HomeMy WebLinkAboutStaff Report 2510-5281CITY OF PALO ALTO
CITY COUNCIL
Monday, December 15, 2025
Council Chambers & Hybrid
4:30 PM
Agenda Item
10.Reaffirmation of the Carbon Neutral Plan and the Renewable Energy Credit Exchange
Program as Recommended by the Utilities Advisory Commission; CEQA Status: Not a
project
City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: Utilities
Meeting Date: December 15, 2025
Report #:2510-5281
TITLE
Reaffirmation of the Carbon Neutral Plan and the Renewable Energy Credit Exchange Program
as Recommended by the Utilities Advisory Commission; CEQA Status: Not a project
RECOMMENDATION
Staff and the Utilities Advisory Commission (UAC) recommend that the City Council:
1) Reaffirm the Carbon Neutral Plan, including the use of Renewable Portfolio Standard
(RPS) eligible, unbundled RECs (Bucket 3 RECs) to neutralize any residual emissions
resulting from the use of an hourly emissions accounting methodology;
2) Reaffirm the continuation of the “REC Exchange Program,” whereby the City exchanges
bundled RECs from its long-term renewable resources (Bucket 1 RECs) for Bucket 3 RECs,
to the maximum extent possible, while maintaining compliance with the state’s RPS
regulations, in order to allocate additional revenues toward local decarbonization efforts;
and
3) Direct staff to return to the UAC and City Council in 2028 to provide another review of the
program’s impacts.
EXECUTIVE SUMMARY
In August 2020, the City Council approved amendments to the electric utility’s Carbon Neutral
Plan that clarified and modified policies regarding the sales and exchanges of renewable energy
credits (RECs) (Staff Report 115561). The amendments permitted the exchange of Bucket 1
(primarily in-state) RECs for Bucket 3 (primarily out-of-state) RECs, provided the City maintains
compliance with State Renewable Portfolio Standard (RPS) regulations. A portion of the earnings
from the program were directed to be used to offset electric operational costs and mitigate the
economic impacts of the coronavirus pandemic, and the remainder were reserved for local
decarbonization programs. Since then, staff has purchased and sold RECs for Calendar Years (CYs)
1 Staff Report 11556: https://www.paloalto.gov/files/assets/public/v/1/agendas-minutes-reports/reports/city-
manager-reports-cmrs/year-archive/2020-2/id-11566.pdf
2020 through 2025 in accordance with the Carbon Neutral Plan amendments, resulting in net
earnings of $27.3 million, or about $4.5 million per year.
3, of which about $10.1 million have been allocated toward local decarbonization
efforts,4 while the remainder have been used to offset operational costs and provide for general
customer rate reduction.
BACKGROUND
5). The City has achieved its Carbon Neutral Plan
objectives each year starting in 2013, primarily via purchases made through its long-term
renewable energy contracts, which all provide the City with energy and Bucket 1 RECs. Due to its
pursuit of these objectives, the City’s electric supply portfolio currently easily exceeds the state’s
Renewable Portfolio Standard (RPS) procurement requirements.
6 to take
advantage of the significant cost difference between Bucket 1 and Bucket 3 RECs7 to generate
additional revenue for the City’s electric utility and to fund local decarbonization initiatives
(Resolution 99138, Staff Report 115569). The Council directed that for 2020 and 2021, two-thirds
of the proceeds from this program would go to electric operating cost reductions and one-third
toward local GHG emission reduction programs, and that for 2022 onward all of the earnings, up
3 The remainder of the $27.3 million in net revenue from all REC transactions over this period was the result of
sales of Bucket 1 RECs that exceeded the City’s total retail sales volumes, rather than for REC Exchange purposes.
4 These funds have been set aside for future local decarbonization spending, but to date the funding for these
efforts has come solely from Public Benefits funds, Low Carbon Fuel Standard revenues, and Gas Cap & Trade
allowance revenues.
5 Resolution 9322: https://www.paloalto.gov/files/assets/public/v/1/city-clerk/resolutions/reso-9322-33835.pdf
6 The exchange of bundled RECs from the City’s in-state, long-term renewable resources (Bucket 1 RECs) for RPS-
eligible, unbundled RECs (Bucket 3 RECs), which usually come from out of state sources.
7 Due to limitations on the use of Bucket 3 RECs for compliance with the state’s RPS mandate (only 10% of a
utility’s RPS procurement may consist of Bucket 3 RECs), a significant financial premium currently exists for in-state
bundled renewable energy resources (Bucket 1 RECs).
