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HomeMy WebLinkAboutStaff Report 2510-5275, Staff Report 2507-5022CITY OF PALO ALTO Climate Action and Sustainability Committee Friday, October 17, 2025   Agenda Item     2.Discussion of Preliminary Analysis of the Infrastructure Impacts Associated with Gas Decommissioning; CEQA Status - Not a Project 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 #:2510-5275 TITLE Discussion of Preliminary Analysis of the Infrastructure Impacts Associated with Gas Decommissioning; CEQA Status - Not a Project This will be a late packet report published on October 9, 2025. 7 9 0 1 Climate Action and Sustainability Committee Staff Report From: City Manager Report Type: ACTION ITEMS Lead Department: Public Works Meeting Date: October 17, 2025 Report #:2507-5022 TITLE Discussion of Preliminary Analysis of the Infrastructure Impacts Associated with Gas Decommissioning; CEQA Status - Not a Project RECOMMENDATION This is a discussion item and no recommendation is requested. Staff is briefing the Climate Action and Sustainability Committee (CASC) on preliminary results from the Gas Transition Study to hear questions from the CASC that could inform future work on the analysis and to provide information that could inform S/CAP work planning and financial planning efforts. EXECUTIVE SUMMARY Achieving the community’s greenhouse gas emissions reductions goals requires extensive reductions in building emissions. Regardless of how quickly the community reaches these goals, impacts on the gas utility’s financial structure and physical operations are expected. Staff is studying those impacts. Item 5.D. in the S/CAP workplan, “Gas Utility Financial and Operating Plan”, seeks to develop a financial and operating plan for declining gas utility sales that maintains safety and solvency while providing affordable gas service to remaining gas uses. The study will simulate different patterns of electrification throughout Palo Alto, identify opportunities for gas main and service abandonment and operational efficiencies, and estimate abandonment costs, changes in operational costs, and customer class cost allocations. It will prioritize gas system safety and identify parts of the gas system that may need to be retained for operational reasons even after substantial parts of the system have electrified. Staff is sharing preliminary results from the first part of the Gas Transition Study with the CASC so staff can adjust course as needed as they work to complete the study. 7 9 0 1 BACKGROUND 1 and with the Utilities Advisory Commission (UAC) at its September 3, 2025 meeting. The study involves multiple steps: Scenario Gas Sales Reduction Residential Space and Water Heating Electrification Small and Medium Non- Residential Space and Water Heating Electrification Medical and Industrial Electrification* 1 20%25%25%0% 2 40%50%50%0% 3 60%75%75%0% 4 80%100%100%0% * In practice, some electrification will occur in this sector, but staff does not have good visibility on the potential for electrification in this space due to the prevalence of unique / process loads 1 Climate Action and Sustainability Committee, June 13, 2025, Discussion of Gas Utility Transition Study Scoping, https://cityofpaloalto.primegov.com/meetings/ItemWithTemplateType?id=8207&meetingTemplateType=2&compil edMeetingDocumentId=14791 7 9 0 1 ANALYSIS The City’s consultant, Energeia, presented some preliminary results of study phases 2 and 3 (estimating gas equipment in each home and simulating different levels of electrification) in late August. Attachment A shows estimated quantities of gas equipment in single family homes and multi-family buildings based on gas usage. The preliminary results estimated 96% of single- family homes had at least one major gas appliance. About 85% of single-family water heating and 81% of single-family space heating is estimated to be gas-driven. About 61% of water heating and 50% of space heating equipment in multi-family buildings is estimated to use gas. This aligns with preliminary expectations in the process of community electrification, but these numbers will likely change as results are reviewed in more detail and any data errors or omissions are identified and fixed. Using these estimates the consultant simulated the levels of electrification included in the methodology. The consultant’s simulation found, preliminarily, that as electrification increased to the point that gas use was reduced 20% and 40% (which represents about 25% and 50% electrification of residential buildings and commercial buildings excluding medical and industrial), only a few mains could be abandoned. At 60% reduction in gas use, only about 10% of mains could be abandoned. Opportunities