HomeMy WebLinkAboutStaff Report 2511-5562CITY OF PALO ALTO
Finance Committee
Regular Meeting
Tuesday, April 07, 2026
Agenda Item
2.Discussion of Electrification State Caps and Additional Discretionary Subsidies and
Potential Recommendation to City Council Staff Presentation
Finance Committee
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: Planning and Development Services
Meeting Date: April 7, 2026
Report #:2511-5562
TITLE
Discussion of Electrification State Caps and Additional Discretionary Subsidies and Potential
Recommendation to City Council
RECOMMENDATION
Staff recommends that the Finance Committee recommend the City Council adopt an ordinance
amending the Fiscal Year (FY) 2026 Municipal Fee Schedule to reflect subsidies for
Electrification fees to further the City’s sustainability goals.
EXECUTIVE SUMMARY
Through the development of the FY 2026 Municipal Fee Schedule, the Finance Committee
expressed interest in subsidizing fees related to electrification to further the City’s sustainability
goals. When the FY 2026 Municipal Fee Schedule was adopted, these fees were inadvertently
not subsidized. Although some fees related to electrification are subject to a State cap that
limits what the City can charge for the fees without a written finding, other fees, such as those
for new or replacement electric service, heating, ventilation, and air conditioning (HVAC)
permits, or permits for electric vehicle charging stations (EVCS), can be full cost-recovery or can
be subsidized through City Council’s policy decisions. Given the current financial forecast, staff
seek feedback from the Finance Committee on the desired level of subsidy for these activities
before returning to the City Council for adoption of new fees.
BACKGROUND
The City conducted a comprehensive review of Planning and Development Services’ fees for
services as part of the development of the FY 2026 Operating Budget. This fee study was
discussed with the Finance Committee on March 4, 2025, and the Finance Committee
recommended adoption of the fees with a recommendation to City Council to subsidize certain
fees to further advance the City’s goals with relation to sustainability and climate action.
At the end of their March 4, 2025, discussion the Finance Committee unanimously voted to:
Recommend the City Council amend the Planning and Development Services municipal
fees as outlined in Attachment B as part of the FY26 budget and municipal fee schedule
with additional recommendation for strong subsidy for electrified appliances and not for
gas, except for consideration of compliance with seeking permit.
As part of the adoption of the FY 2026 Operating Budget, the City Council voted to adopt the
municipal fee schedule, which brought FY 2026 fees for services into alignment with the fee
study presented to the Finance Committee through the March 4, 2025. However, certain fees
were included at full-cost recovery levels – inadvertently contravening staff’s recommendation,
subsequent endorsement from the Finance Committee, and the intent of discussions on
subsidizing electrification. This has resulted in the FY 2026 adopted fees for activities related to
electrification exceeding those of nearby jurisdictions, complaints from applicants pursuing
electrification, and exceeding State limits on certain fees.
ANALYSIS
This report presents options for aligning electrification fees with previous conversations to
further the City’s sustainability goals. As seen in the Finance Committee’s March 4, 2025,
motion (above) there was interest from the committee in subsidizing electrification permits
that were inadvertently not applied through the adoption of the FY 2026 Municipal Fee
Schedule.
There are three categories of electrification fees presented for discussion; those that are
‘capped’ (limited) by state law; those that apply to new/replacement electric service, including
HVAC; and, EVCS. Staff’s recommendations for how to proceed for each of these three
categories are discussed below.
State Limits on Photovoltaic (Solar Energy) Systems per California Government Code 66015(a)
and (b).
The State of California sets ‘caps’ on fees for photovoltaic (solar energy) systems fees that the
City cannot exceed without written findings documenting that actual costs exceed the state
caps. The City has the ability and documentation necessary to make such findings through its
recent fee study. Staff recommends aligning with state caps for clarity with applicants, parity
with neighboring jurisdictions, and to reflect the previous interest in subsidizing electrification
activities. Table 2 below presents the solar fees that are limited by state caps.
Table 1. State Caps on Photovoltaic Systems (PV) compared to current fees
Fee Title
FY
2025
Fee
($)
FY
2026
Fee ($)
FY 2024
Permits
Issued
State
Cap /
Proposed
Fee ($)
Difference
($)
%
Subsidy
% Cost
Recovery
Potential
annual $
Value of
subsidy
Multi-Family /
Commercial System
(10kW or less)
755 1,938 -1,000 (938) 48% 52% -
Multi-Family /
Commercial System
(11kW-49kW)
1,013 2,613 - 1,000 (1,613) 62% 38% -
Multi-Family
Commercial System
(50kW or greater)
755 3,471 2 1,0001 (2,471) 71% 29% (4,942)1
Single-Family
Systems (10kW or
less)
349 1,481 128 450 (1,031) 70% 30% (131,968)
Single-Family
Systems (greater
than 10kW)
223 1,868 73 4502 (1,418) 76% 24%(103,514)2
Single-Family
Systems
(Reinstallation)
1,002 450 (557) 55% 45% -
SolarAPP+PV and
ESS
- 1,331 - 450 (881) 66% 34% -
SolarAPP+PV - 655 - 450 (205) 31% 69% -
Solar Hot Water
System
- 665 - 450 (215) 32% 68% -
Energy Storage
System – Residential
-1,859 -450 (1,409)76%24%
Energy Storage
System –
Commercial
-3,255 -1,000 (2,255)69%31%
Note 1: $7 per kw>51k but less than 250k, $5 per kw>250k. As a result, the "difference" would reduce depending on true scale of proposed system.