8 Resolution 9913: https://www.paloalto.gov/files/assets/public/v/1/city-clerk/resolutions/reso-
9913.pdf?t=40151.26
9 Staff Report 11556: https://www.paloalto.gov/files/assets/public/v/1/agendas-minutes-reports/reports/city-
manager-reports-cmrs/year-archive/2020-2/id-11566.pdf
to the amount of funds available in the Cap and Trade Reserve, would be devoted to emission
reduction programs17.
ANALYSIS
Carbon Neutral Plan Review
annual
accounting of the City’s load and its carbon neutral electric resources: an electric supply portfolio
with “annual net zero greenhouse gas (GHG) emissions, measured at the Citygate, in accordance
with The Climate Registry’s Electric Power Sector protocol for GHG emissions measurement and
reporting.” At the time this definition was adopted, this was the most granular accounting
approach feasible (given the lack of hourly grid emissions data) or necessary (given the small
amount of solar capacity installed at that point, and the resulting emissions profile of grid
electricity).
hourly carbon emissions accounting standard. This modification was made
because: (a) hourly grid emissions data had recently become available, and (b) the large volume
of solar generation on the grid at that point had yielded a wide variation in grid emissions
intensities over the course of the year and any given day.
REC Exchange Program Results (2020-2025) and Projections (2026-2030)
18 These REC Exchange transactions have yielded a total of $12.7 million in net revenue, or
about $2.1 million per year.
17 The exact funding mechanism for the local decarbonization spending allocates all net revenues earned from the
REC Exchanges to local decarbonization, up to the amount available in the City’s Cap and Trade Reserve.
18 The analysis in this report includes only the REC transactions that were the direct result of Council’s approval of
the REC Exchange Program. Staff purchased additional Bucket 3 RECs and sold additional Bucket 1 RECs during this
time period (96,198 additional RECs purchased and 49,814 additional sold); however, these transactions were
Table 1: Summary of REC Exchange Transactions and Revenue, CY 2020-202521
2020 2021 2022 2023 2024 2025
REC Exchange Volume22 (MWh)177,494 287,210 179,290 44,062 31,824 115,000
Bucket 1 REC Sales Revenue ($M)1.96 4.01 2.68 1.78 2.28 3.87
Bucket 3 REC Purchase Cost ($M)0.60 1.47 0.91 0.26 0.15 0.45
Net Revenue ($M)1.36 2.54 1.77 1.52 2.13 3.42
RPS Level (%)33.0%35.0%38.9%39.1%41.0%46.0%
When presenting the REC Exchange Program to Council for approval in 2020, staff estimated that
it would generate roughly $3.0 million per year in net revenue for CY 2021-2025, with a significant
tapering off thereafter due to the steady increases in the statewide RPS requirement level. Actual
net revenues from all REC transactions have thus far come in significantly higher than this initial
estimate (largely due to a huge spike in Bucket 1 REC prices that occurred in 2024), although
many of these REC sales were related to Bucket 1 RECs that exceeded the City’s retail sales totals,
and thus are not counted in the REC Exchange Program totals.
Over the next five years, staff estimates that the program will yield approximately $9.5 million in
total net revenue, or $1.9 million per year, as shown in Table 2 below. The REC Exchange
Program’s earnings are projected to decline sharply in future years, primarily due to the ramping
up of the state’s RPS requirement levels, which reduces the volume of Bucket 1 supplies the City
is able to sell. In addition, the City has begun to experience load growth in recent years (including
a 12% increase from 2022 to 2024), and some of the City’s older renewable energy contracts are
set to expire in the coming years; both factors further reduce the volume of Bucket 1 supplies
available to exchange.
Table 2: Projected REC Exchange Transactions and Revenue, CY 2026-2030
2026 2027 2028 2029 2030
REC Exchange Volume (MWh)155,000 177,000 130,000 48,000 8,000
Bucket 1 REC Sales Revenue ($M)3.87 4.43 3.25 1.20 0.19
Bucket 3 REC Purchase Cost ($M)0.93 1.15 0.91 0.36 0.06
Net Revenue ($M)2.94 3.28 2.34 0.84 0.13
RPS Level (%)50%52%55%57%60%
necessary, either to satisfy the City’s Carbon Neutral Plan goals during a drought period (Bucket 3 REC purchases in
2021 and 2022), or because the City had an overall surplus of such supplies relative to its RPS procurement
requirements (Bucket 1 REC sales).
