
a TDM Ordinance, allocating funding to scale up TDM programming, establishing a Safe Routes
for Older Adults/Aging in Place program, and continuing the Safe Routes to School program.
Change the way we think about parking cars
M5. Implement smart parking infrastructure in public garages and proposals for Council to price
parking in business districts, including implementing an optional Healthy Climate Fee, ideally on
gas vehicles, to partially offset GHG emissions from driving to support alternative modes in Palo
Alto.
Learn how we can grow without increasing GHG emissions
M6. Conduct a land use and transportation study to identify scenarios, changes, services, and
programs that would reduce greenhouse gas emissions and accommodate projected housing
growth without increasing transportation sector emissions. Include mobility equity needs
analysis.
Page 12 of 19
M7. Continue to implement the City’s Housing Element of the Comprehensive Plan to improve jobs -
housing balance and reduce vehicle miles traveled (VMT).
M8. Improve transit and traffic flow through programs to install transit signal priority equipment,
implement traffic signal equipment improvements, and improve transit times.
Leverage current tools to foster mobility-related GHG reductions
M9. Utilize development regulations and standards to continue creating a housing density and land
use mix that supports transit and non-SOV (Single Occupancy Vehicle) transportation modes.
M10. Utilize pricing, fees, and other program and policy tools to encourage reductions in GHGs and
VMT.
KEY PERFORMANCE INDICATORS
• Total VMT
• Commute mode share for all modes
• Commute Benefits participation by City employees
• Transit ridership, the proportion of residents within a quarter-mile walkshed of frequent transit,
and the proportion of residents covered by on-demand transit services (data may not be available
every year)
• Number and proportion of residents within a 10-minute walk of retail land uses (data may not be
available every year)
• Number of businesses participating in TDM programs (when regional TDM Program data becomes
available)
Page 13 of 19
Water
Water is a limited resource in California, and its availability will be further impacted by
climate change and new environmental regulations. Both potable water supplies and
hydroelectric needs could be challenged by long-term shifts in California’s precipitation
regime. With shifting climate patterns, and significant long-term water supply uncertainty,
it would be prudent to reduce water consumption while exploring ways to capture and
store water, as well as to increase the availability and use of recycled water.
Water reuse will increase in importance as California’s population expands and climate change and new
environmental regulations pose uncertainties in imported water supply availability. Whether a water
supply shortage exists or not, “Making Water Conservation a California Way of Life” is a concept
embraced by the City.
In 2020, wastewater accounted for 0.4 percent of Palo Alto’s GHG emissions. While the Goals and Key
Actions for water don’t explicitly address GHG reduction, energy and water use are linked. Energy is
needed to transport and to treat water, treat wastewater, and heat domestic hot water in homes and
businesses across California. Approximately 20 percent of California’s electricity and approximately 30
percent of natural gas used by homes and businesses across the state is dedicated to pumping, treating,
and heating water.
GOALS
Reduce Palo Alto’s potable water consumption 30% compared to a 1990 baseline (subject to
refinement based on forthcoming California water efficiency standards expected in 20246)
Develop a water supply portfolio which is resilient to droughts, changes in climate, and water
demand and regulations, that supports our urban canopy
KEY ACTIONS
W1. Maximize cost-effective water conservation and efficiency through incentives,
outreach/education, and other programs.
W2. Design and build a salt removal facility for the Regional Water Quality Control Plant.
W3. Develop and implement projects that result from a "One Water" Portfolio for Palo Alto7,
including but not limited to: stormwater, recycled water, on-site reuse, conservation,
groundwater.
W4. Develop a tool for dynamic water planning in the future.
6 The California Water Action Plan, first released in 2014 and updated in 2016, is a roadmap to water resilience and reliability.
Ten principles define California’s Water Action Plan, including “Make Conservation a California Way of Life.” Executive Order
(B‐37‐16) instructed State agencies to help Californians adopt permanent changes to use water more wisely. In 2018 the
legislature enacted SB 606 and AB 1668 that provide new requirements for water conservation and drought. Resulting new
regulations will establish water budgets for urban water suppliers based upon state adopted water use efficiency standards
for residential indoor and outdoor water use, outdoor irrigation of landscape areas, water loss, and local service area
characteristics.
7 A “One Water” approach envisions managing all water in an integrated, inclusive, and sustainable manner that is more
resilient to the impacts of climate change. The One Water approach recognizes that water must be managed in ways that
respect and respond to the natural flows of watersheds and the natural ecosystem, geology, and hydrology of an area.
projects and programs focus on achieving multiple benefits—economic, environmental, and social.
Page 14 of 19
KEY PERFORMANCE INDICATORS
• Estimated indoor per capita residential water consumption
• Estimated outdoor residential water consumption for irrigation
• Water consumption of commercial customers with irrigation meters
• Amount of recycled water used in Palo Alto
• Volume of stormwater that is captured and reused
Page 15 of 19
Climate Adaptation and Sea Level Rise
Climate adaptation refers to the actions taken to improve a community’s resilience when
confronted with the impacts of climate change. Actions that reduce the net amount of
GHG emissions are emissions reductions or climate mitigation. Climate adaptation
planning is most effective at the local level. Effective adaptation planning and
management entails dealing with uncertainty. It is a long-term process that should allow
immediate action when necessary and adjust to changing conditions and new knowledge.
One focus of climate adaption is sea level rise. The State of California anticipates that relative sea level
rise projections stemming from GHG emissions and related climate change pose significant economic,
environmental and social risks to communities along the San Francisco Bay Shoreline, including the City
of Palo Alto. Sea level rise in San Francisco Bay is anticipated to range between three feet to more than
ten feet by 2100 with rising tides likely thereafter. In Palo Alto, many City services and infrastructure
that are essential to the City’s public health, safety, and economy are located within areas that are
predicted to be inundated by Bay water if adaptation measures are not implemented.
Another focus of climate adaption is preparation for and protection from wildfires. Climate change is
expected to increase the frequency, intensity, and duration of wildfire events, especially here in
California. On the West Coast, it is projected that an average 1 °C temperature increase could increase
the median burned area per year as much as 600 percent in some forests.8 GHG emissions from wildfires
are not currently included in community GHG inventories. From 2000 – 2019, wildfire-related GHG
emissions in California averaged approximately 14 million metric tons (MMT) of CO2. The California Air
Resources Board (CARB) projects that CA wildfire emissions in 2020 were about 112 MMT CO2.9
While this document focuses primarily on sea level rise and secondarily on wildfire protection, the City is
pursuing many other climate protection and adaption strategies. The City is also working on addressing
extreme weather and natural disasters such as floods.
GOALS
Develop and adopt a multi-year Sea Level Rise Adaptation Plan including a sea level rise
vulnerability assessment and adaptation plan
Minimize wildland fire hazards by ensuring adequate provisions for vegetation management,
emergency access and communications, inter-agency firefighting, and standards for design and
development within wildland areas.
KEY ACTIONS
Minimize the impacts of sea level rise
S1. Complete a Sea Level Rise Vulnerability Assessment to identify risks and hazards to the Palo
Alto Baylands, City infrastructure, and residential and business property, considering high tide,
100-year coastal storm event scenarios and rising shallow groundwater impacts.
8 US Department of Agriculture. (2012). Effects of Climatic Variability and Change on Forest Ecosystems: A Comprehensive
Science Synthesis for the U.S. Forest Sector. https://www.fs.fed.us/pnw/pubs/pnw_gtr870/pnw_gtr870.pdf
9 California Air Resources Board (2020). Greenhouse Gas Emissions of Contemporary Wildfire, Prescribed Fire, and Forest
Management Activities. https://ww3.arb.ca.gov/cc/inventory/pubs/ca_ghg_wildfire_forestmanagement.pdf
Page 16 of 19
S2. Develop and implement a Sea Level Rise Adaptation Plan with goals to 1) Preserve and Expand
Habitat, and 2) Protect City and Community Assets, and Private Property.
S3. Determine levee alignment and begin design process for a levee project that protects the Palo
Alto community from sea level rise, and incorporates other related priorities including habitat
restoration, recreation, transportation, City facilities, and community properties.
S4. Complete bridge improvements and identify protection strategies from significant flood events
Minimize the impacts of wildland fire hazards
S5. Implement the Foothills Fire Management Plan to balance conservation of natural resources
with reduction of fire hazards especially in open space areas.
S6. Minimize fire hazards by maintaining low density zoning in wildland fire hazard areas and
enforcing building codes for fire resistant construction.
S7. Work collaboratively with other jurisdictions and agencies to reduce wildfire hazards in and
around Palo Alto, with an emphasis on effective vegetation management and mutual aid
agreements.
S8. Implement of CAL FIRE recommended programs in educating and involving the local
community to diminish potential loss caused by wildfire and identify prevention measures to
reduce those risks.
KEY PERFORMANCE INDICATORS
• Percent of vulnerable locations protected from 3 feet of sea level rise
• Percent of properties protected from San Francisquito Creek flooding
• Progress towards sea level rise levee alignments
• Implementation of Foothills Fire Management Plan mitigation measures
Page 17 of 19
Natural Environment
Sustainability is not only about mitigation, adaptation, and resilience, but also
regeneration – identifying opportunities for renewal, restoration, carbon sequestration,
and growth of our natural environment. Palo Alto will continue to build and restore the
natural environment and its ecosystem services and bio-capacity that supports it,
including soils, tree canopy, biodiversity, and other components. Enhancing and
maintaining Green Stormwater Infrastructure will use natural areas and systems to
provide habitat, flood protection, stormwater management, cleaner air, cleaner water,
and human health enhancement.
Many actions that address climate vulnerability and risk also reverse emissions of greenhouse gases
(GHGs) into the atmosphere. Shade trees absorb, or sequester, carbon dioxide from the atmosphere.
Studies show that a young tree sapling can sequester anywhere from 1.0 to 1.3 pounds of carbon each
year, while a 50-year-old tree can sequester over 100 pounds annually.10 Restoration of wetlands can
both sequester carbon and be implemented in a way that may protect shoreline communities and
habitats from sea-level rise and storm surge. Healthy soils on farmland also play an important role in
absorbing carbon.
Actions to sequester carbon in trees, soils, and vegetation can increase biodiversity of plants and
animals and minimize stormwater runoff by mitigating impacts from impervious surfaces and providing
opportunities to capture and use rain while also treating runoff pollutants. Biodiversity is critical to the
health of City parks and other open spaces. Natural area conservation and retrofit of impervious areas
protect natural resources and environmental features that sequester carbon, reduce stormwater runoff,
promote infiltration, prevent soil erosion, and increase ecosystem biodiversity.
GOALS
Restore and enhance resilience and biodiversity of our natural environment throughout the City
Increase tree canopy to 40% city-wide coverage by 2030
By 2030, achieve a 10% increase in land area that uses green stormwater infrastructure to treat
urban water runoff, compared to a 2020 baseline11
KEY ACTIONS
Maintain and protect tree canopy
N1. Develop programs to plant trees to increase tree canopy – that will be integrated with
traditional tree planting programs and Green Stormwater Infrastructure programs – and
provide carbon sequestration, improve water quality, capture stormwater when feasible, and
reduce the urban heat island effect.
N2. Ensure No Net Tree Canopy Loss for all projects.
N3. Continue to review the use of pesticides in all parks and open space preserves to identify
opportunities to further reduce and eliminate the use of pesticides.
