Loading...
HomeMy WebLinkAboutStaff Report 2403-2724CITY OF PALO ALTO CITY COUNCIL Special Meeting Monday, April 15, 2024 Council Chambers & Hybrid 5:30 PM     Agenda Item     6.Staff Recommends Increasing the Budget for the Advanced Heat Pump Water Heater Pilot Program by $846,000 to Increase Participation with Higher Rebates, and Amend the Fiscal Year Budget Appropriation for the Gas Fund; CEQA Status: Not a Project under CEQA Guidelines Section 15378(b)(5) Consent Questions City Council Staff Report From: City Manager Report Type: CONSENT CALENDAR Lead Department: Utilities Meeting Date: April 15, 2024 Staff Report: 2403-2724 TITLE Staff Recommends Increasing the Budget for the Advanced Heat Pump Water Heater Pilot Program by $846,000 to Increase Participation with Higher Rebates, and Amend the Fiscal Year Budget Appropriation for the Gas Fund; CEQA Status: Not a Project under CEQA Guidelines Section 15378(b)(5) RECOMMENDATION Staff recommends that Council: 1. Increase the budget for the Advanced Heat Pump Water Heater (HPWH) Pilot Program by $846,000 to increase participation. 2. Amend the Fiscal Year 2024 Budget Appropriation (requires a 2/3 vote) for the following: a. Gas Fund i. Increase the Contract Services expenditure appropriation by $846,000; and ii. Decrease the Gas Cap and Trade Reserve by $846,000. EXECUTIVE SUMMARY Last year staff launched the City’s pilot Heat Pump Water Heater program offering expert help to residents install a better water heater. The City handles the permits, contractors, and installation for program participants. This program is one of many home electrification tools available to Palo Alto residents to support a greener community and advance the Council’s Climate Change & Natural Environment - Protection & Adaptation 2024 priority. Since November 1, 2023 the City has offered discounted pricing for its full-service HPWH program due to the availability of State incentive funds. This lower pricing has helped increase participation in the program, noting as of April 1, 2024 there are nearly 350 participants. Staff recommends increasing the program budget by $846,000 to continue to offer lower pricing for the full-service program. The list below shows the up-front cost to the participant for that program over time: •Participant up-front cost at program launch (March 2023): $2,700 + site preparation costs (about $1,000 on average) •Current pricing (as of November 1, 2023): $1,900 + a $1,500 credit toward site preparation costs, which covers 100% of the site preparation costs for most customers •Tentative pricing if additional budget is approved (with this action): $2,300 + $1,000 credit toward site preparation costs Should Council approve the budget action as part of this staff report, this would mean program participants savings of up to $6,060, versus today’s savings (with State incentives) of up to $7,100. With this budget amendment staff would also increase the rebate for those residents who hire their own contractors. Analysis of 2023 projects showed that customers paid, on average, $1,000 less when they used the full-service program instead of hiring their own contractor. Staff believes encouraging more contractors to install HPWH in Palo Alto will help the community electrify more quickly in the future, advancing the Council’s sustainability goals set through the City’s Sustainability Climate Action Plan (S/CAP). With this additional budget, staff would change the rebate from the current level ($2,300) to a graduated rebate (55% of project costs up to $3,500). BACKGROUND The City of Palo Alto launched the Advanced Heat Pump Water Heater (HPWH) Pilot Program in March 2023. It included two alternatives for participants: 1) hire your own contractor and get a $2,300 rebate, or 2) participate in the full-service program. The full service HPWH program provides an end-to-end advisory and installation service to homeowners to switch from a gas water heater to a HPWH at a discounted price. The program also offers an on-bill financing option with 0% interest to lower the upfront cost to customers. As of March 7, 2024 over 300 people have contracted for a HPWH through the program, 266 through the full-service program and 57 through the rebate program. With the current pace of new signups, the City is on track to do around 250 to 300 installations per year, equivalent to about 25% of the water heaters replaced each year. On November 1, 2023 the State launched TECH Clean California, a statewide initiative designed to accelerate heat pump adoption. Homeowners statewide could receive incentives of $3,100 to $3,800 for HPWHs installed by TECH-certified contractors, which could be paired with local rebates like Palo Alto’s. The City was also able to incorporate this new incentive into the Full-Service HPWH program to lower the price of that program to $1,900. The City also added up to $1,500 in credits for site preparation work such as long conduit runs, relocation of the water heater, etc. Even though it lowered the program pricing, the City was still able to reduce the amount of incentive funding it committed to each installation due to the large State incentives provided. The City saved roughly $170,000 from November 1, 2023 through March 7, 2024 when the State incentive budget was exhausted. The improved pricing helped drive program participation. At least 60 customers who had previously dropped out of the program rejoined upon learning about the new incentives and more favorable pricing. The incentive also increased the percentage of people who signed a contract after initially signing up, rather than leaving the program. However, on March 7, the TECH Clean CA program announced that the funds had been fully expended. Available funds