HomeMy WebLinkAboutStaff Report 2411-3789CITY OF PALO ALTO
CITY COUNCIL
Special Meeting
Monday, March 24, 2025
Council Chambers & Hybrid
5:30 PM
Agenda Item
12.City of Palo Alto's Energy Risk Management Report for the second half of Fiscal Year
2024 (January 1, 2024 - June 30, 2024) CEQA Status – Not a Project.
City Council
Staff Report
From: City Manager
Report Type: INFORMATION REPORTS
Lead Department: Administrative Services
Meeting Date: March 24, 2025
Report #:2411-3789
TITLE
City of Palo Alto's Energy Risk Management Report for the second half of Fiscal Year 2024
(January 1, 2024 - June 30, 2024) CEQA Status – Not a Project.
RECOMMENDATION
This is an informational report and no City Council action is required.
EXECUTIVE SUMMARY
Staff continues to purchase electricity and gas in compliance with the City’s Energy Risk
Management Policies, Guidelines, and Procedures. This report is based on market prices and
load and supply data as of June 30, 2024, the second half of Fiscal Year (FY) 2024.
The projected cost of the City’s fixed-price electricity purchases is $0.55 million lower than the
market value of that electricity as of June 30, 2024 for the 12-month period beginning July 1,
2024. During the second half of FY 2024 (January 1, 2024 through June 30, 2024) the City’s
credit exposure to fixed price contracts is minimal. The projected Electric Supply Operations
Reserve is above the FY 2024 minimum guideline reserve level and the projected gas reserve is
below the FY 2024 guideline reserve level range.
The low gas operations reserve level at the end of FY 2024 is because of the gas price spike of
FY 2023. Although gas prices stabilized in FY 2024, there were several reasons the reserve was
more impacted in FY 2024 than in FY 2023. Specifically, carbon offset purchases from FY 2023
were made in FY 2024, and the transfer of prior years’ Cap-and-Trade auction sales revenue
from the Operations Reserve to the Cap-and-Trade reserve, which was a cost item, also
occurred in FY 2024. Additionally, FY 2024 costs reflect the Council’s adopted revised natural
gas purchasing strategy for the FY 2024 winter months to include insurance against very high
prices. The plan is to bring this reserve within the reserve guidelines in FY 2025.
With the exception of the Gas reserve being below the minimum reserve guideline, there were
no exceptions to the Energy Risk Management Policies, Guidelines, or Procedures during this
reporting period.
BACKGROUND
The purpose of this report is to inform the Council about the status of the City’s energy portfolio
and transactions executed with energy suppliers for the second half of FY 2024. The City’s Energy
Risk Management Policy requires that staff report on a semi-annual basis on: 1) the City’s energy
portfolio; 2) the City’s credit and market risk profile; 3) portfolio performance; and 4) other key
market and risk information.
The City’s Energy Risk Management Policy describes the management organization, authority,
and processes to monitor, measure, and control market risks. “Market risks” include price and
counterparty credit risk. These are risks that the City is exposed to on a regular basis in
procuring electric supplies, and to a lesser extent for gas supplies which are purchased at
market rates via a monthly index price. The City’s Energy Risk Management function, whose
role is to monitor and mitigate the energy market risks, is a part of the Treasury Division of the
Administrative Services Department. This semi-annual of FY 2024 Energy Risk Management
report contains information on the following:
•Electric Supplies
•Hydroelectricity
•Fixed-Price Forward Electricity Purchases
•Gas Supplies
•Credit Risk
•Electric Forward Mark-to-Market Values
•Electric and Gas Supply Operations Reserves Adequacy
•Exceptions to Energy Risk Management Policies, Guidelines, or Procedures
ANALYSIS
Electric Supplies
In order to serve the City’s electric supply demands, the City obtains electricity from:
hydroelectric resources (from Western and Calaveras Hydroelectric Projects); long-term
renewable energy contracts (from landfill gas converted to electricity, wind, and solar projects);
wholesale purchases which are carried out via fixed-priced forward market purchase contracts;
and the electric spot market.
Figure 1 below illustrates the projected sources and expected purchases of electricity supplies by
month for the 36 months from July 1, 2024 to July 1, 2027, in megawatt-hours (MWh). The
negative bars represent sales of excess power on the wholesale market.
Hydroelectricity
The cost of hydroelectricity received from Western over the 12-month period ending
June 30, 2024 is lower than the market value of electricity by $2.8 million. Hydroelectric power
from Calaveras was expected to cost $8.3 million (as of June 30, 2024) more than the market
value of electricity. Note that Calaveras provides benefits not reflected in the mark-to-market
(MTM, defined in the following section) calculation, including, for example, ancillary services
(e.g., the ability to regulate energy output when the electric grid needs change), and that much
of the above-market costs are related to debt service on the cost of constructing the dam. This
debt is due to be retired in 2032, and retirement will substantially improve the value of the
project relative to the market price of electricity.
Fixed-Price Forward Electricity Purchases
The City, as of June 30, 2024, has purchased and sold fixed-priced supplies of electricity for the
next 12 months totaling 62,657 MWh with an average price of $83.58 per MWh and totaling
36,960 with an average price of $41.29, respectively. The City contracted for these purchases
with one of its approved counterparties: NextEra Energy Resources. The 12-month MTM value
of the City’s forward transactions for wholesale power was $0.55 million for fiscal year 2024. A
positive MTM means that the sales price for these transactions was lower than the market value
as of June 30, 2024. The City tracks the mark to market value of its forward contracts to measure
the value that would be lost due to a counterparty failing to deliver on its contractual
commitments, forcing the City to purchase replacement electricity in the market. The exposure
listed above is well within risk management guidelines and presents little risk to the City’s
financial outlook.