10 U.S. Department of Energy Energy Information Administration. (1998). Method for Calculating Carbon Sequestration by
Trees in Urban and Suburban Settings. https://www3.epa.gov/climatechange/Downloads/method-calculating-carbon-
sequestration-trees-urban-and-suburban-settings.pdf
11 Green Stormwater Infrastructure (GSI) goals will be finalized once additional quantification work is conducted over the next
two years to provide accurate, realistic and publicly vetted metrics.
Page 18 of 19
N4. Enhance pollinator habitat by including native plants and pollinator-friendly plant landscaping
with all park improvement projects when feasible.
N5. Establish a baseline and Key Performance Indicator for carbon storage of tree canopy in the
public right-of-way and City-owned property.
Restore and enhance biodiversity
N6. Evaluate and modify plant palette selection in project plans to maximize biodiversity and soil
health to adapt to the changing climate and incorporate buffers for existing natural
ecosystems.
N7. Coordinate implementation of the Urban Forest Master Plan, Parks Master Plan, and other city-
wide planning efforts through interdepartmental collaboration.
N8. Expand the requirements of the Water Efficient Landscape Ordinance (WELO) to increase
native and drought-tolerant species composition.
N9. Phase out gas-powered lawn and garden equipment, in compliance with California’s AB 1346.
Reduce pollutants entering the Bay
N10. Establish policies and ordinance changes as needed to support the Green Stormwater
Infrastructure Plan.
N11. Incorporate Green Stormwater Infrastructure in future municipal projects, including public
right-of-way.
KEY PERFORMANCE INDICATORS
• City-wide Tree Canopy coverage
• Native species on City property and in new landscape projects (to measure biodiversity)
• Land area that uses green stormwater infrastructure to treat urban water runoff
Page 19 of 19
Zero Waste
Zero Waste is a holistic approach to managing materials in a closed loop system (circular
economy), where all discarded materials are designed to become resources. Reducing
waste is an important strategy for both greenhouse gas (GHG) emissions reductions and
overall sustainability. Approximately 42% of GHG emissions in the U.S. are associated with
the flow of materials through the economy, from extraction or harvest of materials and
food, production and transport of goods, provision of services, reuse of materials,
recycling, composting, and disposal.
Palo Alto’s current diversion rate is 84%. Diversion includes all waste prevention, reuse, recycling, and
composting activities that divert materials from landfills. Getting to the 95% diversion goal will require
refinement and enforcement of existing programs, the addition of new policies and programs, fostering
producer and consumer responsibility and building community collaboration on waste prevention.
In 2020, solid waste accounted for 1.7 percent of Palo Alto’s GHG emissions, which can be reduced
through key actions that reduce waste, conserve resources, and prevent pollution.
GOALS
Divert 95% of waste from landfills by 2030, leading to zero waste
Implement short- and medium-term initiatives identified in the 2018 Zero Waste Plan
KEY ACTIONS
Education and outreach
ZW1. Encourage food waste12 prevention and require edible food recovery for human consumption
from commercial food generators.
ZW2. Promote residential food waste reduction.
ZW3. Champion waste prevention, reduction, reusables, and the sharing economy (e.g., promote
adoption of a “Zero Waste lifestyle”, stimulate value of reuse, repair, and access to sharing
goods over ownership).
ZW4. Provide waste prevention technical assistance to the commercial sector.
Collaborate on and expand policies
ZW5. Prioritize domestic processing of recyclable materials and collaborate with stakeholders on
legislation to spur domestic recycling and require traceability of materials processing.
ZW6. Eliminate single-use disposable containers by expanding the Disposable Foodware Ordinance.
ZW7. Expand the Deconstruction and Construction Materials Management Ordinance.
ZW8. Implement Reach Code standard for low carbon construction materials.
KEY PERFORMANCE INDICATORS
• Diversion rate
• Number of Zero Waste Plan13 initiatives implemented
12 “Food waste” refers to edible food that is not eaten, goes bad and is thrown away. It does not include food scraps such as
banana peels, apple cores, and bones – they should be composted.
13 www.cityofpaloalto.org/zwplan
6056669
Attachment B: Overview of Advanced Heat Pump Water Heater Pilot Program
Table of Contents:
1. Executive Summary
2. Prelimimary Program Features and Terms
3. On-bill Financing Program
4. Alternatives Considered
5. Up-front Costs and Electrification Reserve
6. Repayment of Electrification Reserve
7. Program Cost and Funding Source
8. Program Operational Resource Needs
9. Transition to a Scalable Program
10. Selected Programs from Other Agencies
11. Electric Grid Impacts
1. Executive Summary
The goal of the Advanced Heat Pump Water Heater Pilot Program is to replace 1000 gas water
heaters in residences, primarily single-family homes, with heat pump water heaters by the end
of 2023. The program will reduce emissions by 800 metric tons (MT) of carbon-dioxide-equivalent
(CO2-e) per year. It is the first step in electrifying 100% of water heating in single-family homes in
Palo Alto, which, if achieved, would represent an estimated additional 12,330 MT CO2-e per year
(about 4% to 5% of remaining emissions reductions needed to achieve 80% below 1990 levels,
about 5% to 7% when upstream emissions from fuel use are included1). The program will make
it easy for residents to get a water heater installed starting with one phone call to the City. The
City’s contractor will install the water heater for one flat price2 so participating residents are
spared the hassle of contractor selection and permitting. If the $2700 up-front cost is too much,
participants can pay $1500 up front and $20 per month for five years, a 0% loan. Since most gas
water heaters cost over $1500 to replace, and since participants will save $5 per month to $20
per month on their utility bills by switching from gas water heating to efficient electric water
heating using Palo Alto’s low-cost, renewable electricity, the pricing with on-bill financing is
competitive with a gas water heater replacement. And those who prefer to manage their own
projects can do so and still get a rebate of $2300 from the City, an increase from the current
$1200 rebate.
The up-front cost of the program is expected to be $7.4 million, with $1.7 million paid for by
up-front payments from participants and $1.2 million by revenue from the auction of carbon
allowances freely allocated to the gas utility as part of the State’s Cap and Trade program. The
remaining $4.5 million will come from the electric utility’s Electric Special Projects reserve, which
will be transferred to an Electrification Reserve and used to fund customer loans, rebates, and
the up-front cost of the program. The Electrification Reserve will be repaid over time from
1 Upstream emissions from fuel use include emissions involved in collection, processing, and transportation of
fuels, including leakage. These estimates use the 20-year global warming potential of fuels.
2 For most homes. Some installations (such as when a panel upgrade is required) may involve additional costs.
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participant monthly payments, new electric net income,3 and Public Benefits energy efficiency
funds.4 The program will also require some amendments to the FY 2023 budget for some
operational costs associated with the program (marketing costs, contingency temporary staffing
budget for Utilities Customer Service, and contract building inspection services for Planning and
Development Services).
Ideally, this pilot program would provide the City enough experience to expand the program to
enable replacement of 1100-1300 gas water heaters per year going forward, the estimated
number of gas water heaters that reach end of life in Palo Alto annually. Because of the need for
additional funding and the use of internal financing at a low interest rate the program is not
scalable to all of Palo Alto without changes to pricing or costs, but some potential pathways to
making the program scalable are discussed in this report. The Inflation Reduction Act, which staff
is still reviewing, could significantly reduce the cost of HPWH installation, help reduce costs in
the pilot program, and help the City transition to a scalable program. The report also discusses
other building electrification programs in the region and the country, and how this program is
innovative in offering turnkey installation services to all residents (they are normally offered only
to income-qualified residents) and the use of a flat pricing model combined with on-bill financing.
2. Preliminary Program Features and Terms
Nearly every single-family home has a gas water heater, as do some multi-family units5. Very few
homes have electrified so far. Staff estimates under 200 homes are without gas service. With
over 15,000 single-family homes in Palo Alto, and with most gas water heaters lasting 13-15
years, staff estimates between 1100 and 1400 gas water heaters are replaced each year. This
program aims to have as many as 1000 gas water heaters replaced with heat pump water heaters
between program launch and the end of 2023.
Heat pump water heaters are not as well-known as gas tank water heaters and involve more
complicated installations that involve both plumbing and electrical work, unlike gas water
heaters. A new electrical circuit, venting of air to the outside, a drain line for compressor
condensation, and capping of gas plumbing might be required. In some homes the water heater
location might need to be moved if the space is insufficient, and a panel upgrade might be
required. With more complexity comes a more expensive installation, and the water heater itself
is more expensive as well. And it is challenging for homeowners to manage these installations
themselves. The technology is unfamiliar, it can be challenging to find contractors and evaluate
bids, and it is always complicated for homeowners to coordinate a permitting process.
Staff has developed a preliminary program design and funding allocation that is designed to
remove these hassles. To get a new heat pump water heater a homeowner will just need to call
3 New revenues from sale of electricity to the heat pump water heaters net of the cost of the electricity
4 Public benefits funds come from a charge that Public Utilities Code 385 requires local publicly owned electric
utilities to collect from customers, which can be used to fund cost-effective demand-side management services to
promote energy efficiency, low-income programs, research and development, and renewable energy. Due to Palo
Alto’s low electric rates and the efficiency of heat pump water heaters compared to their gas counterparts,
switching to a heat pump water heater reduces electricity supply costs and promote energy efficiency.
5 Most multi-family buildings have central water heating for all units
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the City’s Home Efficiency Genie, who will answer questions and talk them through their goals
and program options. If they would like to have the City’s contractor replace their gas water
heater, the contractor will come to their home, do a complete home efficiency and electrification
assessment, deliver them a report, let them know if there are any additional costs,6 and offer
them on-bill financing options. If the homeowner decides to proceed they will schedule a time,
sign a participation agreement, and the contractor will install their water heater, managing the
permitting and building inspection on the homeowner’s behalf. Afterward the contractor will
answer any questions about the installation and make sure the homeowner is satisfied, and the
homeowner will be able to contact the Home Efficiency Genie with questions over the long term.
The equipment itself will have a twelve-year warranty, while labor will be covered for one year
(staff is exploring adding an extended labor warranty up to five years).
The program would offer participating residents two options for installation with various pricing
and financing alternatives:
1. Have the City’s contractor install a heat pump water heater. Participants will have two
payment options:
a. On-bill financing program: $1500 up front with a $20 per month utility bill charge
for five years, OR
b. No financing: $2700 up front
2. Find their own contractor (potentially with the help of the City’s Home Efficiency Genie
service) and be eligible to receive a $2300 rebate. This is intended to make the expected
out of pocket cost for turnkey and self-managed install participants similar.7
a. When the program is first launched there will be no City-sponsored financing
option available for residents who find their own contractor. Staff is working to
get the City access to the State’s GoGreen Financing program, which, if adopted
by Council, would allow residents to find a certified contractor, receive the City’s
rebate, and get financing from a local credit union for the cost of the project.
3. Income-qualified customers would be eligible for free direct installation.
Staff is still reviewing the newly approved Inflation Reduction Act. It appears this bill would add
State-administered rebates for building electrification, including rebates as high as $1750 for
income-qualified residents (potentially up to 150% of area median income) and 30% Federal tax
credits up to $2000. Both could reduce costs for pilot program participants, though the
State-administered rebates may take some time to set up. The tax credits apply to equipment
installed starting in January 2023. One outstanding question is whether the tax credit could be
received for the full cost of equipment for on-bill financing participants or rebate recipients. Staff
6 The City’s flat pricing will include the most common costs of a heat pump water heater installation, such as adding
venting, a condensate drain line, and an additional electric circuit, but will not include less common additional costs
to prepare the home for the water heater installation, such as enlarging a room, moving the water heater to a new
location, or upgrading the electrical panel. However, the resident will be able to hire the City’s contractor to do the
additional work if they choose.