declined more rapidly than expected, likely due to the unexpected addition of multi-family central water heating to the program. To avoid program disruption staff is devoting some of the $170,000 savings noted above to maintain the current program pricing until Council is able to act on this staff recommendation. ANALYSIS Cost of installation continues to be a key decision in whether to install a heat pump water heater over gas water heater. To maintain the momentum of residents taking advantage of the full-service program staff is recommending pricing of $2,300 (for a standard 65 gallon HPWH) and an up to $1000 credit for site preparation measures. To keep the rebate program competitive with the full-service program staff would like to change the rebate to be 55% of project costs up to a maximum of $3,500. These actions would require an additional $846,000 in funding to cover the remaining ~700 HPWH installations to meet the pilot program target of 1,000 HPWH. Staff evaluated several alternatives, as shown in Table 1, below. Table 1: Pricing Alternatives Considered and Budget Required Option Pricing (65 gallon HPWH) Funding Need 1: Return to original pricing $2,700, no site prep allowance None 2: Maintain Current Pricing $1,900 + $1,500 site prep allowance $1.63 million 3: Lower pricing + site preparation credit $2,300 + $1000 site prep allowance $850,000 4: Original pricing + site preparation credit $2,700 + $1000 site prep allowance $560,000 The following chart gives an example of how the revised pricing in the staff recommended alternative 3 would work for a participant in the full-service program. Assuming a 65-gallon HPWH with an up-front City-contracted cost of $7,561 and $1,000 in site preparation expenses, the $1,000 site preparation credit and the $5,261 in City discounts would yield a participant cost of $2,300. Most customers will also be eligible for a 30% federal tax credit (up to $2,000), which would result in a total customer cost of $1,610. This is well below the average cost to install a conventional gas water heater, which is estimated at $2,000 or more. However, even the up-front price without the tax credit is competitive with a gas water heater. Since it may be difficult for many participants to psychologically factor in the tax credit when making decisions, staff believes it is important for the up-front cost to remain competitive. And those participants who would like to pay even less up-front can take advantage of the $1,200 on-bill financing loan and pay $1,100 up-front with a $20/month charge on their electric bill for five years, which staff expects to be partially or fully offset by utility bill savings from switching from gas to electricity. FISCAL/RESOURCE IMPACT Staff recommends an appropriation of $846,000 in the FY 2024 Electric Fund operating budget to fund the Advanced Heat Pump Water Heater Pilot Program, offset by a reduction of $846,000 from the Gas Fund’s Gas Cap and Trade Reserve, which is projected to be at $12.1 million at the end of fiscal year (FY) 2024 ($11.2 million after the proposed withdrawal, assuming program participants use the entire $846,000). New revenue for this reserve is expected to be $2 million to $3 million per year through FY 2029. The existing reserve, the new revenue, and other available funding sources like the Low Carbon Fuel Standard reserve and revenues and the Electric Utility Cap and Trade and Public Benefits reserves and revenues should provide enough funding for other decarbonization programs in addition to this program, even if this additional budget for the HPWH program is approved. STAKEHOLDER ENGAGEMENT Staff reviewed this proposal with the Council Ad Hoc Climate Protection Committee, which unanimously recommended approval. Staff continues to engage key stakeholders and S/CAP working group members about this program and other elements of our S/CAP implementation. Communications and outreach continues to build community awareness about the benefits of the HPWH program, including recently sending a postcard to all households in Palo Alto. Notable that as part of our digital advertising, interest and value in the program is highest when discussing savings to residents and taking actions to protect our planet. Program website can be found at www.cityofpaloalto.org/switch. ENVIRONMENTAL REVIEW Council’s approval of the Advanced Heat Pump Water Heater Program budget is not subject to CEQA review, as an administrative government activity that will not result in any direct or indirect physical change to the environment (CEQA Guidelines section 15378(b)(5)). Potential environmental impacts of the Advanced Heat Pump Water Heater Program were analyzed as part of the Sustainability and Climate Action Plan (S/CAP) Addendum to the Comprehensive Plan Environmental Impact Report. On June 5, 2023 (Staff Report #2303-1158) Council certified the Addendum, which found that the S/CAP programs would not result in any significant or substantially more severe effects beyond what was previously analyzed in the Comprehensive Plan EIR. ATTACHMENTS None. APPROVED BY: Dean Batchelor, Director of Utilities Dear Mayor and Council Members, On behalf of City Manager Ed Shikada, please see staff responses below for questions from Council Member Tanaka on the Monday, April 15 Council Meeting. Item 5: Approval of Construction Contract C24190225 with Graham Contractors, Inc. in an Amount Not-to-Exceed $1,594,195 and Authorization for the City Manager or Their Designee to Negotiate and Execute Change Orders for Related Additional but Unforeseen Work that may Develop During the Project Up to a Not-to-Exceed Amount of $159,420 for the Fiscal Year 2024 Streets Preventive Maintenance Project, Capital Improvement Program