for gas main abandonment began to increase as reduction in gas use stepped from 60% to 80% (75% to 100% electrification of residential and commercial buildings excluding medical and industrial), with the number of mains eligible for abandonment increasing from 10% to 90%. At 80% gas use reduction, about 90% of residential mains were eligible for abandonment and most commercial area mains could be abandoned as well, leaving a small amount of infrastructure available for medical and industrial customers. These results are preliminary and this scenario is still being modeled in more detail. One key insight is that significant electrification and reductions in gas sales could take place before the cost reductions associated with abandoned mains are realized. As noted below, though, only about 40% of gas utility costs decline as gas mains are abandoned, so the rate impact will be limited to rate impacts associated with this portion of costs. In the next phase of the study staff will estimate the scale of potential rate impacts from this disparity between declines in sales and declines in costs. Staff will also refine the underlying simulations and develop tables to provide more detailed insights. A high-level overview of the assumptions and methodology behind the preliminary analysis is included in Attachment A. Staff has also begun phase four of the study, identifying which types of costs are expected to decline based on usage and which costs would require gas main abandonment to decline. A list of these costs is included in Attachment A. Gas supply, gas transmission, and environmental charges decline with the number of units of gas sold, as do demand side management (gas efficiency) and the General Fund transfer. Customer Service costs will eventually decline with gas disconnections. All of these costs together represent about 60% of the gas utility’s total 7 9 0 1 costs. Other gas distribution costs, which represent the remaining 40% of the gas utility’s costs, do not decline with declining sales or customer disconnections. Nearly all gas distribution costs require gas main abandonment before they can be reduced, and they do not necessarily decline linearly. Attachment A includes a table showing all the different cost categories and how they decline. FISCAL/RESOURCE IMPACT 3 (presented at the April 4, 2025 CASC meeting) showed that there are some scenarios in which community benefits from electrification would exceed community costs, including lost gas revenue. Staff and its consultants will complete more detailed estimates of the cost and revenue impacts to the gas utility at various levels of electrification as part of the Gas Transition Study. Staff plans to estimate the cost impacts of various levels of electrification and the impact on various customer classes in the coming months and will return to the UAC and CASC in early 2026 with the results and a list of potential mitigations for any impacts as part of the Gas Transition Study. 3 Climate Action and Sustainability Committee, April 4, 2025, Discussion of Preliminary Sustainability and Climate A ction Plan (S/CAP) Funding Study Results, https://cityofpaloalto.primegov.com/meetings/ItemWithTemplateType?i d=7672&meetingTemplateType=2&compiledMeetingDocumentId=13682 7 9 0 1 STAKEHOLDER ENGAGEMENT This topic was discussed by the UAC at its November 20205 and January 20216 meetings, and since then the need to more carefully assess the costs of transitioning the gas utility has been raised in several meetings of the UAC, S/CAP climate stakeholders, the Council subcommittees focused on climate contexts, and at City Council. The UAC discussed these preliminary results at its October 1, 2025 meeting. Commissioners found the preliminary findings to be validating of their insight expressed at previous meetings that it would be challenging to get whole blocks to disconnect. There was a request to include an 80% gas sales reduction scenario done using a Monte Carlo simulation of gas disconnection rather than just setting residential and small and medium non-residential equipment electrification rates to 100%. There was appreciation expressed for the clarification that 60% of gas utility costs would decline with sales, that only 40% was fixed, but also a request to model those percentages under different gas price assumptions, since commodity prices fluctuate. They also asked questions about current rates of electrification and future plans to accelerate electrification. One Commissioner asked that there be eventual consideration of the pros and cons of trying to sell the gas utility as an option for controlling the potential impact on gas rates of high levels of electrification. Commissioners provided feedback on