7 Assuming a market price for installed heat pump water heaters of $4500-$5500, a $2300 rebate is roughly
equivalent to the up-front turnkey cost of $2700.
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is researching this question and may reconfigure program terms and pricing if needed to enable
residents to claim the full credit.
An estimated 20% of homes in Palo Alto are rented out. This program would also be available to
landlords, and staff plans to create informational materials that interested renters could share
with their landlords. Landlords and renters could agree independently on how to share the costs.
Staff does not expect landlords to be interested in the on-bill financing program, and there are
challenges in implementing landlord participation in the billing system, since landlords for single-
family homes typically are not the account holder of the utility bills for the rental unit. But staff
will track interest and investigate billing system improvements if needed.
This combination of program features would provide several benefits:
• It would promote awareness of the need to reduce emissions in the home to combat climate
change and help people understand what they need to do.
• It would make it easier for residents to find a contractor to get a HPWH installed. They could
either find their own contractor or use the City’s contractor.
• It would create a simple, uniform, and transparent pricing structure for new HPWH
installations, allowing residents to easily decide whether a HPWH was affordable for them
with a single call to the City without the hassle of finding contractors and obtaining several
quotes.
• It would create a pricing structure for a HPWH installation that is attractive relative to the
cost of a new gas water heater. Staff estimates a gas tank water heater costs $1800 to $2000
(or even higher) to replace8 and costs more to run than a HPWH thanks to Palo Alto’s low-
priced electricity. The pricing above ($1500 up front and $20/month on the bill) has a lower
up-front cost than a gas water heater replacement, and the ongoing monthly payment would
be offset by a $5 per month to $20 per month bill savings for most residents.
• The extensive public awareness campaign, the ambitious goal of installing 1000 water
heaters, the inclusion of rebates, and the eventual inclusion of GoGreen financing could
attract more contractors to Palo Alto, jump-starting the local market and eventually reducing
the need for the more expensive turnkey program to drive the market.
• It would lay the foundation for an eventual end of life water heater replacement mandate.
3. On-bill Financing Program
Staff has developed a preliminary set of on-bill financing options for participating customers to
guide Council’s consideration. If Council approves moving forward with the program, staff will
work with a contractor with relevant experience to craft a complete set of program terms and
parameters. Legal counsel with expertise in lending regulations and the variety of consumer
protection disclosures and conditions will also be retained to ensure compliance.
8 This is based on a gas tank water heater. Gas tankless water heaters present greater complexity to replace with
heat pump water heaters and may not be good candidates for this program. Gas tankless water heater
replacements will need further investigation.
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Staff’s proposed terms assume a cost to the homeowner of $2700. To offer terms of $1500 up
front and $20 per month, terms comparable to a gas water heater installation and the savings
associated with switching to a heat pump water heater, an on-bill financing program is required.
Staff is proposing to make 0% loans of $1200 ($20/month for five years) as part of this program.
In sections 5 (Up-front Costs and Electrification Reserve) and 6 (Repayment of Electrification
Reserve) below this report describes how the program’s up-front costs would be funded from an
Electrification Reserve funded from electric utility funds, and how the Electrification Reserve
could be paid back over time with interest. Because repayment comes from a variety of sources
(new electric utility net income, energy efficiency funds) it is possible to provide a 0% loan to
program participants and pay the interest to the Electrification Reserve from these other internal
sources, meaning the Electrification Reserve is kept whole.
A 0% loan program is expected to reduce the number of loan-related disclosures the City would
need to provide if it runs a financing program. And putting the loan repayment on the utility bill
makes it more likely the loan will be repaid, since utility bills are usually a high priority expense.
On the other hand, this type of loan can complicate the process of moving to a new home. If the
homeowners sells their home they must pay off the on-bill loan, and this can be a significant
expense. If the owner takes the loan into account when planning the sale they likely will be able
to pay it off without too much trouble, but if not, it could be a large unexpected expense on their
final utility bill. This could lead to the final utility bill being left unpaid either accidentally or
intentionally, leading to collections issues. Despite this, however, staff believes the potential
losses associated with this pilot are small because the value of homes in Palo Alto is high and
most homeowners are expected to have adequate equity to pay the final bill. As a result, staff is
proposing to run the on-bill financing program without credit checks, simply checking to ensure
the homeowner has not defaulted on their utility bill in the last six months.
This would be similar to the standards for Sonoma Clean Power’s 0% loan program. They have
been running a 0% on-bill financing program for over a year. They have had multiple homeowners
sell homes and have not run into any issues with collections. About 20% of homeowners who
participate in their electrification programs take advantage of the loan program. This is lower
than staff’s assumption that two thirds of participants in Palo Alto’s turnkey program will
participate, but Sonoma’s program is different. Sonoma does not provide installation services nor
a simple pricing model, they simply provide loans and rebates for participants who select and
negotiate with their own contractors. Staff expects Palo Alto’s participation rate to be higher.
Running an on-bill financing program does come with some administrative complexity:
• A suite of documents will need to be drafted to implement the program, including a Policy
and Procedural Manual for use by the City’s contractor and City staff, a Site Assessment
Agreement permitting the City’s contractor to assess potential customer’s residence to
determine whether a HPWH is a feasible option, a Program Participation Agreement setting
forth the terms and conditions for the project, including repayment terms, and various
customer feedback and contractor reporting documents. These documents will be drafted
by the City’s contractor and reviewed and revised by the City’s legal team.
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• There are several changes to be made in the utility billing system and utility customer portal
to accommodate the program. Most of these changes can be completed by the time the
program launches. Some changes related to the way the loan program is presented on the
utility customer portal may not be ready until a month or two after the first installations are
completed. However, staff believes that the earliest adopters of the program will understand
the delay and can be reassured by Utilities Customer Service if they call in.
• Staff is also wary of a potential increase in service calls to the Utilities customer service center,
since this is an unfamiliar type of loan and a new utility charge. In case call volumes increase
more extensively than expected, staff is proposing some contingency temporary salary
budget for customer service staffing (see Section 8, Program Operational Resource Needs,
below).
If this 0% on-bill financing model is successful it could be used for other programs in the future.
For this reason and the other reasons listed above, staff recommends implementing a 0% on-bill
financing program.
Staff did consider joining the State’s GoGreen Financing program as an alternative, but that
program would not have allowed the pricing model staff proposed above and likely could not be
available on the City’s launch timeline. Staff is still pursuing a potential partnership with GoGreen
as a complementary program that could be used to finance items not covered by the City’s on-
bill financing program (such as energy or water efficiency improvements, other electrification
measures, or panel upgrades) or for residents who manage their own installations and are
seeking a source of financing. There are also contractors and credit unions who partner with the
GoGreen program, so this program will add to the list of contractors the City can provide to
customers who want to obtain their own quotes. And if this pilot program is expanded to all
water heaters in Palo Alto, staff would like to explore whether the City could seek a deeper
partnership in the future and use GoGreen or a similar State program as a potential outside
source of capital for the City’s expanded on-bill financing program.
4. Alternatives Considered
In developing this program staff considered various alternatives for each element of the program,
as summarized in Table 1 below.
Table 1: Program Alternatives Considered
Program Element Recommended Alternatives Considered Why Not Recommended
Program size 1000 heat pump water
heaters
1000 turnkey installations +
1000 rebates = 2000 water
heaters
Costs for the turnkey program
were higher than expected.
Installation
options
1. Turnkey install by City
2. Self-install with rebate
Eliminate the turnkey
option due to the expense
The City’s rebate-only program
has generated under 100
applications, and a turnkey
program seems necessary.
Financing options 1. Utility on-bill financing
(not “tariffed”)
GoGreen Financing only,
without on-bill financing
Timeline for launching GoGreen
Financing is uncertain, on-bill
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Program Element Recommended Alternatives Considered Why Not Recommended
2. GoGreen financing
(possible future program
addition)
financing allows incorporation of
incentives directly into pricing
“Tariffed” on-bill financing9 Requires monthly bill savings
exceeding the monthly charge,
this requirement cannot be met
On-bill financing
term
5 years ($20/month) 7 years ($25/month) This alternative reduces the need
for additional funding, but the
longer repayment period and
higher monthly payment may
intimidate potential participants
On-bill financing
charge amount
$20/month (5 year term) $27/month or $35/month
(7 year or 5 year term)
These options allow shorter
financing terms at no additional
cost, but exceed the amount staff
expect participants would pay
Appliances
included in the
program
Heat pump water heaters Heat pump space heaters,
Induction cooktops, and
other building equipment
and appliances
Heat pump water heaters have
the lowest grid impact. Grid
modernization efforts in progress
will allow other appliances to be
rapidly adopted in modernized
areas without overwhelming
electric utility staff.
Up-front
payments for
turnkey program
with on-bill
financing
$1500 $1800 or higher Staff believes $1500 is a simple
price to market and appears
attractive compared to the cost
of a gas water heater
replacement.
5. Funding Up-Front Costs using an Electrification Reserve
Figure 1 below shows the up-front costs of the program. Staff is assuming that 90% of program
participants use the turnkey program and 10% use the rebate program. This would result in a
total of $7.4 million in funding needs.
• About $7.2 million for the up-front costs associated with the turnkey program (which
equates to 900 water heater installations at about $7,990 per water heater)
• About $230,000 for rebates (which equates to 100 rebates at $2300 per rebate)
Staff is assuming two-thirds of turnkey program participants will use the on-bill financing
program, paying $1500 up front. The other one third are assumed to simply pay $2700 up front.
This results in $1.7 million in up-front payments. This results in a net need for $5.7 million in up-
front payments from City funds. This will be difficult to absorb from existing budgets. In addition,
raising electric rates reduces the cost-effectiveness of electrification programs and so could be a
9 This specialized pricing approach allows a monthly charge to be attached to the meter instead of the property
owner and can be transferred to a new owner on sale of a home, eliminating the need to pay a loan balance upon
home sale.
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counter-productive way to raise funding. Staff is instead recommending establishing an
Electrification Reserve in the utility using funds from the Electric Special Projects Reserve.
This newly created Electrification Reserve would be used to track funding of City building,
appliance and vehicle electrification projects and programs, including development and
implementation costs and associated financial incentives, loans and rebates for participating
customers. The reserve may be funded by any lawful source of funds available for such programs,
including new or ongoing utility revenues derived from customer participation.
The first use of the Electrification Reserve would be to fund loans to customers for building
electrification projects, and to amortize the up-front costs over time to more closely match
benefits as they accrue to the electric utility. The electric utility benefits from new heat pump
water heater installations by receiving increased net income (new sales revenue net of the
increased utility cost of supplying electricity to the heat pumps). This net income can be used to
repay the Electrification Reserve over time. In addition, new heat pump water heaters are an
energy efficiency measure. They heat water more efficiently and at lower cost than a gas water
heater. This means they are eligible for Public Benefits energy efficiency funding.10 These benefits
will accrue slowly over time, but as they accrue they can be used to fund the Electrification
Reserve. And as the loans are paid back the Reserve will accumulate funds that can be used to
make more loans.
The repayment of the Electrification Reserve will be done at the rate of return on the City’s
investment portfolio (1.6% to 3%) rather than at market interest rates for utility debt (currently
around 4.25%). Staff estimates that it would cost about $1.9 million more to repay the
Electrification Reserve at market interest rates. This is relevant when considering the pricing
needed to scale the program up, since there are not enough available utility funds to fund an
Electrification Reserve large enough for a program to cover all heat pump water heaters in Palo
Alto. This means it would be necessary to attract outside capital using market interest rates, with
significantly higher program pricing.