Projects PE- 86070, and PO-11001; CEQA status – exempt under CEQA Guidelines Section 15301(c) 1. In light of Graham Contractors, Inc.'s legal dispute detailed in the case of Graham Contracting, Ltd. v. City of Federal Way, which has exposed vulnerabilities in managing contractual obligations and dispute resolutions that ultimately resulted in a lawsuit as a result of contractual delays, how does the city propose to mitigate these risks in the administration of the Fiscal Year 2024 Streets Preventive Maintenance Project? Please provide detailed strategies that will be employed. Staff response: First, it should also be noted that the contract award pertains to Graham Contractors, Inc., a California corporation, and not Graham Contracting, Ltd., a Washington corporation, as referenced in the legal case. In the Graham Contracting, Ltd. v. City of Federal Way case, a court found against Graham Contracting and in favor of the City of Federal Way because Graham did not follow the dispute resolution procedures included in the relevant contract. As is common practice in staff’s administration of all construction contracts, in the event of a dispute staff will insist that the contract dispute resolution procedures are followed and will not waive the City’s rights under the contract. 2. Given the current economic climate and the pressing needs of our community in other critical areas such as housing, how does the city justify prioritizing this particular street preventive maintenance project over other potentially more urgent community needs? Furthermore, what comprehensive assessment confirms that the current condition of the streets involved in this project indeed warrants this level of immediate investment, or could these funds be more effectively allocated to address other immediate challenges facing our community? Staff response: The prioritization of funding for City needs is conducted by the City Council through the annual budget process. The City Council has budgeted an annual amount in the capital improvement program’s Street Maintenance project to further the City’s goal of maintaining an average citywide pavement condition index score of 85. As described in the staff report, staff conducts biennial surveys of all City streets to determine pavement condition index scores that, along with planned utility work and bicycle facilities, are used to prioritize which streets are selected for this annual project as well as the annual street resurfacing project. 3. In light of the discrepancy between Graham Contractors, Inc.'s bid and the engineer's estimate, which suggests a significant undervaluation or possible oversight in the project's complexity and required resources, can you explain how the city plans to ensure that this contract will not encounter unforeseen cost overruns or require additional funding beyond the allocated budget? Specifically, what measures are in place to prevent the project from exceeding its financial boundaries due to the initial underestimation, and how will these measures protect the city's financial interests without compromising on the quality and timeline of the project? Staff response: The engineer’s estimate is based on previous project pricing with consideration to inflation to come up with an estimated total project cost. In this instance, the bid from Graham Contractors, Inc. came in 5% below the engineer’s estimate. The budgeted contract amount will be fixed to the amount of $1,753,615 which includes a 10% contingency amount to account for any unforeseen circumstances. Historically for this annual project, staff has not encountered issues staying within these financial boundaries. For any adjustments to the Contract Value, the contractor is required to follow City processes outlined in the construction contract. Requests are reviewed by project staff and approved or rejected accordingly. Item 6: Staff Recommends Increasing the Budget for the Advanced Heat Pump Water Heater Pilot Program by $846,000 to Increase Participation with Higher Rebates, and Amend the Fiscal Year Budget Appropriation for the Gas Fund; CEQA Status: Not a Project under CEQA Guidelines Section 15378(b)(5) 1. Considering the significant allocation of $846,000 from the Gas Fund's Cap and Trade Reserve for the HPWH Pilot Program, could you elaborate on how this investment compares, in terms of projected environmental impact and cost-effectiveness, with other potential uses of these funds? Specifically, how does this initiative align with our broader sustainability goals compared to alternative projects that these funds could support, ensuring we maximize the environmental benefit and equity per dollar spent across the community? Staff Response: To meet the City’s S/CAP goals, staff is working to implement a number of programs targeting GHG emissions reductions in both residential and nonresidential building sectors as well as the transportation sector. Within the residential building sector, water heating in single family homes accounts for 40% of the GHG emissions and is the second most cost-effective GHG emissions potential, behind central HVAC system with cooling, which accounts for only 10% of the GHG emissions in single family homes (see chart below). While there are other strategies that are more cost effective than electrification of water heating in single family homes, the City will not be able to meet its 80x30 goals by solely relying on GHG emission reductions in the transportation sector. source: 2022 Sustainability/Climate Action Plan 2. Considering that nearly 44.1% of Palo Alto's population are renters and may face barriers to participating in the HPWH Pilot Program, how does the city plan to ensure equitable access to the program's benefits across