how to communicate some of the insights more effectively. ENVIRONMENTAL REVIEW The CASC’s discussion of this topic does not meet the California Environmental Quality Act’s definition of a project, pursuant to Public Resources Code Section 21065, and no environmental review is required. ATTACHMENTS Attachment A: Assumptions, Methodology, and Preliminary Key Results from Gas Transition Study Currently in Progress APPROVED BY: Brad Eggleston, Director Public Works/City Engineer 5 Staff Report ID#11639, November 4, 2020, Discussion of Electrification Cost and Staffing Impacts on the City of Pa lo Alto's Electric and Gas Distribution Systems, http://cityofpaloalto.org/civicax/filebank/blobdload.aspx?BlobID=7 8897 6 Staff Report ID#11751, January 6, 2021, Discussion of Projected Electrification Impacts on Gas Utility System Average Rates, https://www.cityofpaloalto.org/files/assets/public/agendas-minutes- reports/agendasminutes/utilities-advisory-commission/archived-agenda-and-minutes/agendas-and-minutes- 2021/01-06-2021special/01-06-21-uac-item-1.pdf Attachment A Assumptions, Methodology, and Preliminary Key Results from Gas Transition Study Currently in Progress This attachment gives a high-level overview of various inputs, estimates, assumptions, methodological detail, and some key preliminary results for the Gas Transition Study. Estimated Quantities of Gas Equipment in Single-Family Homes Based on Gas Use Staff’s consultant, Energeia, used anonymized gas usage information from all homes and businesses in Palo Alto to estimate what gas equipment was in the homes. Seasonal usage patterns were used to estimate water heating and space heating gas use. Other data used included home sizes and whether the County Assessor’s data for the parcel noted a pool. Multi-family building equipment was estimated by looking at the combined gas use for the entire building, including the house accounts, to determine whether space and water heating equipment was centrally located or in units and whether that equipment was gas or electric. Equipment in commercial buildings was not estimated, but basic estimates of how much gas was used for space heating vs. water heating were created. Based on that information the following very preliminary estimates for populations of gas equipment were generated. Note that the total number of single-family and multi-family units identified are a bit lower than would be expected based on other sources, indicating the need to review the underlying inputs for missing data. Note that multi-family gas equipment accounts are expected to be significantly lower than the number of multi-family units in Palo Alto, since many apartment units do not have dedicated gas meters, having electric or central gas space heating and central gas water heating. Equipment # units % gas % electric Single family Water heating 13,077 85% 15% Space heating 82% 18% Multi-family Water heating 3,963 61% 39% Space heating 50% 50% Gas Utility Costs and How Electrification Would Affect them The table below lists the different costs the gas utility incurs, what percentage of the utility’s costs each category represented in FY 2024, and what factors would lead to each category of costs declining. Attachment A Cost Category Varies Based On % of Gas Utility Cost (FY24) Decreases when Commodity, Transportation, and Environmental Sales 41% Sales decline General Fund Transfers Sales 15% Sales decline Demand Side Management Sales 1% Sales decline Customer Service # Customers 4% Customers disconnect Operations and Maintenance (incl. Engineering) Miles of main, main age 16% Lengths of main are abandoned, especially older materials or steel Capital Investment (incl. Engineering) Miles of Main needing Replacement 13% Lengths of main needing replacement are abandoned Administrative Overhead: Mostly staffing 7% Enough lengths of main abandoned that the gas utility needs fewer staff Supply Management Does not vary 2% Gas is no longer used in Palo Alto Debt Service Debt service schedule 1% Debt is paid off Rent Square footage of gas receiving stations 1% Gas is no longer used in Palo Alto Estimated Gas Main Abandonment Opportunity for Different Electrification Levels The City’s consultant ran the following simulations, which loosely aligned with the scenarios discussed with the Climate Action and Sustainability Committee and Utilities Advisory Commission: Scenario Gas Sales Reduction Residential Space and Water Heating Electrification Small and Medium Non- Residential Space and Water Heating Electrification Medical and Industrial Electrification* 1 20% 25% 25% 0% 2 40% 50% 50% 0% 3 60% 75% 75% 0% 4 80% 100% 100% 0% * In practice, some electrification will occur in this sector, but staff does not have good visibility on the potential for electrification in this space due to the prevalence of unique / process loads Attachment A The consultant found the following after simulating several iterations of random electrification among the sectors noted above. The chart below shows the number and percentage of gas mains with the number of connections shown on the x axis. So, for example, under the 60% scenario about 300 mains (about 10%) had no connections and could be removed, while over 500 mains (about 20%) had only one connection. And the number of mains with no connections increased from almost none under the 20% scenario to about 40 in the 40% scenario, over 300 in the 60% scenario, and the vast majority of mains in the 80% scenario. More work is needed to identify the miles of main that can be removed in each scenario, how many mains need to be retained for operational purposes, and how many mains have minimal gas usage and could be retired with the right outreach and incentives to the connected building owners. October 17, 2025 www.cityofpaloalto.org Gas Transition Study Preliminary Results Climate Action and Sustainability Committee Background •City, State, and Regional policies drive building electrification •If successful, gas use will decline significantly •The City must plan for financial, physical, and safety impacts •This will enable a safe, smooth, equitable transition Council 2025 Priority Objective #32:Share preliminary analysis of strategies for a physical and financial transition of the gas utility to relevant policymakers and stakeholders 2023-2025 S/CAP Work Plan Work Item 5D: Develop financial and operating plan for declining gas utility sales 2 Study Goals •Understand physical impacts of electrification on gas infrastructure •Estimate operational and financial impacts •Estimate cost of gas main and service abandonment •Develop strategies to: •facilitate abandonment •mitigate physical and financial impacts 3 Study Outputs 4 Other Outputs •Cost impacts to other utilities •General Fund transfer and UUT impacts For the Gas Utility •Cost of gas main/service abandonment •Operational cost impact •System average rate changes by class •How much funding would be needed from some other source to keep gas rates in line with current forecasts •Cap and Trade cost and revenue impacts Overview of Study Progress 5 Study Component Status 1 Build System Model Completed Apr 2025 2 Equipment estimation First draft completed, being reviewed and refined 3 Simulate main abandonment under various electrification scenarios First draft completed, being reviewed and refined 4 Cost categorization and estimates of cost impacts by electrification scenario Partially complete 5 Evaluate impacts on customer groups Not started 6 Identify mitigations At brainstorming stage Electrification Scenarios to Model 6 Scenario Reduction in Gas Sales Water and Space Heating Electrification Residential Small / Med Commercial Large Comm / Industrial 1 20%25%25%0% 2 40%50%50%0% 3 60%75%75%0% 4 80%100%100%0% •Medical and Industrial electrification excluded •Gas disconnection likelihood evaluated for buildings with water and space heating already electrified Preliminary Result:Estimated Equipment Population 7 Equipment # units in data set % gas %electric Single family Water heating 13,077 85%15% Space heating 82%18% Multi-family Water heating 3,963 61%39% Space heating 50%50% TITLE 40 FONT BOLD Subtitle 32 font Preliminary Result: Cost Categories and Cost Drivers Outer Circle = Cost Categories Inner Circle = Cost Drivers Key Insight: Over 60% of costs decrease with declining sales and customer disconnections Preliminary Result:Mains Eligible for Abandonment 9 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 20% Reductions 40% Reductions 60% Reductions 80% Reductions Working Group Feedback 10 •Clarifications about the study methodology and why time and adoption rates over time do not factor into the study •Recommended looking at what other cutting-edge cities and states are doing •Expectation that creativity will be needed to navigate financial and physical impacts of declining gas sales •Discussions of the value to the gas utility of electrifying a block •Recommended helping people try out induction cooking Next Steps 11 •By end of 2025, complete modeling: •Refine data and methodology for estimating equipment population •Refine simulations of electrification scenarios and their outputs •Test simulated electrification scenarios in system model to identify any system operational issues •Estimate utility costs and revenues for each scenario •Estimate impacts to specific gas customer groups •Brainstorm strategies to manage issues identified by the modeling •Early 2026: Final report development