Staff is recommending funding the Electrification Reserve by transferring $4.5 million from the
Electric Special Projects Reserve.11 The Electric Special Projects Reserve has a balance of $29.6
million as of July 1, 2022, with internal loans of $10 million outstanding to the reserve to be repaid
by the end of FY 2027 ($10 million to the Electric Supply Operations Reserve).
6. Repayment of Electrification Reserve
10 Public Benefits revenue comes from a surcharge imposed on all electric bills per State Public Utilities Code
Section 385. Public Benefits charge revenue is required to be spent on cost-effective energy efficiency, low-income
programs, research and development, and renewable energy.
11 The Electric Special Projects Reserve was created in 2015 from the Calaveras Reserve, a reserve fund created in
the late 1990s to offset potential stranded costs from California’s transition to a competitive market for electricity.
These stranded costs did not materialize and the Council changed the name to the Electric Special Projects
Reserve, which was intended to fund innovative utility projects (CMR 5716).
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A sample repayment schedule for the Electrification Reserve is shown as Exhibit A to this
Attachment. This is a hypothetical repayment schedule assuming 1000 water heaters are
installed by the end of 2023. It assumes 90% of participants use the turnkey installation program
and two thirds of those use the on-bill financing program. The remaining 10% of participants are
expected to seek rebates. Staff does not have a projection of how long it will actually take to get
the water heaters installed. It could take more time or less time. But the attachment is useful for
understanding the long-term repayment schedule involved in funding these improvements.
The repayment schedule assumes that some of the up-front costs are amortized over 30 years
while others are amortized over ten. This is because some of the costs of installing an electric
heat pump water heater involve reconfiguring the house and its energy and water systems to
accommodate a different type of appliance. These reconfigurations will only need to be done
once and can be used even when the heat pump water heater is replaced by a new heat pump
water heater after 10-15 years, so it is appropriate to amortize those costs over a 30-year period.
Repayment of the Electrification Reserve could come from the following sources:
• $70,000 per year from new net electric sales income associated with the newly installed
heat pump water heaters (new sales revenues net of the cost of new electric supply)
• $144,000 per year from monthly customer repayments
• $70,000 per year from existing Public Benefits budgets (Energy efficiency).12 See section
5, above, for more discussion of this funding source.
The repayment schedule repays $4.5 million of the Electrification Reserve plus $1.4 million in
interest, but some additional funding is still required, as discussed below.
7. Program Additional Cost and Funding Source
The funding sources described in Section 5 are not sufficient to fully repay the up-front costs of
the program. They repay approximately $4.5 million in principal over the life of the program (and
1.4 million in interest), but since the necessary up-front funding is $5.7 million ($7.4 million in
total up-front costs less $1.7 million in participant up-front payments), that means that an
estimated additional $1.2 million is required to fully fund the program.
This amount could be reduced through a variety of changes to the program terms, as shown in
Table 2. Staff is looking for Council feedback on which program terms are most acceptable.
Choosing the largest funding reduction options (Option 1, $1800 up front payment, and Option
2c, $25 per month for seven years) would result in a higher cost to participants of $3900 ($1800
up front and $25 per month for seven years) but would eliminate the need for additional funding
from the City almost completely. Staff believes these terms would be more difficult to sell to
residents than the original staff proposal, but still manageable.
12 Public Benefits revenue comes from a surcharge imposed on all electric bills per State Public Utilities Code
Section 385. Public Benefits charge revenue is required to be spent on cost-effective energy efficiency, low-income
programs, research and development, and renewable energy.
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Table 2: Alternatives for Reducing Program Costs
Cost Reduction
1. Increase up-front payment to $1800 $300,000
2. Change term and/or monthly charge:
2a. $25/month payment (no change to term) $270,000
2b. Seven year term (no change to payment) $430,000
2c. Seven year, $25/month term $800,000
If Council maintains any sort of additional funding need for the program, staff has considered
three potential funding sources:
1. Public Benefits Research and Development funding (up to $400,000 per year available)
2. Electric Utility Cap and Trade revenue ($1.76 million available in reserves as of July 1,
2022)
3. Gas Utility Cap and Trade revenue ($7.4 million available in reserves as of July 1, 2022)
Public Benefits revenue comes from a surcharge imposed on all electric bills per State Public
Utilities Code Section 385. Public Benefits charge revenue is required to be spent on cost-
effective energy efficiency, low-income programs, research and development, and renewable
energy. Research and development funding is appropriate in this case because the Heat Pump
Water Heater Advanced Pilot is intended to develop the pricing, financing, and installation
practices to enable scaling of the program to all water heaters in Palo Alto. Staff does not
recommend using Public Benefits funds to extend the pilot beyond the first 1000 water heaters.
This funding source is limited, since the City’s $4 million per year in Public Benefits revenue must
fund all of the City’s energy efficiency programs and low-income programs while paying off some
commercial solar rebates that were approved several years ago but are paid off over multiple
years. There is not enough money in the budget to fund the entire program cost in a single year.
Staff can absorb the necessary funding into the Public Benefits budget over several years, but
this would require an additional $1.2 million be added to the Electrification Reserve, since the
payments would have to be made over time.
To reduce the amount needed in the Electrification Reserve, staff is recommending using gas
utility Cap and Trade revenue as the funding source. These revenues are available due to the
City’s gas utility’s mandated participation in the State’s Cap and Trade program, which generates
costs to the City’s gas and electric utilities, but also revenues that are intended to be used for
greenhouse gas reducing activities.13 These revenues must be used within ten years or returned
to ratepayers in the form of a dividend. This revenue source is declining in value and will not be
available after 2030, so it is most appropriate for one-time expenses, such as pilot programs.
13 The Cap and Trade program requires various emissions-producing entities, including gas utilities, to buy
emissions allowances equal to the greenhouse gas emissions they produce. The State creates these emissions
allowances, allocates them to utilities, and then requires that the utilities auction most of them off rather than use
them for compliance. The resulting revenue must be used for emissions reducing activities or returned to
ratepayers as a flat “dividend.” It cannot be used to offset the cost of gas.
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The use of these revenues is governed by State law and a Council policy on the use of these
revenues adopted January 26, 2015.14 The Council policy allowed the use of Gas Cap and Trade
Revenue for the following:
• Investment in energy efficiency programs for the natural gas portfolio and retail
customers;
• Purchases or investment in cost-effective renewable biogas resources for the gas
portfolio;
• Investment in other carbon reduction activities for the natural gas utility, including
system maintenance or replacement to reduce fugitive gas emissions; and
• Rebates to natural gas retail ratepayers.15
The policy expresses a preference for greenhouse gas reduction activities over rebates. And while
building electrification is not listed as an allowed use, the policy does not preclude using these
revenues for that purpose.16 Building electrification is consistent with California Air Resources
Board (CARB) regulations governing the use of these funds and is a benefit to gas ratepayers. If
using this funding source, staff would bring a resolution to Council to add building electrification
to the list of allowed uses under the Council’s policy to avoid any future confusion.
The relevant sections of State law (California Code of Regulations 95893) require that these
revenues be used as follows:
• CCR 95893(a) requires that “Any allowances allocated to natural gas suppliers must be
used exclusively for the benefit of retail ratepayers of each such natural gas supplier,
consistent with the goals of AB 32, and may not be used for the benefit of entities or
persons other than such ratepayer.” The attached resolution finds that given the
expected increasing cost of gas due to maintenance, the transition away from natural gas
for climate reasons, and given that Palo Alto’s gas ratepayers represent the same group
of community members as its electric ratepayers, building electrification to switch uses
away from gas is to the benefit of gas ratepayers.
• CCR 95893(d) and (e) list the uses allowed by State law for these revenues. Building
electrification is not explicitly listed. However, CCR 95893(d)(3)(B) states it may be used
for “Other GHG emissions reduction activities,” and the resolution includes findings for
Council regarding building electrification being consistent with this provision. Staff has
spoken with multiple CARB gas supplier allowance allocation staff members who have
advised that a customer fuel switching program is an allowable use of gas allowance
value, provided the program expenditures adhere to the limitations in CCR 95893(d). .
14 Staff Report ID 5397, Use of Cap and Trade Compliance Revenue
15 In this case “rebates” refers to a periodic credit to the customer bill, similar to PG&E’s biannual “Climate Credit”
16 This was stated in Staff Report ID 5397, Use of Cap and Trade Revenue, page 5: “Some [Utilities Advisory
Commission] commissioners asked if funding for “fuel switching” programs to provide incentives for customers to
change from gas-fueled to electric appliances (e.g. water heaters and space heating equipment) could be added to
the list of potential uses of the allowance revenue. Staff indicated that fuel switching programs were not precluded
from the proposed policy, but reminded that any program funded from the revenue must be beneficial for gas
ratepayers.” There was also a motion to explicitly add fuel switching as an approved use, but the UAC rejected this
motion until additional cost effectiveness analysis could be done.
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8. Program Operational Resource Needs
If starting this program, staff recommends adoption of a budget amendment to adjust the
FY 2023 budget to reflect the costs, revenues, and new resource needs of this program. The
budget amendment would include the items listed in Table 3, below.
The budget amendment includes additional funding for certain operational aspects of the
program:
• The up-front payments to the City’s turnkey installation contractor require a large budget
addition, but will not impact rates because they will be funded from the Electrification
Reserve.
• An addition of $86,000 for temporary salaries for Utilities Customer Service. This would
enable the hiring of up to two half-time hourlies to field calls from participants regarding
their loan balances. This is requested based on the projected call volumes typically
handled by staff (as opposed to the installation contractor) from program participants.
Those participants who join the on-bill loan program will likely generate additional call
volumes based on our conversations with a community choice aggregator (CCA) running
a similar loan program. Staff plans to equip program operators to handle calls on their
own and provide self-service tools for participants, and hopes not to use this temporary
salary budget, but recommends putting it in place in case operational impacts do
materialize.
• An additional $250,000 in contract inspection time for Planning and Development
Services, paid for by new permit revenues. One thousand water heater inspections in a
single year is roughly equal to a single FTE and cannot be absorbed with existing
resources. However, hiring in-house staff for this function would not be prudent for a
pilot program.
• An additional $150,000 for program marketing and engagement. This program will
require a combination of extensive City marketing and extensive partnership with local
nonprofits and individual advocates to promote the program. The participation goals are
higher than for any other sustainability program the City has run.
Table 3: Contents of Upcoming Proposed Budget Amendment
Item Cost/(Revenue) Type Description
Up-front costs
1 Cost of turnkey
HPWH installation
(Electrification
Reserve share)
$4,500,000 New one-
time cost
The contractual cost of HPWH
installation less the up-front
payment. These costs will be paid
from the Electrification Reserve.
2 Cost of turnkey
HPWH installation
(Cap and Trade
revenue share)
$1,250,000 New one-
time cost
The first 800 participants will pay a
discounted up-front cost, with
discounts decreasing with every
few hundred customers. These
discounts will be funded by Cap and
Trade revenues.