22 The volume of PCC1 RECs that are sold and the volume of PCC3 RECs that are purchased, pursuant to the REC
Exchange Program.
Impact on Palo Alto’s Supply Portfolio
As discussed in Staff Report 1155624, although exchanging in-state RECs for out-of-state RECs has
no real impact on the City’s total electricity-related carbon emissions, the downside of this
strategy is that it has a negative impact on the City’s reported portfolio make-up and carbon
emissions. California’s RPS law gives preferential treatment to in-state renewable resources over
out-of-state resources, and the same is true of how such resources are reported to customers on
the annual Power Content Label (PCL). The California Energy Commission’s (CEC’s) PCL
regulations require that utilities report their out-of-state (Bucket 3) REC purchases as
“unspecified sources of power” rather than under the appropriate renewable energy technology
category. Furthermore, utilities are now required to report the annual average GHG emissions
intensity of their electric supply on their PCLs—and again, rather than being treated as carbon-
free resources like other forms of renewable energy, Bucket 3 RECs are treated as having an
emissions intensity equivalent to generic market power purchases (944 lbs of CO2 per MWh,
which is almost 20% greater than the average emissions intensity of natural gas generation).
As a result, rather than reporting a supply mix that is over 60% renewable and nearly
carbon-free,25 under the REC Exchange Program the City must report a portfolio mix that is less
than 40% renewable and is responsible for a moderate amount of carbon emissions. Figure 1
below depicts the City’s projected electric supply portfolio mix in CY 2025, before and after
accounting for the REC Exchange Program transactions. Meanwhile, the estimated annual
average GHG emissions intensities that the City would report on its PCL for these two portfolios
are 45 and 159 lbs CO2 per MWh, respectively.26
24 Staff Report 11556: https://www.paloalto.gov/files/assets/public/v/1/agendas-minutes-reports/reports/city-
manager-reports-cmrs/year-archive/2020-2/id-11566.pdf
25 Although the City’s baseline portfolio mix is entirely comprised of renewables and hydroelectric resources, the
CEC’s PCL regulations assign a small emission intensity to all biomass generation such as landfill gas generation,
which currently accounts for about 9% of the City’s baseline electric supply mix.
26 For reference, the statewide average GHG emissions intensity for CY 2024 was 359 lbs CO2 per MWh, while the
City’s average GHG emissions intensity as reported on its PCL (and accounting for the REC Exchange Program
transactions) was 21 lbs CO2 per MWh. The City’s emissions intensity is projected to be higher for CY 2025 than for
CY 2024 because of a significant decline in hydroelectric generation this year.
Figure 1: Projected Electric Supplies in CY 2025, with and without REC Exchange Transactions
Use of REC Exchange Funds
Of the $12.7 million in net revenue that the REC Exchange Program has yielded since 2020,
approximately $2.6 million of it has been directed towards general electric operating cost
reductions and the remaining $10.1 million has been set aside for future spending on local
decarbonization programs.30 This split of the overall program funds reflects Council’s original
direction that two-thirds of the net proceeds would be used to offset electric supply costs and
the remainder would be used to fund local decarbonization efforts; then, when Council
reauthorized the program in 2022, it directed that all of the net proceeds (up to the amount of
funds available in the Cap and Trade Reserve) be used for local decarbonization.
If the recommendation to continue the REC Exchange Program is approved, all of the net revenue
from the program (whose estimates are shown in Table 2) would continue to be available for
these decarbonization efforts. The programs that this funding is intended to support include the
advanced heat-pump water heater (HPWH) pilot, the Home Efficiency Genie program, and multi-
family building electrification efforts. However, to date the funding for these programs has been
provided through other sources (e.g., Public Benefits funds, Low Carbon Fuel Standard credits,
30 Again, the mechanism for funding the local decarbonization programs is that an amount equivalent to the net
revenues earned from the REC Exchanges would be allocated from the City’s Cap and Trade Reserve to local
decarbonization efforts. Although, if the REC Exchange Program’s net revenues exceed the revenues from selling
the electric utility’s Cap and Trade allowances in a given year, the local decarbonization funding allocation would
be limited by the Cap and Trade allowance revenue amount.
and natural gas carbon allowances), leaving all of the REC Exchange Program funding that has
been earmarked for local decarbonization efforts available to fund these programs in the future.
Next Steps
FISCAL/RESOURCE IMPACT
STAKEHOLDER ENGAGEMENT
ENVIRONMENTAL REVIEW
ATTACHMENTS: None
APPROVED BY: