HomeMy WebLinkAboutStaff Report 2510-5274, Staff Report 2507-5024CITY OF PALO ALTO
Climate Action and Sustainability Committee
Friday, October 17, 2025
Agenda Item
1.Recommendation to the City Council to Approve the Advanced Commercial Heat
Pump HVAC Program Design Guidelines; CEQA Status -– Categorically Exempt
Under CEQA Guidelines Section 153021 (Replacement of Existing Facilities),
Replacement of Existing Rooftop HVAC Units with Heat Pumps is Categorically
Exempt Late Packet Report Added, Staff Presentation
Climate Action and Sustainability Committee
Staff Report
Report Type: ACTION ITEMS
Lead Department: City Clerk
Meeting Date: October 17, 2025
Report #:2510-5274
TITLE
Recommendation to the City Council to Approve the Advanced Commercial Heat Pump HVAC
Program Design Guidelines; CEQA Status -– Categorically Exempt Under CEQA Guidelines
Section 153021 (Replacement of Existing Facilities), Replacement of Existing Rooftop HVAC
Units with Heat Pumps is Categorically Exempt
This will be a late packet report published on October 9, 2025.
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Climate Action and Sustainability Committee
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: Public Works
Meeting Date: October 17, 2025
Report #:2507-5024
TITLE
Recommendation to the City Council to Approve the Advanced Commercial Heat Pump HVAC
Program Design Guidelines; CEQA Status – Categorically Exempt Under CEQA Guidelines Section
15302 (Replacement of Existing Facilities)
RECOMMENDATION
Staff recommends that the Climate Action and Sustainability Committee recommend the City
Council approve the Advanced Commercial Heat Pump HVAC Pilot Program Design Guidelines.
EXECUTIVE SUMMARY
As part of the City’s Sustainability and Climate Action Plan (S/CAP), staff launched a pilot
program in summer 2024 to encourage commercial customers to replace gas-fired packaged
HVAC units with electric heat pump HVAC systems.1 To date, 14 customers have enrolled in the
pilot, six projects have secured permits, and three projects have been completed.
Preliminary results confirm that heat pump replacements are technically feasible and ranged
from an 18% savings in up-front cost to a 40% additional cost compared to like-for-like gas
system replacements. When there is additional cost, voluntary adoption can be difficult without
financing options. Early projects also highlighted permitting challenges that add to overall
project costs and complexity. While these requirements are necessary for safety and
compliance, they can discourage voluntary adoption. A study of non-residential building
equipment performed by a City consultant indicated heat pump replacements may result in bill
savings, but this is yet to be confirmed by the projects in progress.
Building on these lessons, staff proposes an Advanced Commercial Heat Pump HVAC (HPHVAC)
Pilot Program. The goal of the program would be to replace direct incentives with scalable
financing options while providing optional technical assistance. The program is designed to
1 https://www.paloalto.gov/Departments/Utilities/Electrification/Business-Electrification/Commercial-Heat-Pump-
HVAC-Program
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reduce barriers to adoption while maintaining compliance with all applicable permitting
requirements.
BACKGROUND
14 customers enrolled in the pilot
6 projects permitted
3 projects completed
Structural engineering studies on roof integrity for rooftop units.
Sound studies to demonstrate compliance with noise standards.
Visual screening/line-of-sight reviews.
Fire Department permits, including hazardous materials documentation and equipment
labeling.
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was quoted over $10,000 to complete a sound study, while another completed the study for a
negligible increase to their overall project quote. One community member incurred a $5,000
cost for hazardous materials services. Another was looking at potential increases of over
$10,000 related to roof structural calculations related to the HVAC roof attachment method.
ANALYSIS
3 research done
as part of the S/CAP Funding Study and corresponding Non-Residential Building Sector Study
(which are not yet final), and some interviews (participants, contractors, a financing provider,
and a consultant) as detailed in the Stakeholder Engagement section below, to develop the
Program Design Guidelines for the Advanced Commercial Heat Pump Heating, Ventilation, and
Cooling (HVAC) Pilot Program (Program Design Guidelines) in Attachment A. Staff has learned
from its existing program how to navigate the permitting process and the associated costs. The
studies gave staff indications that packaged space heating electrification should provide long-
term utility bill savings. In the participant and business partner interviews, staff found potential
interest in financing, particularly on-bill financing, and especially if it enabled the cost of
improvements that benefit tenants to be passed through to them based on the bill savings they
would realize.
3 https://www.paloalto.gov/Departments/Utilities/Electrification/Business-Electrification/Commercial-Heat-Pump-
HVAC-Program
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The Program Design Guidelines generally address the following topics:
rd party with a charge that does not
exceed their utility bill savings. This may enable the placement of the charge on commercial
tenant utility bills, with the right agreements in place, enabling the recovery of some of the
costs for energy improvements from tenants, who experience utility bill reductions as a result.
Funding sources and program structure are still being explored, though as noted in the Fiscal
Impact section, some money is set aside for a program like this from Gas Cap and Trade
revenues in the FY 2026 budget.
Evaluating electrification project designs, including conducting preliminary reviews of
project designs for Heat Pump HVAC installations and performing limited design checks
on equipment, engineering plans, and project specifications.
Providing electrification technical guidance, including offering non-biased, expert
technical advice to CPAU commercial customers and validating equipment selections to
ensure projects meet technical standards.
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Providing electrification cost guidance, including performing savings calculations and
general project cost evaluations, assessing financial feasibility, and providing cost
insights for customer projects.
The consultant, Prospect Silicon Valley, provided electrification technical advisory services to
three commercial customers to support their Heat Pump HVAC projects. Without the
consultant’s guidance, these projects would likely have been delayed for years, potentially
causing the customers to miss rebate opportunities or drop out of the program entirely.
To support the successful adoption of commercial Heat Pump HVAC projects, there is also a
clear interest in some form of assistance finding qualified contractors. The guidelines envision
some form of complementary contractor list, and possibly even providing services to
contractors, such as the ability to use a City financing program or a contact for trying to
understand common permitting pitfalls.
Permit Assistance and Streamlining
Early projects in the current enhanced rebate HVAC pilot have highlighted several permitting-
related challenges that informed the design guidelines and will inform program design:
Many gas-for-gas replacements proceed without permits, avoiding compliance costs
that are unavoidable for heat pump projects participating in a City program.
Noise reports are required for all projects (per PAMC 18.42.190(B)(iii)). Equipment must
be no louder than 15 dB above local ambient noise levels at 25 feet. Hiring an acoustical
engineer can cost thousands of dollars and adds time to the overall project timeline.
Structural engineering analysis is required for all rooftop packaged HVAC projects. These
studies incur a cost and sometimes trigger additional work that needs to be completed
for safety reasons.
Screening requirements add cost, and may result in additional roofing loads, which
could then incur the cost of a roof structural analysis. If a roof upgrade is required, that
can be prohibitively costly and can stop a project.
Fire Department requirements related to HVAC and hazardous materials permits,
equipment labeling, and integration with fire alarm systems need more communication
to applicants up front.
Planning and Development Services and the Fire Department have been active in helping the
Climate Action Team understand permitting requirements and discussing potential approaches
to ease compliance costs and workload.
FISCAL/RESOURCE IMPACT
$1.1 million was approved in the FY 2026 budget5 for the Advanced Commercial HPHVAC Pilot
Program, funded by Gas Cap and Trade revenues, which will support incentives if needed,
5 https://www.paloalto.gov/Departments/Administrative-Services/City-Budget
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outreach, technical assistance, and 3rd party program operation. Launch and operation of the
program is expected to require approximately 0.75 FTE, which will be performed by existing
staff and will include program design and operation, outreach, customer care, and
establishment and operation of a financing and on-bill repayment program if implemented.
Staff will continue to explore opportunities to leverage State and Federal funds if available.
STAKEHOLDER ENGAGEMENT
ENVIRONMENTAL REVIEW
7 and Comprehensive Plan
adopted in November 2017.8
ATTACHMENTS
APPROVED BY:
7 https://www.paloalto.gov/City-Hall/Sustainability/SCAP
8 https://www.paloalto.gov/Departments/Planning-Development-Services/Housing-Policies-Projects/2030-
Comprehensive-Plan
Program Design Guidelines for Advanced Heating, Ventilation, and Cooling
(HVAC) Pilot Program
These design guidelines are meant to guide development of a financially accessible
Advanced Packaged HVAC Pilot Program for non-residential customers.
Program goals and scope
The program should:
1. Ease electrification of non-residential packaged HVAC units
2. Pilot financial designs that can be deployed community-wide with little or no additional
funding from the City
3. Enable participation by a wide range of contractors, building types, and landlord-tenant
arrangements for payment of energy bills
4. Address landlord/tenant split incentives while being economically attractive to both
landlords and tenants
Program financial design
To ensure the program is cost-effective, legally viable, and scalable:
1. It should provide financing rather than up-front incentives, and ideally financing that
will encumber a property owner’s balance sheet as little as is feasible, such as on-bill
repayment out of utility bill savings
2. Financial incentives may be offered only if legally appropriate and available, and are
intended to be offered on a temporary basis.
3. Repayment of any financing offered should come from those who benefit, which could
include both tenants and landlords
4. Should not increase tenant utility bills
5. Should be accessible to a range of contractors
6. Should incorporate risk management measures to control risks to the City
Program technical design
To keep program costs lower and easier for participants, staff should explore:
1. Streamlining of permit processes
2. Technical and permitting assistance for participants
3. Contractor training on program rules and operation
4. A courtesy contractor list
Commercial Heat Pump HVAC Program Update
September 16, 2025
Current Enrollment
As of September 16, 2025, a total of 14 customers applied for the Commercial Heat Pump HVAC Pilot
program. Applicants have primarily learned about the pilot through the Business Electrification Technical
Assistance Program, the Business Customer Rebate Program website, and the Commercial and Industrial
Energy Efficiency Program.
Customers become eligible for rebate approval only after submitting all required documentation and
securing an approved permit. Of the 14 applicants, seven have initiated the permitting process with the
City, and six have received their permits. One customer has received their permit but has not submitted
project cost estimates, resulting in only five customers being officially approved at this stage.
To date, three customers have completed installations and received program rebates. Detailed project
information for these installations is provided in a subsequent section of this report. Two participants
have unenrolled from the program. In one case, a customer required an emergency replacement and
proceeded with equipment available through their contractor, which did not meet the program’s
efficiency requirements. In the second case, permitting requirements significantly increased project
costs, approximately doubling the original estimate, leading the customer to withdraw. Table 1 provides
a summary of the status and progression of all pilot participants.
Table 1. Current Program Participation for the Commercial Heat Pump HVAC Program
Cost Analysis
The tables below address the current cost comparisons between project estimates, project costs, and
rebate amounts. Table 2 compares heat pump HVAC quotes and gas quotes received from 10 customers
against project cost estimates developed by Peninsula Clean Energy (PCE) in its 2021 commercial
electrification analysis. PCE’s estimates were based on average equipment and labor costs at the time,
calculated per ton across three equipment size categories: less than 5 tons, 5–10 tons, and 15–20 tons.
On average, heat pump HVAC project estimates were 21.8% higher than gas quotes.
Table 2. Heat Pump HVAC Project Estimate Comparison Between Gas, Electric Heat Pump, and Peninsula
Clean Energy Predicted Costs
Project 2 High Quotes Explained:
• $6,980 out of the total cost is related to a heat pump water heater, meaning part of the total
project estimate was associated with another project this customer plans to do simultaneously.
• The address has a split system (one condenser and four heating units spread through the
building) serving the downstairs and it requires more ducting and equipment.
o The upstairs units use existing ducting, which is lower cost, because they are replacing a
gas rooftop unit (RTU) with a heat pump packaged unit
Project 5 Quotes Explained:
This customer’s total project cost is significantly higher than usual for a project like this. This is because
this customer redid their ducting and piping, which also resulted in added carpentry and painting costs.
They also had additional electrical work done.
• This is the percentage split cost breakdown of the $541,000 project total.
o Carpentry, painting and electrical 21%
o Equipment (condensers outdoor units and fan coils with new stats) 13%
o Piping (drain pans, condensate piping and hard copper piping for long runs) Labor and
material 28%
o HVAC & Refrigerant (line sets, refrigerant and duct connections, including new plenums)
Labor and material 37%
Project 8 Low Gas Quote Explained:
This participant did not address the cost differential in his documentation. The contractor who provided
him with these quotes has been unresponsive, so he is now going to reach out to a new potential
contractor to receive new quotes.
Project 10 Quotes Explained:
This participant’s higher heat pump HVAC quote reflects several factors: higher equipment and material
costs compared to the gas alternative, additional work such as line setting, conduit, and breaker
installation, and higher anticipated permitting expenses. In contrast, the gas quote did not account for
replacement of the AC units. If those costs had been included, the “like-for-like” comparison would have
been closer.
Completed Project Details
As of September 16, 2025, three customers have fully completed their projects. Table 3-5 highlights the
cost comparison between these customer’s initial quote, final project cost, and rebate paid.
Table 3. Dollar Comparison Between Project #1’s Quote, Project Cost, and Rebate
Please note that this customer’s total project cost is less than the original price estimate received in the
quote because the customer negotiated a lower cost when hiring the contractor to work on multiple
projects at once. The City’s rebate covered 96% of this customer’s project cost.
Table 4. Dollar Comparison Between Project #5’s Quote, Project Cost, and Rebate
This customer’s costs increased from the original quote due to added work by the contractor and
permitting costs, which were $1,268.90. The City’s rebate covered 17% of this customer’s project cost.
Table 5. Dollar Comparison Between Project #7’s Quote, Project Cost, and Rebate
This customer’s total project cost was higher due to the addition of a phase 2 to their project and the
$1,437.84 permit fee. This addition came after the quotes were processed and phase 1 was completed.
The reason for their decision to replace another unit was due to the increased rebates offered by CPAU
and the ease of completing phase 1. Due to the added unit on this project, their rebate came out to be
$43,750, which covered 67% of their total project cost.
Installation Location for HP HVAC Equipment
At this time, we do not have complete data on the installation locations of the heat pump HVAC
equipment for all applicants. Among those who have submitted site plans or permit information, four
projects consist of rooftop HVAC units. Due to the structure of the rooftop, three projects are ground-
level installations. The installation location for the remaining 6 active participants is currently unknown.
It is also possible that some customers may install equipment in both rooftop and ground locations, but
this has not been confirmed. Table 6 below summarizes the number of customers in each category.
Table 6. Locations of Installed Heat Pump HVAC Equipment
Summary of Permitting Comments
As of September 15, 2025, 7 customers have applied for the commercial heat pump HVAC permit
through the City’s Planning and Development Services (PDS) Department. Here is a consolidated list of
corrective comments provided to the customers and their contractors from the City’s PDS Department.
Many customers who participated in the pilot program received similar feedback on their permit
submissions. Learning about these recurring comments help us understand where there are gaps in
permitting instructions and opportunities on where we can smooth out the process for customers.
When submitting plans, PDS wants all details to be accurate and documentation to be complete,
including manufacturer’s specs that match the project plan details, showing where equipment and
electrical panels will be located, and clearly labeling the mechanical and electrical scope. Plans must
show property lines and setbacks. For rooftop equipment, engineers need to confirm the roof can
handle the added weight, show how it will be anchored, and provide details on ductwork, drains, and
demolition. Wood blocks (sleepers) aren’t allowed unless fully roofed over.
The City also checks for noise and safety. Equipment must meet local noise limits, and an acoustical
engineer’s report or post-installation testing is required. Fire safety permits are needed for both
refrigerant removal and installation, and the Fire Department requires notes on the plans and how the
HVAC system connects with the fire system in the building. A special inspection form must also be
submitted, listing contractors, agencies, and required safety checks. Overall, the City’s goal is to make
sure projects are well-documented, safe, and considerate of the community.
Based on the permitting requirements outlined above, some customers were able to provide details on
the additional costs some of these requirements added to their projects. For the structural analysis, one
customer’s initial cost for this study was around $25,000. There is a possibility there will be an added
cost of $12,000-$15,000 if the City’s PDS requires additional analysis for the curbs. For the HazMat
permitting, one customer was quoted $5,000. This is not confirmed though, since the customer hasn’t
completed this portion of the permit yet. There has been mixed feedback on the added cost for the
sound engineering analysis. One customer was told the cost would be “insignificant.” On the other hand,
another customer was quoted $10,000-$12,000. It has been challenging to pinpoint the exact cost of
each study because most engineers group the costs in the final invoice. We are waiting for more
feedback on these items as projects move forward.
ADVANCED COMMERCIAL HEAT PUMP HVAC PROGRAM
Presenters:
Shelby Sinkler
Hiromi Kelty
Jonathan Abendschein
OCTOBER 17, 2025 www.paloalto.gov
2 2paloalto.gov/ClimateAction
Agenda
•Commercial Heat Pump HVAC Pilot Results
•Advanced Heat Pump HVAC Program Proposal
–Customer Engagement
–Program Components
–Draft Program Workflow
•Staff Recommendations
3 3paloalto.gov/ClimateAction
Commercial Heat Pump HVAC Pilot Results
•Key findings
–On average, heat pump HVAC project
estimates are 22% higher than
equivalent gas projects
–Inconsistent pricing between
contractors
–Permitting requirements can have
significant impact
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Unenrolled
Rebates Paid
Approved
Applied
Program Enrollment Status
Number of Customers
•Customer feedback
–They would not have done the project if it weren’t for the boosted incentive
–Gained insight on permitting requirements that could be clarified
–Permitting process requires continued study – adds time and cost
4 4paloalto.gov/ClimateAction
Advanced Heat Pump HVAC program
Vision: All of Palo Alto's commercial buildings use efficient electric heat
pumps for space heating.
Program Goal: A scalable, cost-efficient program that supports the
needs of commercial customers ready to remove gas heating systems
Innovations: This program will have multiple modes of assistance,
including novel financing options and expert technical assistance.
5 5paloalto.gov/ClimateAction
Customer Engagement
CITY DOES OUTREACH TO
OWNERS, TENANTS, AND
PROPERTY MANAGERS AND
BRINGS IN POTENTIAL
PARTICIPANTS
PLANNING AND DEVELOPMENT
SERVICES (PDS) CENTER WILL REFER
COMMERCIAL CUSTOMERS WHO HAVE
QUESTIONS OR PLANS FOR HVAC
PROJECT TO UTILITIES WITH THE
OPPORTUNITY TO ENGAGE WITH THEM
ON HEAT PUMP HVAC RESOURCES.
6 6paloalto.gov/ClimateAction
Program Components – Technical Assistance
Electrification technical
assistance
•Site assessments
through existing CPAU
commercial programs
•Additional engineering
review support for HP
HVAC projects
Potential contractor
resources
•“Certification” process
to participate in
financing program
•City contact for
permitting challenges
•Contractor permitting
guide noting key things
to watch
•Develop a courtesy
contractor list
Streamline permitting
process
•Review feedback from
pilot program with
permitting and
interconnection staff
7 7paloalto.gov/ClimateAction
Possible Financing and Incentive Options
•Loans through statewide GoGreen Business program (requires
additional agreement with State)
GoGreen Business
•Customer on-bill loan repayment or repayment from bill savings
On-Bill Repayment / Electrification as a Service
•Standard rebates through Business Customer Rebates program
Incentives (Least Preferred)
8 8paloalto.gov/ClimateAction
Working Group Feedback
•Extensive discussion of results from current pilot program
–Questions about permitting feedback
–Reasons for disparities in costs between electric and gas packaged units
–Impact on building owner operational expenses
–Why owners chose to act
•Recommended raising awareness of permitting rules
9 9paloalto.gov/ClimateAction
Staff Recommendations
Staff recommends that the Climate Action and Sustainability Committee (CASC)
recommend the City Council adopt Design Guidelines for the Advanced
Commercial Heat Pump HVAC Program