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Item Cost/(Revenue) Type Description
3 Increased contract
building inspection
budget
250,000 New one-
time cost
This is for contract inspectors to
manage the increased number of
building inspections needed during
the pilot period funded by
increased permit revenue (below)
4 Increased building
permit revenue
($250,000) New one-
time revenue
This represents the increased
building permit revenue during the
pilot period
5 Increased
marketing budget
$150,000 New one-
time cost
Achieving 1000 installations on a
rapid time frame will require
expanded City marketing in
addition to partnerships with local
nonprofits
10 Increased
temporary salary
budget
$86,000 New ongoing
cost
Additional customer service staffing
that may be needed to manage
various customer service and billing
issues related to the HPWH
program, particularly the on-bill
financing.
11 Increased funding
for utility customer
portal provider to
accommodate
on-bill financing
To be determined
and requested in
December 2022,
but estimated at
about $50,000
New one-
time cost
A budget amendment is expected
to be requested in December 2022
and will accompany a contract
amendment for the City’s portal
provider. Work will begin on the
customer portal using existing
budgets.
Additional budget changes would be added as part of the FY 2024 budget to reflect ongoing
changes to electric and gas revenues and expenses as well as the ongoing participant repayments
of on-bill financing loans. This may include additional funding for legal expenses related to on-bill
financing implementation.
9. Transition to a Scalable Program
Ideally, lessons learned in the pilot program will enable the program to be scaled to enable
replacement of the 1100-1300 gas water heaters that reach end of life each year. To move to a
fully scalable program after this pilot the additional funding described in section 7 would need
to be eliminated. There is not enough additional funding available to scale this program to all
single-family homes in Palo Alto and those multi-family homes with individual water heaters. To
scale this program further, staff will need to reduce the program costs for turnkey installations,
reconfigure the program to use more cost-effective methods, or find additional funding. With
both tax credits and rebates available, the Inflation Reduction Act may provide enough funding
to scale the program, possibly even without cost reductions. More research is needed and the
City may need to gather more information as the program is implemented. It is also possible this
pilot program may simply create enough momentum in the local water heater replacement
market that the City can retire the turnkey aspect of the program and scale the water heater
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program by simply focusing on outreach, rebates, and possibly third party financing programs
like the GoGreen financing program.
The repayment of the Electrification Reserve will be done at the rate of return on the City’s
investment portfolio (1.6% to 3%) rather than at market interest rates for utility debt (currently
around 4.25%). Staff estimates that it would cost about $1.9 million more to repay the Loan
Reserve at market interest rates. This is relevant when considering the pricing needed to scale
the program up, since there are not enough available utility reserves to fund an Electrification
Reserve large enough for a program to cover all heat pump water heaters in Palo Alto. This means
it would be necessary to attract outside capital using market interest rates, and that would
increase the pricing needed to repay the capital.
10. Selected Programs from Other Agencies
Palo Alto is not the only community working on building electrification programs. More programs
are summarized in Exhibit B, below. BayREN currently offers a $1000 HPWH rebate to residents
in the nine Bay Area counties (excluding Palo Alto, Healdsburg, City of Alameda and Silicon Valley
Power customers). In some jurisdictions, additional customer incentives are offered by the local
community choice aggregator or local government, e.g. Peninsula Clean Energy (PCE), Silicon
Valley Clean Energy, and Marin County offers an additional HPWH incentive of $1000; Redwood
City offers a $500 HPWH rebate that can be layered on top of the BayREN and PCE rebates. SMUD
currently offers a HPWH rebate of $2,500, with additional rebates available for adding electric
circuit in preparation for appliance electrification.
At the state level, SB 1477 (2018) has created a TECH Clean California Initiative (TECH) to drive
market adoption of heat pump space heating and water heating technologies in single family
homes by targeting upstream and midstream market actors such as contractors and
manufacturers. TECH provides contractor training and a contractor incentive of $1000 for each
HPWH and HP HVAC installation project, although Palo Alto residents are ineligible for the TECH
incentive since the program is funded by the cap and trade allowance revenues from gas investor
owned utilities. As of May this year, SB 1477 funds for contractor incentives are fully reserved in
PG&E and SDGE service territories; additional funding may be available pending adoption of SB
1261 (Stern).
Besides incentive and rebates, financing programs are available to support electrification
projects. The California investor owned utilities (IOUs) currently offer a GoGreen Financing
program to provide low-cost financing for energy retrofit projects to IOU customers. GoGreen
covers a wide range of measures including shell insulation, efficiency upgrades, HPWHs, etc.
Sonoma Clean Power offers 0% on-bill financing for loans of up to $10,000 for the installation of
energy efficient and low carbon technologies. Note that customers apply for these programs.
The most comprehensive electrification program is currently undertaken by the City of Ithaca in
New York, with the goal to fully decarbonize all 6,000 buildings within the city by 2030. The city
has 30,000 residents, and more than 40% of Ithaca’s home are more than 100 years old. Ithaca
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is partnering with BlocPower to implement this goal by targeting the electrification of 600
commercial buildings and 1,000 residential buildings in the next 3 to 4 years.
One thing that distinguishes the planned Palo Alto program from most others is its ambition. This
advanced pilot program in Palo Alto is larger as a share of population than others in the region,
and it is intended to ultimately be scalable to all water heaters in the community.
The other thing that distinguishes Palo Alto from many of these other communities is its
municipal utility. Palo Alto has an electric distribution system it must maintain. Other
communities can provide incentives independently of the local utility. In some cases, the local
utility could delay electrification projects until it can upgrade local transformer capacity (which
could take as long as a year). Other agencies running electrification programs are not likely to be
held responsible for these delays, but in Palo Alto, providing an electrification incentive,
mandate, or other program that the City’s distribution system was unable to accommodate could
lead to a backlash against electrification efforts. The Grid Modernization effort discussed
previously in this report will take a little time, but will lead to a greater pace of electrification
than is likely possible in surrounding communities. The State is only beginning to discuss the
capability of investor-owned utility distribution systems to handle electrification and establish
requirements that they upgrade to accommodate it.
11. Electric Grid Impacts
One reason to focus on heat pump water heaters is that it has some of the lowest electric grid
impacts of any building electrification technology. A significant area of discussion of the Council
Ad Hoc S/CAP Committee related to electric grid impacts. The Committee heard from the Utilities
Engineering team about the way the electric grid had originally been designed and the impact
electrification was having. Historically, mixed-fuel Palo Alto homes had about a 3 kW peak load,
which allowed the City to comfortably put as many as 10-15 homes on a single transformer. That
equation is changing, given that a single electric vehicle charger can exceed 3 kW when charging.
This means more transformers are needed, particularly in residential areas. In addition, the rise
of more loads that use inverters and more solar panels and battery systems in Palo Alto means
modernization of the grid is needed to avoid some of the more complex impacts these systems
can have on an electric grid. The City is starting on a grid modernization study to evaluate upgrade
needs and is expected to complete it in 2022 and begin modernization soon after. However, as
the grid modernization effort ramps up, engineering capacity for unplanned transformer
upgrades due to customer electrification efforts may be limited. The S/CAP Committee heard
from Utilities engineering staff about its high vacancy rate (eleven vacant positions of seventeen
budgeted) and challenges with recruitment and retention. In addition, electric vehicle chargers
and large solar and battery systems are being installed more frequently, which requires more
engineering time to review and occasional engineering and operations time to perform upgrades.
There was agreement that to manage grid impacts while the modernization effort got off the
ground there was a need to innovate to address recruitment and retention issues and to focus
initial incentive programs on technologies like heat pump water heaters that have less of an
impact on the electric system. Staff also intends to help residents electrify in grid-friendly ways
where feasible, such as by communicating low-wattage solutions for vehicle charging and
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building electrification and providing incentives. Staff is evaluating programs and communication
materials to launch alongside a heat pump water heater program to mitigate the grid impacts of
high-wattage EV chargers and other high wattage electrification and to help people understand
how to set their technologies to operate in a grid-friendly manner.
Exhibit A: Electrification Reserve Repayment Schedule
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Repayment of Electrification Loan Reserve
All amounts in thousands of dollars ($000)
Funding Needed $7,422
Upfront Cutomer Payments ($1,710)
Cap & Trade ($1,215)
Electric Loan Reserve Initial Balance $4,500
Fiscal Year:
2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 2051 2052 2053
Electrification Loan Reserve
Beginning Balance 4,500 3 221 439 657 875 1,093 1,311 1,529 1,747 1,965 2,183 2,366 2,549 2,732 2,915 3,098 3,281 3,465 3,648 3,831 4,014 4,197 4,380 4,563 4,747 4,930 5,113 5,296 5,479 5,662
Expenses:
Turnkey Installation Cost (4,497)
Repayment:
Annual deposit to Electrification Loan
Reserve (30-year repayment)173 173 173 173 173 173 173 173 173 173 173 173 173 173 173 173 173 173 173 173 173 173 173 173 173 173 173 173 173 173
Annual deposit to Electrification Loan
Reserve (10-year repayment)35 35 35 35 35 35 35 35 35 35 - - - - - - - - - - - - - - - - - - - -
Annual deposit to Electrification Loan
Reserve (Rebates, 30-year repayment)10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10
TOTAL 218 218 218 218 218 218 218 218 218 218 183 183 183 183 183 183 183 183 183 183 183 183 183 183 183 183 183 183 183 183
Electrification Loan Reserve
Ending Balance 3 221 439 657 875 1,093 1,311 1,529 1,747 1,965 2,183 2,366 2,549 2,732 2,915 3,098 3,281 3,465 3,648 3,831 4,014 4,197 4,380 4,563 4,747 4,930 5,113 5,296 5,479 5,662 5,846
Funding sources for repayment
Participant Monthly Payments 144 144 144 144 144 - - - - - - - - - - - - - - - - - - - - - - - - -
New Electric Sales Net Income 64 67 68 71 74 77 81 84 88 92 96 100 104 108 112 117 121 125 130 135 140 145 150 156 160 165 170 175 181 191
Energy Supply Savings (PB EE)69 71 71 72 73 75 76 78 80 81 83 83 79 75 71 67 62 58 53 48 43 38 33 27 23 18 13 8 3 -
TOTAL**277 282 283 286 291 152 157 162 168 173 179 183 183 183 183 183 183 183 183 183 183 183 183 183 183 183 183 183 183 191
*Assume 1000 HPWHs installed immediately at the start of FY23 and loan is paid down each year prior to interest accruing (including in FY23)
**Note: Surpluses in years FY 2024 to FY 2028 are used to offset deficits In years FY 2029 to FY2033
Exhibit B: Selected Programs from Other Agencies
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Abbreviations:
HPWH = Heat Pump Water Heater
HVAC = Heating, Ventilation, and Air Conditioning
Organization Service Territory Heat Pump Water Heater
Program
Other Electrification
Programs
BayREN All nine Bay Areas counties, excluding
publicly owned utilities like Palo Alto,
Healdsburg, City of Alameda and Silicon
Valley Power customers
$1000 customer rebate Rebates available for heat
pump HVAC ($1,000),
induction range or cooktop
($750), heat pump dryer
($300) wall/attic insulation
(up to $2,500), air sealing (up
to $150), duct sealing or
replacement (up to $800)
Peninsula Clean
Energy (PCE)
San Mateo County $1000 rebate (combines with
BayREN rebate for $2000 total)
Additional $1,000 HPWH
rebate for income qualifying
customers
City of Redwood
City
Redwood City $500 rebate (combines with
PCE and BayREN rebates for
$2500 total)
Rebate for heat pump HVAC
($500), panel upgrade ($500),
additional $500 rebate for
income-qualified customers
Silicon Valley Clean
Energy (SVCE)
Santa Clara County (excluding Palo Alto,
Santa Clara, and San Jose)
$1000 rebate (combines with
BayREN rebate for $2000 total)
Rebate for panel upgrade
($1500), additional $1,500
rebate for income-qualified
customers
Marin County
Energy (MCE)
Marin County $1000 rebate (combines with
BayREN rebate for $2000 total)
Additional $1,000 rebate for
income-qualified customers
Exhibit B: Selected Programs from Other Agencies
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Organization Service Territory Heat Pump Water Heater
Program
Other Electrification
Programs
Sonoma Clean
Power (SCP)
Sonoma County (excluding publicly
owned utilities like Healdsburg and Ukiah)
$3,100 rebate (combines with
BayREN rebate for $4,100 total)
0% loans available for up to
$10,000 in electrification
projects, including HPWH
Rebate for heat pump HVAC
($3,000), heat pump dryer
($500), induction cooktop
($500)
Sacramento
Municipal Utility
District (SMUD)
Most of Sacramento County (and small,
adjoining portions of Placer and Yolo
Counties).
$2500 rebate Rebate for induction cooktop
($750), heat pump HVAC
($3000), panel upgrade to
support electrification
($2,500)
Energy-Smart
Homes
Investor-owned utility electric customers
that are not eligible for any Regional Area
Network programs, including BayREN
programs
$450 rebate Rebate for ductless minisplit
($325 per ton), central heat
pump ($90 per ton), heat
pump dryer ($500)
TECH Clean
California
Customers of Pacific Gas and Electric,
Southern California Edison, San Diego Gas
and Electric, and SoCal Gas
$1000 contractor rebate (as of
May 2022, incentives fully
reserved for PG&E and SDGE
customers; additional funding
may be available pending
passage of SB 1261)
Multifamily heat pump
incentives, Contractor
workforce education &
training, multiple regional
pilots
City of Ithaca, New
York
Ithaca, New York Goal to fully decarbonize all
6,000 buildings in the city by
2030, 1,000 buildings in the
next 3-4 years.
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Attachment C
Resolution No. ____
Resolution of the Council of the City of Palo Alto Adopting
Design Guidelines for an Advanced Heat Pump Water Heater
Pilot Program to Further the City’s Sustainability and Climate
Action Plan Goals
R E C I T A L S
A. The Council has approved a Sustainability and Climate Action Plan Goal of 80%
emissions reduction from 1990 levels by 2030, a Framework, and an Implementation Plan. A
preliminary impact analysis reviewed by the Council on April 19, 2020 demonstrated that
building and vehicle electrification was a critical part of achieving these goals.
B. The Council intends to establish various programs to promote building,
appliance and vehicle electrification. Given State and Federal action on electric vehicles, local
governments can be most effective in developing programs to promote electric vehicle
charging and building electrification.
C. The Council finds that heat pump water heater technology is widely available,
significantly reduces emissions when compared to natural gas water heating, and is a familiar
technology that will allow the community to take immediate, manageable steps to reduce
greenhouse gas emissions.
D. The Council finds that heat pump water heaters have lower grid impacts than
other building electrification measures. The City’s electric utility is undertaking a grid
modernization effort, and Council wishes to prioritize heat pump water heaters while this grid
modernization gets underway.
E. As a result, the Council wishes to prioritize the development of an ambitious
Advanced Heat Pump Water Heater Pilot Program to convert gas water heaters to heat pump
water heaters.
The Council of the City of Palo Alto (“City”) RESOLVES as follows:
SECTION 1. The Council makes the following findings:
a) Prioritizing action on Advanced Heat Pump Water Heater Pilot Program (“the HPWH
Program”) does not preclude action on electrifying other types of equipment,
action on Goals or Key Actions in other areas of the Sustainability and Climate
Action Plan (such as Electric Vehicles or Mobility), or other parallel efforts to
improve electric system reliability, streamline permitting, promote low-wattage
vehicle charging and electrification strategies, or other barrier reduction strategies.
The Council encourages continuing staff action and expects additional discussions
in these areas.
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b) The HPWH Program would benefit electric ratepayers by increasing utilization of
the electric distribution system, spreading the cost of maintaining the system over
more units sold, and decreasing costs for all ratepayers in the long term.
c) The HPWH Program would benefit gas ratepayers by avoiding future increasing
environmental and transmission charges on gas use, by helping ratepayers begin
an orderly, planned transition from natural gas use consistent with State and local
climate goals, and by helping ratepayers adopt the most cost-effective method of
heating water, lowering their utility bills overall.
d) The HPWH Program is a “cost-effective demand-side management service to
promote energy efficiency and energy conservation” under State Public Utilities
Code 385(a)(3) because the cost of heating water using efficient heat pumps and
low-cost Palo Alto electricity is lower than the cost of heating water using a gas
water heater.
SECTION 2. The Council approves the Design Guidelines for an Advanced Heat Pump
Water Heater Pilot Program (Exhibit A).
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SECTION 3. The Council finds that the adoption of this resolution is not subject to
California Environmental Quality Act (CEQA) review 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)).
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
Assistant City Attorney City Manager
Director of Utilities
Director of Administrative Services
Exhibit A to Resolution No.
Adopted by Council on
Advanced Heat Pump Water Heater Pilot Design Guidelines
The following design guidelines are intended to guide the development of an Advanced Heat
Pump Water Heater Pilot Program (“the HPWH Program”):
1. The goal of the HPWH Program should be to achieve at least 1000 conversions of gas water
heaters to heat pump water heaters with the goal of transitioning to a full-scale program
intended to convert all gas water heaters in Palo Alto to heat pump water heaters.
2. The HPWH Program should include a marketing effort sufficient to increase awareness of the
climate benefits and utility bill savings of heat pump water heaters over gas water heaters.
3. The HPWH Program should reduce barriers to residents in installing heat pump water heaters
by measures including, but not limited to:
a. Turnkey installation of heat pump water heaters by a City contractor
b. Utility on-bill financing
c. Enhanced rebates
d. Partnership with third party financing programs
4. The HPWH Program should offer pricing to early participants attractive enough to compete
with gas water heater installations.
5. The HPWH Program should take advantage of all utility-related benefits, such as increased
revenues and decreased energy supply costs, to minimize program costs.
6. When setting participant pricing, staff should ensure that a) the HPWH Program is attractive
to residents but that b) the HPWH Program achieves its goals within the amount of funding
provided by utility-related benefits and any Council-approved funds.
7. On-bill financing should be attractive to participants, easy to understand, simple to administer,
and accessible, which could involve features such as:
a. Uniform loan amounts that do not vary by project
b. Monthly payments that are similar to the on-bill savings experienced by most
participants
c. Simple qualifications to participate (e.g. history of utility bill payment instead of using
credit scores for qualification)
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Attachment D
Resolution No. ____
Resolution of the Council of the City of Palo Alto Establishing an
Electrification Reserve and Amending the Electric Utility Reserves
Management Practices
R E C I T A L S
A. The Council has approved a Sustainability and Climate Action Plan Goal of 80%
reduction from 1990 levels by 2030, a Framework, and an Implementation Plan. A preliminary
impact analysis reviewed by the Council on April 19, 2020 demonstrated that building and
vehicle electrification was a critical part of achieving these goals.
B. The Council intends to establish various programs to promote building,
appliance and vehicle electrification. Simple, easy to access financing can help residents and
businesses in Palo Alto participate in these programs.
C. These programs are intended to be large in scale, potentially reaching
thousands of homeowners and businesses, and are expected to require significant start up
and operational funding.
D. The Council wishes to establish a reserve that could be used to fund building,
appliance and vehicle electrification projects and programs, including rebates and other
financial incentives designed to assist residents and businesses with these projects.
E. The Council wishes to establish an Advanced Heat Pump Water Heater Pilot
Program and fund the Electrification Reserve sufficiently to administer this program.
The Council of the City of Palo Alto (“City”) RESOLVES as follows:
SECTION 1. The Council authorizes the City Manager or his designee to establish an
Electrification Reserve in the City’s Electric Utility Distribution Fund.
SECTION 2. The Council amends the Electric Utility Reserves Management Practices
(Appendix B of the FY 2023 Electric Utility Financial Plan) as shown in Exhibit A to establish
management practices for the Electrification reserve.
SECTION 3. The Council hereby approves the following reserve transfer:
a. Up to $4,500,000 in FY 2023 from the Electric Special Projects Reserve to the
Electrification Reserve.
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SECTION 4. The Council finds that the adoption of this resolution is not subject to
California Environmental Quality Act (CEQA) review 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)).
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
Assistant City Attorney City Manager
Director of Utilities
Director of Administrative Services
Exhibit A to Resolution No.
Adopted by Council on
ELECTRIC UTILITY RESERVES MANAGEMENT PRACTICES
The following reserves management practices are used when developing the Electric Utility
Financial Plan:
Section 1. Definitions
a) “Financial Planning Period” – The Financial Planning Period is the range of future fiscal
years covered by the Financial Plan. For example, if the Financial Plan delivered in
conjunction with the FY 2015 budget includes projections for FY 2015 to FY 2019, FY 2015
to FY 2019 would be the Financial Planning Period.
b) “Fund Balance” – As used in these Reserves Management Practices, Fund Balance refers to
the Utility’s Unrestricted Net Assets.
c) “Net Assets” - The Government Accounting Standards Board defines a Utility’s Net Assets
as the difference between its assets and liabilities.
d) “Unrestricted Net Assets” - The portion of the Utility’s Net Assets not invested in capital
assets (net of related debt) or restricted for debt service or other restricted purposes.
Section 2. Supply Fund Reserves
The Electric Supply Fund Balance is reserved for the following purposes:
a) For existing contracts, as described in Section 4 (Reserve for Commitments)
b) For operating budgets reappropriated from previous years, as described in Section 5
(Reserve for Reappropriations)
c) For special projects for the benefit of the Electric Utility ratepayers, as described in Section
6 (Electric Special Projects Reserve)
d) For year to year balancing of costs associated with the Electric Utility’s hydroelectric
resources, as described in Section 7 (Hydroelectric Stabilization Reserve)
e) For rate stabilization, as described in Section 1.d) (Rate Stabilization Reserves)
f) For operating contingencies, as described in Section 12 (Operations Reserves)
g) Any funds not included in the other reserves will be considered Unassigned Reserves and
shall be returned to ratepayers or assigned a specific purpose as described in Section 13
(Unassigned Reserves).
Section 3. Distribution Fund Reserves
The Electric Distribution Fund Balance is reserved for the following purposes:
a) For existing contracts, as described in Section 4 (Reserves for Commitments)
b) For operating and capital budgets reappropriated from previous years, as described in
Section 5 (Reserves for Reappropriations)
c) As an offset to underground loan receivables, as described in Section 8 (Underground Loan
Reserve)
d) To hold Public Benefit Program funds collected but not yet spent, as described in Section 9
(Public Benefits Reserve)
e) For cash flow management and contingencies related to the Electric Utility’s Capital
Improvement Program (CIP), as described in Section 10 (CIP Reserve)
f) For rate stabilization, as described in Section 11.d) (Rate Stabilization Reserves)
g) For operating contingencies, as described in Section 12 (Operations Reserves)
h) For tracking of Low Carbon Fuel Standard (LCFS) revenues as described in Section 15 (LCFS
Reserve)
i) For tracking of Cap and Trade Program revenues as described in Section 16 (Cap and Trade
Reserve)
g)j) For electrification programs, as described in Section 17 (Electrification Reserve)
h)k) Any funds not included in the other reserves will be considered Unassigned
Reserves and shall be returned to ratepayers or assigned a specific purpose as described in
Section 14 (Unassigned Reserves).