-40,000
-20,000
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
Jul-24
Sep-24
Nov-24
Jan-25
Mar-25
May-25
Jul-25
Sep-25
Nov-25
Jan-26
Mar-26
May-26
Jul-26
Sep-26
Nov-26
Jan-27
Mar-27
May-27
Megawatt Hours
Figure 1 -Electric Balance Geothermal &
WholesaleWind
Western
Solar
Landfill
Calaveras
Total Load
The figures below represent the electric forward volumes (Figure 2) and MTM positions (Figure
3) for each electric supplier by month of delivery for all forward fixed-price electricity contracts
over the 12-month period ending July 1, 2025.
Gas Supplies
In order to serve the City’s natural gas needs, the City purchases gas on the monthly and daily
spot markets. The City purchases all of its forecasted gas needs for the month ahead at a price
based on the published monthly spot market index price for that month. Within the month, the
City’s gas operator buys and sells gas to match the City’s daily needs if the actual daily usage is
different from the forecasted daily usage. Those daily transactions are made at an average price
based on the published daily spot market index. These costs are passed through directly to
customers using a monthly rate adjustment mechanism, leaving the City with little or no price
risk or counterparty risk exposure for the gas utility.
Credit Risk
Staff monitors and reports on counterparty credit risk based on the major credit rating agencies
(S&P and Moody’s) scores, Ameresco has an 8.53 percent Expected Default Frequency (EDF)
which is much higher than the recommended EDF level of 0.08%. Staff is continuing to monitor
Ameresco’s EDF and will continue to report to City Council in this semi-annual report. Table 1
below shows the EDF values for the City’s renewable energy counterparties. Table 2 below shows
the EDF values and credit exposure for the City’s electric suppliers. There is virtually no credit
exposure to the City’s gas suppliers since the supplies are purchased on a short-term basis.
Table 1 - Renewable Counterparties Credit Ratings and EDFs as of 06/30/24
Table 2 - Credit Exposure and Expected Default Frequency of Electric Suppliers as of 06/30/24
Electric Forward Mark-to-Market Values
It is important to note that, for contracts with renewable energy companies, Council waived the
investment grade credit rating requirement of Section 2.30.340(d) of the Palo Alto Municipal
Code, which applies to energy companies that do business with the City. In addition, the City
does not pay for renewable energy until it is received, thereby reducing risk.
An EDF of 0.08% or below indicate supplier’s current expected default frequency falls within the
investment grade range. An EDF above 0.08% indicates the supplier may have financial issues
that require monitoring.
Current
Expected
Default
Frequency
Moody's
(EDF)
Implied
Rating
Ameresco 8.53%Ca
0.10%Baa3
Source: Moody's EDF-X (formerly CreditEdge) website
Avangrid (fomerly Iberdrola)
Renewable Counterparty
Electric
Counterparty
Cost
of Transaction
Market Value
of Transaction
Current
Expected
Default
Frequency
Moody's
(EDF)
Implied
Rating
NextEra 4,129,195$ 3,578,925$ 0.038%A3
Totals 4,129,195$ 3,578,925$
A-
(550,270)$ (207)$
Cost vs.
Market
(MTM) Value
S
&
P
C
r
Expected Loss
(MTM x
Expected
Default
Frequency)
(207)$ (550,270)$
Electric and Gas Supply Operations Reserves Adequacy
As shown in Table 3 below, the Electric Supply Operations reserve’s audited balance as of June
30, 2024 is $32.2 million, which is within the reserve guideline with $12.3 million above the
minimum reserve guideline level. Contributing to this higher reserve are related to a favorable
past litigation settlement of the Central Valley Project Improvement Act (CVPIA) operated by the
U.S. Bureau of Reclamation and anticipates and increase in wholesale revenues. The plan is to
transfer the excess reserves to other reserves (e.g., Special Projects, CIP, etc.). The audited Gas
Operations reserve balance is $4.3 million, which is ($5.5) million below the minimum reserve
guideline level.
Table 3 - Electric Supply Operations and Gas Operations Reserve Levels for FY 2024
Exceptions to Energy Risk Management Policies, Guidelines, or Procedures
Except for the Gas reserve being below the minimum reserve guideline, there were no
exceptions to the Energy Risk Management Policies, Guidelines, or Procedures to report during
the semi-annual of FY 2024.
FISCAL/RESOURCE IMPACT
This is an information report.
STAKEHOLDER ENGAGEMENT
ASD staff works internally with the Utilities Department and Moody’s website to prepare this
report.
ENVIRONMENTAL REVIEW
This item is not a project under California Environmental Quality Act (CEQA) as defined in CEQA
Guidelines, section 15378, because the report is for informational purposes only with no action
required by the Council.
APPROVED BY:
Lauren Lai, Administrative Services Director
Fund
Audited
Reserve for
Operations
Balance as of
06/30/2023
($ Millions)
Changes
to the
Reserves
for
Operations
($ Millions)
Unaudited
Reserve for
Operations
Balance as of
06/30/24
($ Millions)
Minimum
Guideline
Reserve
Level
($ Millions)
Maximum
Guideline
Reserve
Level
($ Millions)
Electric $38.88 ($6.66)$32.22 $19.90 $39.80
Gas $14.44 ($10.18)$4.26 $9.76 $19.52
FY 2024