all income levels and housing situations, particularly for those who may not have the authority to make such installations in their homes? Staff Response: Staff agrees that renters should have equal access to electrification programs and their benefits. The current turnkey HPWH program is open to participation by renters with consent by their landlords. Because the program is designed to provide the service of a pre-screened contractor that can cover the electrical and plumbing work as well as the permit coordination, with an upfront cost to replace a gas water heater with a HPWH that is lower than a like-for-like gas water heater replacement, this makes the program attractive from a landlord perspective. Low-income residents in single-family homes are eligible to participate in the Residential Energy Assistance Program (REAP), which offers a HPWH retrofit at no cost, in addition to other no cost efficiency retrofits. The City continues to receive generous state incentives for HPWH retrofits for income-qualified customers, with up to $4,885 for each HPWH installed plus an additional $4000 for electrical upgrades. 3. How does the city justify the expectation to double the program's installation rates from 350 to 700 participants with the proposed incentives, which are notably less generous than those offered after November 1, 2023? Specifically, what strategies are in place to ensure that the reduced incentives will still effectively motivate a significant increase in participant uptake, despite the increased financial commitment required from them? Staff Response: The new incentives, while slightly lower than the previous incentives that included the state's TECH funds before they were expended, will continue to offer a new HPWH retrofit that is price-competitive with a like-for-like gas water heater replacement. With the new incentive level, the average customer cost for a new permitted HPWH will be $2,300, or $1,100 if they choose the zero interest on bill financing option. After taking into account the 30% federal tax credit for heat pump installation, the net customer cost is just $1,600. By comparison, a gas tank water heater replacement is between $2,000 to $2,500 before the permit cost. This means the customer will continue to get substantial savings by choosing the turnkey HPWH program. Item 10: Approval of Contract Amendment Number 2 to Seven On-call Consulting Contracts to Increase in the Amount by $500,000 to a Total Not to Exceed to $3.5 Million and Extend Term by Three Months to Provide Expertise for Long Range Planning Projects, Application Processing, Environmental Review, and Other Planning Analysis in the Planning and Development Services Department 1. Given the proposal to increase the budget for on-call consulting contracts by $500,000, the staff report fails to provide a precise, itemized breakdown of this allocation, offering only broad implications of its use across various projects and services. Considering the importance of fiscal responsibility and transparency to our constituents, what is a detailed justification for this increase? Specifically, how will each segment of the increase directly contribute to the city's strategic priorities and deliver tangible benefits to our community? We are seeking more specifics rather than the broad strokes provided in the staff report. Staff response: The proposed amendment seeks to augment contract capacity only, without the need for an additional increase to the budget. The budget to support this work has already been approved in the FY2024 Operating Budget. The additional contract capacity will support: current planning application processing, the next phase of the parklet prototype study, continuation of the retail study, Housing Element program implementation, and any Council priorities that are initiated between now and September 2024. Approval of this item is directly in support of providing planning services to the community and addressing the City’s strategic priorities. The budget and work associated with these contracts have already been approved by Council, and no additional budget will be allocated without Council consideration and approval. 2. Given the proposed $500,000 increase in the budget for on-call consulting contracts, and recognizing the critical need for the city to maintain and develop its internal planning and development expertise, how does the city plan to address the potential long-term negative impacts of this dependency on external consultants? Specifically, how will the city mitigate the erosion of in-house expertise, manage escalating costs associated with prolonged consultant use, and ensure operational consistency amid potential risks introduced by relying heavily on external entities? Is there a strategic plan in place to balance the benefits of external expertise with the development of our city staff's capabilities to safeguard our fiscal health and strategic autonomy? Staff response: The use of on-call consultants offers a flexible solution to the City’s evolving needs, enabling staff to respond to the changing needs of the community while maintaining fiscal prudence. Through the use of on-call consultants, the City has the ability to scale services up or down based on workload, staffing level, technical expertise, and economic conditions. This approach ensures the continuity of services during staffing vacancies or peak application volume and provides specialized expertise required for policy consideration as it relates to Council priorities. Utilizing on-call consultants allows the department to avoid overstaffing for peak application volume and specialized technical support, thereby contributing to the City’s financial health and operational flexibility.