Section 4. Reserves for Commitments
At the end of each fiscal year the Electric Supply Fund and Electric Distribution Fund Reserves
for Commitments will be set to an amount equal to the total remaining spending authority for
all contracts in force for the Electric Supply Fund and Electric Distribution Fund, respectively,
at that time.
Section 5. Reserves for Reappropriations
At the end of each fiscal year the Electric Supply Fund and Electric Distribution Fund Reserves
for Reappropriations will be set to an amount equal to the amount of all remaining capital and
non-capital budgets that will be reappropriated to the following fiscal year for each Fund in
accordance with Palo Alto Municipal Code Section 2.28.090.
Section 6. Electric Special Projects Reserve
The Electric Special Projects Reserve (ESP Reserve) will be managed in accordance with the
policies set forth in Resolution 9206 (Resolution of the Council of the City of Palo Alto
Approving Renaming the Calaveras Reserve to the Electric Special Project Reserve and
Adoption of Electric Special Project Reserve Guidelines). These policies are included from
Resolution 9206 as amended to refer to the reserves structure set forth in these Reserves
Management Practices:
a) The purpose of the ESP Reserve is to fund projects that benefit electric ratepayers;
b) The ESP Reserve funds must be used for projects of significant impact;
c) Projects proposed for funding must demonstrate a need and value to electric ratepayers.
The projects must have verifiable value and must not be speculative, or high-risk in nature;
d) Projects proposed for funding must be substantial in size, requiring funding of at least $1
million;
e) Set a goal to commit funds by the end of FY 2025;
f) Any uncommitted funds remaining at the end of FY 2030 will be transferred to the Electric
Supply Operations Reserve and the ESP Reserve will be closed;
Section 7. Hydroelectric Stabilization Reserve
The Hydroelectric Stabilization Reserve is used to manage the supply cost impacts associated
with variations in generation from hydroelectric resources. Staff will manage the Hydroelectric
Stabilization Reserve as follows:
a) Projected Hydro Output: Near the end of each fiscal year, staff will determine the actual
and expected hydro output for that fiscal year, compare that to the long-term average
annual output level (495,957 MWh as of March 2018), and multiply the difference by
the average of the monthly round-the-clock forward market prices for each month of
the current fiscal year.
b) Changes in Reserves. Staff is authorized to transfer the amount described in Sec. 7(a)
from the Operations Reserve to the Hydroelectric Stabilization Reserve for hydro output
deviations above long-term average levels, or transfer this amount from the
Hydroelectric Stabilization Reserve to the Operations Reserve for hydro output
deviations below long-term average levels.
c) Implementation of HRA. The level of the Hydroelectric Stabilization Reserve after the
transfers described above shall be the basis for staff’s determination, with Council
approval, of whether to implement the Hydro Rate Adjuster (Electric Rate E-HRA) for the
following fiscal year.
d) Reserve Guidelines. Staff will manage the Hydroelectric Stabilization Reserve according
to the following guideline levels:
Minimum Level $3 million
Target Level $19 million
Maximum Level $35 million
Section 8. Underground Loan Reserve
At the end of each fiscal year, the Underground Loan Reserve will be adjusted by the principal
payments made against outstanding underground loans.
Section 9. Public Benefits Reserve
The Public Benefits Reserve will be increased by the amount of unspent Public Benefits
Revenues remaining at the end of each fiscal year. Expenditure of these funds requires action
by the City Council.
Section 10. CIP Reserve
The CIP Reserve is used to manage cash flow for capital projects and acts as a reserve for
capital contingencies. Staff will manage the CIP Reserve according to the following practices:
a) The following guideline levels are set forth for the CIP Reserve. These guideline levels are
calculated for each fiscal year of the Financial Planning Period and approved by Council
resolution.
Minimum Level 20% of the maximum CIP Reserve guideline
level
Maximum Level Average annual (12 month)1 CIP budget, for
48 months of budgeted CIP expenses2
1 Each month is calculated based upon 1/12 of the annual budget.
2 For example, in the Financial Plan for FY 2021, the 48 month period to use to derive the annual average is FY 2021
through FY 2024. In the FY 2022 Financial Plan, the 48 month period to use to derive the annual average would be FY
2022 through FY 2025 etc.
b) Changes in Reserves: Staff is authorized to transfer funds between the CIP Reserve and the
Reserve for Commitments when funds are added to or removed from the Reserve for
Commitments as a result of a change in contractual commitments related to CIP projects.
Any other additions to or withdrawals from the CIP reserve require Council action.
c) Minimum Level:
i) If, at the end of any fiscal year, the minimum guideline is not met, staff shall present a
plan to the City Council to replenish the reserve. The plan shall be delivered by the end
of the following fiscal year, and shall, at a minimum, result in the reserve reaching its
minimum level by the end of the next fiscal year. For example, if the CIP Reserve is below
its minimum level at the end of FY 2017, staff must present a plan by June 30, 2018 to
return the reserve to its minimum level by June 30, 2019. In addition, staff may present,
and the Council may adopt, an alternative plan that takes longer than one year to
replenish the reserve, or that does so in a shorter period of time.
d) Maximum Level: If there are funds in this reserve in excess of the maximum level staff must
propose in the next Financial Plan to transfer these funds to another reserve or return them
to ratepayers in the funds to ratepayers, or designate a specific use of funds for CIP
investments that will be made by the end of the next Financial Planning period. Staff may
also seek City Council to approve holding funds in this reserve in excess of the maximum
level if they are held for a specific future purpose related to the CIP.
Section 11. Rate Stabilization Reserves
Funds may be added to the Electric Supply or Distribution Fund’s Rate Stabilization Reserves
by action of the City Council and held to manage the trajectory of future year rate increases.
Withdrawal of funds from either Rate Stabilization Reserve requires action by the City Council.
If there are funds in either Rate Stabilization Reserve at the end of any fiscal year, any
subsequent Electric Utility Financial Plan must result in the withdrawal of all funds from this
Reserve by the end of the Financial Planning Period. The Council may approve exceptions to
this requirement, when proposed by staff to provide greater rate stabilization to customers.
Section 12. Operations Reserves
The Electric Supply Fund and Electric Distribution Fund Operations Reserves are used to
manage normal variations in the costs of providing electric service and as a reserve for
contingencies. Any portion of the Electric Utility’s Fund Balance not included in the reserves
described in Section 4 to 11 above will be included in the appropriate Operations Reserve
unless the reserve has reached its maximum level as set forth in Section 12 (e) below. Staff
will manage the Operations Reserves according to the following practices:
a) The following guideline levels are set forth for the Electric Supply Fund Operations
Reserve. These guideline levels are calculated for each fiscal year of the Financial Planning
Period based on the levels of Operations and Maintenance (O&M) and commodity
expense forecasted for that year in the Financial Plan.
Minimum Level 60 days of Supply Fund O&M and commodity expense
Target Level 90 days of Supply Fund O&M and commodity expense
Maximum Level 120 days of Supply Fund O&M and commodity expense
b) The following guideline levels are set forth for the Electric Distribution Fund Operations
Reserve. These guideline levels are calculated for each fiscal year of the Financial Planning
Period based on the levels of O&M expense forecasted for that year in the Financial Plan.
Minimum Level 60 days of Distribution Fund O&M expense
Target Level 90 days of Distribution Fund O&M expense
Maximum Level 120 days of Distribution Fund O&M expense
c) Minimum Level: If, at the end of any fiscal year, the funds remaining in the Supply Fund or
Distribution Fund’s Operations Reserve are lower than the minimum level set forth above,
staff shall present a plan to the City Council to replenish the reserve. The plan shall be
delivered within six months of the end of the fiscal year, and shall, at a minimum, result in
the reserve reaching its minimum level by the end of the following fiscal year. For
example, if the Operations Reserve is below its minimum level at the end of FY 2014, staff
must present a plan by December 31, 2014 to return the reserve to its minimum level by
June 30, 2015. In addition, staff may present an alternative plan that takes longer than
one year to replenish the reserve.
d) Target Level: If, at the end of any fiscal year, either Operations Reserve is higher or lower
than the target level, any Financial Plan created for the Electric Utility shall be designed to
return both Operations Reserves to their target levels by the end of the forecast period.
e) Maximum Level: If, at any time, either Operations Reserve reaches its maximum level, no
funds may be added to this Reserve. Any further increase in that fund’s Fund Balance shall
be automatically included in the Unassigned Reserve described in Section 13, below.
Section 13. Unassigned Reserves
If the Operations Reserve in either the Electric Supply Fund or the Electric Distribution Fund
reaches its maximum level, any further additions to that fund’s Fund Balance will be held in
the Unassigned Reserve. If there are any funds in either Unassigned Reserve at the end of any
fiscal year, the next Financial Plan presented to the City Council must include a plan to assign
them to a specific purpose or return them to the Electric Utility ratepayers by the end of the
first fiscal year of the next Financial Planning Period. For example, if there were funds in the
Unassigned Reserves at the end of FY 2016, and the next Financial Planning Period is FY 2017
through FY 2021, the Financial Plan shall include a plan to return or assign the funds in the
Unassigned Reserve by the end of FY 2017. Staff may present an alternative plan that retains
these funds or returns them over a longer period of time.
Section 14. Intra-Utility Transfers between Supply and Distribution Funds
Transfers between Electric Distribution Fund Reserves and Electric Supply Fund Reserves are
permitted if consistent with the purposes of the two reserves involved in the transfer. Such
transfers require action by the City Council.
Section 15. Low Carbon Fuel Standard (LCFS) Reserve
This reserve tracks revenues earned via the sale of Low Carbon Fuel Credits allocated by the
California Air Resources Board to the City, as well as expenses incurred, in accordance with
California’s Low Caron Fuel Standard program. At the end of each fiscal year, the LCFS Reserve
will be adjusted by the net of revenues and expenses associated with California’s LCFS
program.
Section 16. Cap and Trade Program Reserve
This reserve tracks unspent or unallocated revenues from the sale of carbon allowances freely
allocated by the California Air Resources Board to the electric utility, under the State’s Cap and
Trade Program. Funds in this Reserve are managed in accordance with the City’s Policy on the
Use of Freely Allocated Allowances under the State’s Cap and Trade Program (the Policy),
adopted by Council Resolution 9487 in January 2015.
Section 17. Electrification Reserve
This reserve is used to track funding of City building, appliance and vehicle electrification
projects and programs, including development and implementation costs and associated
financial incentives, loans and rebates for participating customers. The reserve may be
funded by any lawful source of funds available for such programs, including new or ongoing
utility revenues derived from customer participation. The reserve balance shall be annually
adjusted based on the net of revenues and expenses associated with the City’s building,
appliance and vehicle electrification projects and programs using this reserve.
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Attachment E
Resolution No. ____
Resolution of the Council of the City of Palo Alto Amending
the City’s Policy on the Use of Freely Allocated Allowances
Under the State's Cap-and-Trade Program and Authorizing
the City Manager to use $1.25 million from the Gas Utility
Cap and Trade Reserve for the Advanced Heat Pump Water
Heater program
R E C I T A L S
A. The Global Warming Solutions Act, also known as Assembly Bill 32 (AB 32), as
amended by Senate Bill 32 (2016), requires that California's Greenhouse Gas {GHG) emissions
be reduced 40% below 1990 levels by 2030, and authorized the California Air Resources Board
(CARB) to develop regulations to reach this goal.
