HomeMy WebLinkAboutStaff Report 2412-3877CITY OF PALO ALTO
CITY COUNCIL
Monday, May 19, 2025
Council Chambers & Hybrid
4:30 PM
Agenda Item
7.Climate Action and Sustainability Committee Recommendation to Council to Direct Staff
to Develop an Affordable Multi-Family Housing Electrification Grant Program and to
Approve a Budget Amendment in the Gas Utility Funds; CEQA Status: Under CEQA
Guidelines section 15183, projects consistent with an existing general or comprehensive
plan do not require additional CEQA review Item Removed Off Agenda
City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: Public Works
Meeting Date: May 19, 2025
Report #:2412-3877
TITLE
Climate Action and Sustainability Committee Recommendation to Council to Direct Staff to
Develop an Affordable Multi-Family Housing Electrification Grant Program and to Approve a
Budget Amendment in the Gas Utility Funds; CEQA Status: Under CEQA Guidelines section
15183, projects consistent with an existing general or comprehensive plan do not require
additional CEQA review
RECOMMENDATION
Staff and the Climate Action and Sustainability Committee recommend that the City Council:
1. Direct staff to develop a program to provide incentives for electrification of dedicated
affordable multi-family housing central and in-unit gas equipment;
2. Direct staff to explore including a provider cost-share contribution in the program;
3. Authorize staff to use up to $6.6 million in Gas Utility Cap and Trade Revenues for the
program, and
4. Amend the FY 2025 Budget Appropriation (requires a 2/3 vote) for the Gas Utility Funds:
a. Increase Gas Resource Management Operating Expenses for Contract Services by
$6.6 million; and
b. Decrease the Cap and Trade Reserve by $6.6 million.
EXECUTIVE SUMMARY
This action would enact an affordable housing electrification retrofit pilot program with the
objective of helping local affordable housing providers take advantage of State and Federal
incentive programs. This program has been on an accelerated timeline as these programs have
limited budgets, have expressed great demand and need, and critical Federal funding support is
uncertain so timing of the City support program is important.
The proposed budget for the program is $6.6 million, funded from the Gas Cap and Trade
Reserves. The program budget will not directly impact utility rates or the General Fund budget,
but will indirectly affect both by facilitating the conversion of gas equipment to electricity. The
Climate Action and Sustainability Committee also unanimously recommended that the City
Council direct staff to explore including a provider cost-share contribution in the program. The
program will have the capacity to electrify central heating or water heating systems serving up
to 500 units (about 20% of Palo Alto affordable housing units) and equipment in up to 275
individual units (about 10% of Palo Alto affordable housing units). In addition, this program will
have the capacity to save about 800 to 1,000 metric tons of carbon-dioxide equivalent (MT CO2-
e) per year, comparable to the emissions savings of the Advanced Heat Pump Water Heater
Pilot Program’s capacity.
BACKGROUND
1,
299 below market rate (BMR) rental units in market-rate rental complexes, and 265 BMR
ownership units in 48 market-rate condo developments. 2023-2025 S/CAP Work Plan work
items 2.1(I) (Affordable Housing EV Charging and Electrification Pilot) and 2.1(K) (Multi-family
and Affordable Housing Electrification and EV Charger Access Strategy Development) both focus
on piloting scalable strategies for electrifying these units and providing EV charging. In addition,
work item 4.A (Multi-Family and Commercial End Use Study) focuses on doing studies to
identify opportunities for electrifying equipment in multi-family buildings.
2 The study is nearly complete and will
1 23 managed by Alta Housing, three by Front Porch, two by Eden, two by MidPen Housing, two by Abode, one by
Bridge Housing, as well as Stevenson House, Terman Apartments, the Moldaw Residences, and the HomeKey
transitional housing project still under development
2 Staff Report 2308-1939, https://www.cityofpaloalto.org/files/assets/public/v/1/administrative-services/budget-
adjustments-and-monitoring/fy-2024-budget-adjustments/january/january-18-ccm-item-4.pdf
be ready for Council review once the final report is written. Over the course of the study
Willdan visited several multi-family buildings, including buildings managed by three different
affordable housing providers who between them manage most of Palo Alto's dedicated
affordable housing (27 properties out of 37 total). Staff consulted a fourth provider for data
from a study they did on their own. The studies identified aging equipment representing good
opportunities for building electrification in six buildings with 428 units of affordable housing in
them. Equipment nearing end of life across all six surveyed properties included six central water
heaters, one central space heater, as many as 240 in-unit space heaters, and a central kitchen.