B. Under the terms of CARB's cap-and-trade regulations, including Title 17
California Code of Regulations Sections 95892 (d)(2) and 95893 (d)(3), the City is required to
sell a portion of these allocated allowances in the auctions conducted by CARB and utilize the
auction sale proceeds “exclusively for the benefit of retail electric ratepayers” (for the electric
utility) or "exclusively for the benefit of retail ratepayers of each natural gas supplier" (for the
gas utility) and "consistent with the goals of AB 32".
C. On January 26, 2015 the Council approved a Policy on the Use of Freely
Allocated Allowances Under the State’s Cap and Trade Program (Resolution 9487).
D. The Council of the City of Palo Alto supports the state's AB 32 goals and intends
to implement the City's Policy on the Use of Freely Allocated Allowances Under the State's
Cap- and-Trade Program (formerly titled the Cap-and-Trade Revenue Utilization Policy) in
furtherance of these goals.
E. The Council has approved a Sustainability and Climate Action Plan Goal of 80%
emissions reduction from 1990 levels by 2030, a Framework, and an Implementation Plan. A
preliminary impact analysis reviewed by the Council on April 19, 2020 demonstrated that
building and vehicle electrification was a critical part of achieving these emissions reduction
goals.
F. The Council intends to establish various programs to promote building,
appliance and vehicle electrification, which will require significant funding. The Council wants
to amend the previously approved policy to clearly state its intention to use revenues from
the sale of City’s Gas Cap and Trade allowances for building, appliance and vehicle
electrification.
The Council of the City of Palo Alto (“City”) RESOLVES as follows:
SECTION 1. The Council finds that the use of revenues from the auction of freely allocated Gas
Utility allowances under the State’s Cap and Trade program to promote building, appliance
and vehicle electrification, when such conversions also reduce greenhouse gas emissions,
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provides a variety of benefits to the City’s gas customers, including:
a. furthering State and local climate protection goals by reducing natural gas-related
emissions due to the long-term and orderly transition away from natural gas to
carbon neutral electricity;
b. avoiding increasing environmental and transmission charges on gas use;
c. decreasing the energy cost of operating equipment, vehicles, and appliances due to
Palo Alto’s low electricity costs;
d. avoiding increasing natural gas distribution system maintenance costs.
SECTION 2. The Council finds that because nearly all members of the community use both
natural gas and electricity, fuel switching from natural gas to electricity reduces energy costs
and greenhouse gas emissions and facilitates an orderly transition away from natural gas at
the lowest feasible cost, it is of benefit to both gas and electric ratepayers to use revenues
from auction of both gas and electric allowances under the State’s Cap and Trade program to
promote fuel switching.
SECTION 3. The City's Policy on the Use of Freely Allocated Allowances Under the State's
Cap-and-Trade Program is amended as shown in Exhibit A.
SECTION 4. The Council grants the City Manager or his designee the authority to implement
the Policy on the Use of Freely Allocated Allowances Under the State's Cap-and-Trade Program
and to use allowances and allocate auction revenues to projects or expenditures as defined in
Exhibit A.
SECTION 5. The Council affirms the use of up to $1.25 million in revenues from gas utility
participation in the State’s Cap and Trade program to fund an Advanced Heat Pump Water Heater
Pilot, as described in Staff Report 14606.
SECTION 6. The Council finds that the implementation of this Policy, including the use of
revenue derived from it, and the expenditures of funds necessary to implement it, represent the
City's cost of regulatory compliance with the state's cap-and-trade program and are consistent
with the goals of AB 32. Such costs therefore represent the reasonable costs of providing service
to CPAU's gas customers.
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SECTION 7. The Council finds that the amendment of this policy does not meet the definition
of a "project" under the California Environmental Quality Act, as defined by California Public
Resource Code Section 21065.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
Assistant City Attorney City Manager
Director of Utilities
Director of Administrative Services
Exhibit A to Resolution No.
Adopted by Council on
CITY OF PALO ALTO POLICY ON THE USE OF FREELY ALLOCATED ALLOWANCES
UNDER THE STATE’S CAP-AND-TRADE PROGRAM
This Policy applies to freely allocated greenhouse gas (GHG) emission allowances from the California
Air Resources Board (CARB) to the City of Palo Alto’s electric and natural gas distribution utilities
(“Allocated Allowances”). The City Manager or his designee is authorized to use Allocated
Allowances and any resulting revenue in any lawful manner consistent with this policy.
The City’s Policy on the Use of Freely Allocated Allowances for the Electric Utility is as follows:
1. The City shall abide by CARB’s regulations by using the auction proceeds and allowance value
obtained from the City’s allocated allowances for the exclusive benefit of the City’s electric retail
ratepayers, consistent with the goals of the Global Warming Solutions Act, also known as
Assembly Bill 32 (AB 32), and not for the benefit of entities or persons other than such
ratepayers.
2. The following uses of the City’s auction proceeds are permitted:
a) Purchases or investment in renewable resources (outside Palo Alto or locally) for the electric
portfolio;
b) Investment in energy efficiency programs for the electric portfolio and retail customers;
c) Fuel switching from other fuels to electricity that reduces greenhouse gas emissions;
c)d) Investment in other carbon reduction activities, including those required to achieve
a carbon-neutral electric portfolio; and
d)e) Rebates to electric retail ratepayers.
3. Allocated allowances may also be used to meet the City’s electric utility’s compliance obligations
for electricity scheduled into the California Independent System Operator Markets, should state
law eventually permit this action.
4. Council will receive annual reports on the allowance revenues and expenditures associated with
complying with CARB regulations and this policy.
5. Additional Council approval will be required for any rebates to electric ratepayers proposed
under this Policy.
The City’s Policy on the Use of Freely Allocated Allowances for the Gas Utility is as follows:
1. The City shall abide by CARB’s regulations by using the auction proceeds for the exclusive
benefit of the City’s natural gas retail ratepayers, consistent with the goals of the Global
Warming Solutions Act, also known as Assembly Bill 32 (AB32), and not for the benefit of
entities or persons other than such ratepayers.
2. A portion of the Allocated Allowances can be used to meet the City’s natural gas utility’s
compliance obligations, and the remaining Allocated Allowances will be consigned to
auction.
3. The following uses of the City’s auction proceeds from the sale of Allocated Allowances are
permitted, with a preference that greenhouse gas reduction measures be pursued before
providing rebates:
a. Investment in energy efficiency programs for the natural gas portfolio and retail
customers;
b. Purchases or investment in cost effective renewable bio-gas resources for the gas
portfolio;
c. Fuel switching from natural gas to electricity that reduces greenhouse gas emissions;
c.d. Investment in other carbon reduction activities for the natural gas utility, including
system maintenance or replacement to reduce fugitive gas emissions;
d.e. Rebates to natural gas retail ratepayers. Rebates, if provided, must be allocated on
a non-volumetric basis as stated in Title 17 CCR Section 95893 (d)(3).
4. Council will receive annual reports on the use of Allocated Allowances, including the use of
auction revenues and expenditures associated with complying with CARB regulations and
this policy.
5. Additional Council approval will be required for any rebates to natural gas ratepayers
proposed under this policy.
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Attachment F
Resolution No. ____
Resolution of the Council of the City of Palo Alto Adopting a
Carbon Neutrality Goal to Further the Climate Goals of the
Sustainability and Climate Action Plan
R E C I T A L S
A. In December 2007, Council adopted the City’s Climate Protection Plan which
set a greenhouse gas (GHG) emissions reduction goal of 20% reduction by the year 2020.
B. In March 2013, Council approved Resolution 9322 directing staff to achieve
carbon neutrality for the electric supply portfolio by 2013 through the use of a combination of
hydroelectric resources, long-term renewable resources and short-term renewable energy
resources and/or renewable energy certificates (RECs).
C. In 2013, Council established the Office of Sustainability to work with other City
departments to bring a sharper strategic focus, better interdepartmental synergy, and greater
momentum to the City’s sustainability and climate initiatives.
D. In April 2016, Council adopted a GHG emissions reduction goal of 80%
reduction by the year 2030, relative to a 1990 baseline (the “80 x 30” goal). In 2016, the City
and Community reduced GHG emissions an estimated 37% relative to the 1990 baseline.
E. In December 2016, Council approved Resolution 9649 directing staff to achieve
carbon neutrality for the natural gas supply portfolio by 2018 through the use of high-quality
environmental offsets and physical “biogas” or “biomethane”.
F. In September 2018, Governor Brown issued California Executive Order B-55-18,
setting the goal to achieve carbon neutrality as soon as possible, by 2045 at the latest, and
achieve and maintain net negative emissions from that point forward. As defined by the
California Air Resources Board, “Carbon neutrality means that all GHG emissions emitted into
the atmosphere are balanced in equal measure by GHGs that are removed from the
atmosphere, either through carbon sinks or carbon capture and storage”.
G. In 2020, the City and Community reduced GHG emissions an estimated 50.6%
relative to the 1990 baseline.
H. In April 2021, Council directed the Mayor to form a Sustainability and Climate
Action Plan (S/CAP) Ad Hoc Committee to guide the development, implementation,
communication, and future community engagement of the S/CAP. In April 2022, the S/CAP Ad
Hoc Committee began discussions on carbon neutrality. The “80 x 30” goal is an interim step
that supports California’s statewide goal of achieving carbon neutrality by 2045.
I. As a result, the Council wishes to adopt a carbon neutrality goal to further the
climate goals of the S/CAP beyond the “80 x 30” goal, and direct staff to evaluate how the City
would meet a carbon neutrality goal.
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The Council of the City of Palo Alto (“City”) RESOLVES as follows:
SECTION 1. The Council hereby approves a goal to achieve carbon neutrality by 2035.
SECTION 2. The Council finds that the adoption of this resolution is not subject to
California Environmental Quality Act (CEQA) review 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)).
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
Assistant City Attorney City Manager
Director of Utilities
Director of Administrative Services
Attachment G
Utilities Legislative Policy Guidelines: 2022 Update
City of Palo Alto Utilities Department (CPAU) staff will use the below guidelines as well as
the City’s guidelines to help determine any advocacy position or action on Utilities-related
issues. Formal advocacy, such as submitting written letters or comments and meeting with
policymakers and/or staff, requires the approval of the Utilities Director or his designee.
1. Seek to preserve local government flexibility, discretion, accountability, and oversight of
matters impacting utility programs, services, activities, and rates. Oppose action that could
hamper or minimize this flexibility or discretion.
2. Where possible, seek funding and program incentives.
3. Advocate for reasonable government action with minimal customer impact that allows for
flexibility and implementation feasibility.
4. Advocate for locally-designed conservation or efficiency programs. Support reasonable State
conservation or efficiency requirements that consider local populations, environment, and
resources.
5. Inform state and federal policymakers about CPAU’s current programs, services, goals, and
reporting requirements.
6. Oppose unnecessary, unreasonable, impractical, or costly rates or mandates.
7. Collaborate with and support the efforts of regional agencies and associations whose goals
align with ours.
8. Advocate for fair cost allocation and support the principle of beneficiary pays.
9. Support efforts to maintain or improve the security and reliability of our infrastructure.
10. Support government action that cost effectively reduces greenhouse gas emissions.
11. Promote locally-designed residential and commercial electrification programs.
12. Support government action allowing CPAU to maintain customer confidentiality.
13. Support government action to expand the workforce in trades and technical disciplines
necessary to support building and vehicle electrification and grid modernization.