The providers are ready or close to ready to replace the equipment and eager to electrify it,
providing a unique opportunity to electrify equipment serving about 20% of the dedicated
affordable units in Palo Alto. Some of these replacements could be showcase projects for which
the provider and the City could submit for awards, allowing the community to demonstrate that
fully electrified affordable housing is an attainable goal.
ANALYSIS
•The Home Energy Efficiency Retrofits and Residential Assistance (HEEHRA) program
offers rebates of up to $14,000 per household, covering up to 100% of electrification
costs for low- and moderate-income households, including heat pumps, electric panel
upgrades, and energy-efficient appliances (note that project costs tend to exceed the
incentive cap). The program is funded by the Inflation Reduction Act, and California’s
share of the funding that has been allocated specifically for multi-family housing is $35
million. Initial interest in the program is high, which may result in limits on per-project
or per-provider incentives that can be received. This program is unlikely to be available
in the near term or at all, however, due to Federal funding currently being withheld.
•The State has allocated over $120 million to the Low-Income Weatherization Program
(LIWP) Multi-Family Program since State Fiscal Year 2014/2015,3 providing incentives on
a $/MT CO2-e basis for energy efficiency and solar photovoltaic systems, and
electrification upgrades, focusing on reducing energy costs for low-income individuals
and greenhouse gas emissions.
•The Technology and Equipment for Clean Heating (TECH) multifamily program has
offered incentives of up to $1,200 per unit in the past for multi-family central water
3 Low Income Weatherization Program Guidelines, State Dept of Community Services & Development, June 8,
2022. https://www.csd.ca.gov/Shared%20Documents/LIWP-2022-Multi-Family-2.0-Final-Program-Guidelines.pdf
heating. Renewed funding and adjustments to incentive levels are expected to be
announced soon.4
While the above programs provide significant incentives, electrification projects are costly and
most housing providers will need local matching funds to be able to take advantage of the State
and Federal programs, particularly for in-unit improvements. Assuming that these incentive
funds remain available, staff believes affordable housing providers in Palo Alto may be eligible
to receive nearly $7 million in State and Federal incentives for these projects, based on the
equipment to be electrified and the incentive program rules, though over half of that is Federal
funds unlikely to be delivered. However, these projects are estimated to cost over $10 million
(of which an estimated $6.5 million would be related to in-unit measures). Costs average about
$10,400 per unit for projects focused primarily on central systems and $34,500 for projects that
include in-unit heating electrification as well. This implies a need for at least $3.7 million in local
incentives to cover 100% of known project costs, likely closer to $6 million without Federal
funding.
Other providers, aside from those who participated in the Willdan study, may also wish to
apply, which would necessitate an increased budget to support those projects as well. Staff is
proposing a budget of $6.6 million; $2.5 million for central system incentives and $4.1 million
for in-unit + central incentives. This provides adequate funding for 500 units of central heating
incentives plus 275 units of in-unit incentives, assuming the City will provide incentives of up to
$7000 per unit for projects involving central systems only and an additional $15000 per unit
when both central and in-unit electrification measures are included. These incentives would
only be available after the provider has applied for all State and Federal incentives and would
only cover any residual cost. Staff proposes funding these incentives from the Electric Utility
Public Benefits reserves and Gas Cap and Trade reserves as described in the “Fiscal Impact”
section below.
In practice, the program budget might not be used completely. As noted above, if estimated
State and Federal incentives were received, the known electrification projects would require $6
million in local incentives. However, logistical challenges may prevent some projects from
proceeding. In some cases project costs may come in lower or higher than expected. Staff could
report back to Council in late 2025, once State and Federal incentive allocations are known and
projects are underway, and unused budget could be returned to reserves.
Another factor is the potential provider contribution, which the Climate Action and
Sustainability Committee (Committee) recommended the City Council direct staff to explore.
This would involve requiring a funding contribution from providers (a cost share) representing
the cost of like for like replacement. Replacing equipment at end of life would normally be a
provider’s responsibility. Staff could determine the funding contribution required for each
4 Technology and Equipment for Clean Heating
https://techcleanca.com/documents/3829/Multifamily_Incentives_for_Heat_Pump_Water_Heaters_240102.pdf
project to electrify by having a building consultant calculate a cost estimate for a like for like gas
replacement, with the option for the affordable housing vendor to provide actual contractor
quotes as an alternative.
The budget for the program could be reduced using this approach, but the exact amount of
reduction is difficult to estimate without having actual quotes for like for like gas replacements.
Willdan performed a rough analysis of one property that estimated like for like replacement
costs at 20% of the cost of central water heating and 40% of the cost of in-unit space heating.
This analysis relied on average costs in the Bay Area for gas equipment replacement and likely
did not include some project-specific additional costs that would be incurred. Based on those
numbers, the maximum provider contribution could reach up to $1.9 million, or $460,000 if
only a central equipment program is considered. But these numbers are very uncertain and will
depend on actual project design and quotes, and a lower provider contribution may be needed
to avoid deterring participants who have not yet accumulated the capital to pay for their
contribution.
Staff is only aware of one other program providing similar grants, the Silicon Valley Clean
Energy (SVCE) Multifamily Retrofit program, which provides direct install services for affordable
housing owners or up to $450,000 in grants to affordable housing owners who hire their own
contractors. The program budget is about $12 million. Sacramento Municipal Utility District
(SMUD) provides multifamily building electrification rebates in the range of $1000 to $2000 per
unit served. Other multifamily services in PG&E territory focus primarily on energy efficiency.
Committee Review
On March 21, 2025, the Committee considered the staff proposal and budgets for a set of
potential alternatives5 that included:
•A grant program with no provider contribution
•Starting with a smaller budget and increasing if necessary
•Requiring a provider contribution, or
•A smaller grant program only covering central equipment.
Variations on these themes were also presented, including the possibility of loans rather than
grants for the provider contribution. The Committee recommended that that Council approve
the staff proposal with the recommended direction that staff consider a provider contribution
at a size that would not deter potential participants.
5 For more detail, see Staff Report 2503-4392
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=46204&dbid=0&repo=PaloAlto
Climate Actionn and Sustainability Committee, March 21, 2025, Recommendation to Council to Direct Staff to
Develop an Affordable Multi-Family Housing Electrification Grant Program and to Approve a Budget Amendment
in the Gas Utility Funds
Comments and questions from the Committee included:
•Questions aimed at demonstrating the public purpose return on investment for the
program, that is, how many metric tons of emissions reduction would be obtained at
what cost, how that compared to other programs, and the overall impact of the
program. Staff explained how the program had a scale of impact and cost-effectiveness
comparable to the 1000-unit Advanced Heat Pump Water Heater Program in those
terms.
•Questions about the regulations governing the use of Cap and Trade funds, a
clarification that transformer upgrades and induction cooktops would be eligible aspects
of the grant funding, and whether parts of the gas system would be retired as a result
(staff did not see obvious opportunities to do so from these projects).
•Explorations of possible additional funding sources, including philanthropy and
rehabilitation grants, as well as the potential alternatives and the idea of a provider
contribution, which ultimately settled on this report’s recommendations.
FISCAL/RESOURCE IMPACT
The staff recommendation would be implemented using existing staff, but would increase
program spending by up to $6.6 million, funded by the Gas Cap and Trade reserves. Those
reserves are currently at $13.5 million, with projected annual revenues of $3 million to $4
million per year as authorized through 2030. This spending would not directly impact gas rates,
but Gas Cap and Trade reserves can potentially be used to provide climate credits. $6.6 million
is equivalent to about a 2% decrease in gas rates if spread over five years. The Finance
Committee will be considering potential uses of the funding sources for this $6.6 million (and
for other proposed Climate Programs in the FY 2026 Proposed Budget) before this item goes to
Council for approval.
The use of Gas Cap and Trade revenues is governed by Title 17 California Code of Regulations
Section 95893(d), which requires that it be used for the primary benefit of retail natural gas
ratepayers, subject to any limitations imposed by Council, and must be used for:
•Energy efficiency, including energy efficiency equipment rebates, building retrofits and
other projects that reduce energy demand;
•GHG emissions reducing activities, which include projects to reduce gas leaks that are
not mandated by federal, state or local health and safety requirements;
•Non-volumetric return to some or all ratepayers in the form of a climate credit;
•Administrative and outreach costs and educational programs.
The Council adopted a policy on the use of Gas Cap and Trade Revenue on January 26, 2015
(Resolution 5397) and updated it October 3, 2022 (Resolution 10077),6 which stated that:
6 Resolution 10077 https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=61567
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:
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).
STAKEHOLDER ENGAGEMENT
Affordable housing electrification has been discussed extensively as part of the stakeholder
engagement for the S/CAP as a whole, and during adoption of the 2023-2025 S/CAP Work Plan,
but this program has not received any stakeholder engagement due to the rapid turnaround
needed to avoid missing out on access to State and Federal incentives. In developing this
program staff consulted with various affordable housing providers to understand their needs
and relied on studies performed by Willdan of various properties.
ENVIRONMENTAL REVIEW
Potential environmental impacts of an affordable housing building electrification pilot 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. Under CEQA Guidelines section 15183, projects consistent with an
existing general or comprehensive plan do not require additional CEQA review.
ATTACHMENTS
None
APPROVED BY:
Brad Eggleston, Director of Public Works