Note 2: Additional $15/kw > 15. As a result, the "difference" would reduce depending on true scale of proposed system.
permits would cause lesser financial impacts on cost recovery levels. Through January 2026,
approximately $113,000 in revenues have been impacted by these State caps. Given the
growing interest in electrification, in both commercial and residential sectors, staff will continue
to closely monitor these activity levels to determine precise impacts of this policy subsidy.
1
1 Future legislation could limit permit fees like photovoltaic permits. Senate Bill (SB) 222 is bill advancing through
the state legislature.
Table 2. Electric Service and HVAC Permits – Base Fee Subsidy
Fee Title
FY
2025
Fee*
($)
FY
2026
Fee
($)
Proposed $
Subsidized
Cost (Less
Base Fee)
New
Cost
Recovery
New
Subsidy
FY
2024
Activity
Level
Annual $ Value
estimate of
subsidy
Electrical Service - New or
Replacement: 400 amp and
Greater
745 958 653 68%32%1 (305)
Electrical Service - New or
Replacement: Less than 400
amp
497 621 316 51%49%187 (57,035)
HVAC Systems (i.e., Air
Conditioners, Heat Pumps,
Air Handling Unit):
Multi-Family / Commercial
(Groups of 5): Direct
replacements
64 902 597 66%34%--
HVAC Systems (i.e., Air
Conditioners, Heat Pumps,
Air Handling Unit):
Multi-Family / Commercial
(Groups of 5): New - with
curb
64 1,539 1,234 80%20%--
HVAC Systems (i.e., Air
Conditioners, Heat Pumps,
Air Handling Unit):
Multi-Family / Commercial
(Groups of 5): New - without
curb
64 1,232 927 75%25%--
HVAC Systems (i.e., Air
Conditioners, Heat Pumps,
Air Handling Unit):
Single-Family*
64 714 328 46%54%219 (84,534)
*This aligns with the City’s fee for ’Residential Gas Water and Space Heating Equipment – Stand Alone’ set by Council in September 2025. The
Annual estimated subsidy impact includes the estimated impacts associated with gas subsidy.
Electric Vehicle Charging Stations (EVCS)
The final discussion area for electrification subsidies relates to EVCS for both residential and
commercial applicants.
The department’s 2025 Fee Study calculated 100% cost-recovery for processing permits. These
levels were applied through the Municipal Fee Schedule process, inadvertently contravening
the recommendation from the Finance Committee to apply a policy subsidy. Since the fees
were adopted, there have also been numerous complaints from EVCS applicants about the high
cost of permits, especially as it relates to neighboring jurisdictions and the cost for the EVCS
equipment.
Given the costs associated with processing permits for EVCS through the fee study
methodology, a base fee subsidy (as discussed above for Electric Service and HVAC units) would
not bring the City into alignment with neighboring jurisdictions nor address the relative cost of
the permit compared to the EVCS equipment. There is also concern that the relatively high
price point of the permit could dissuade applicants from obtaining a permit. This issue of permit
avoidance is one that is contrary to the City’s interests; the City needs to understand which
households are installing electric vehicle charging stations not only from a safety perspective
but also from a utilities load management perspective.
Table 3. Electric Vehicle Charging Stations Refined Review Process Fee
Fee Title
FY 2025
Fee* ($)
FY 2026
Fee ($)
Refined
Review
Process Fee
($)
Difference
($)
FY 2024
Activity
Level
Annual $
Value
impact
EVCS: Single-Family (Level 1 and 2) 209 1,327 307 1,020 121 (123,420)
EVCS: Single-Family (Level 3) 317 1,527 489 1,038 0
EVCS: Multi-Family / Commercial
(Level 1 and 2): 1-6 Stations
483 4,326 3,338 988 12 (11,856)
EVCS: Multi-Family / Commercial
(Level 1 and 2): Each add’l 6 stations
91 1,134 1,036 98 167 (16,366)
EVCS: Multi-Family / Commercial
(Level 3 and 4): 1-6 Stations
577 5,238 3,806 1,432 1 (1,432)
EVCS: Multi-Family / Commercial
(Level 3 and 4): Each add’l 6 stations
113 1,134 1,036 98 1 (98)
FISCAL/RESOURCE IMPACT
STAKEHOLDER ENGAGEMENT
2 There were a number of meetings with internal stakeholders,
including the Utilities Department and Planning and Development Services to align on
approaches for incorporating Finance Committee’s Spring 2025 feedback. No additional
external stakeholder engagement was conducted for this report since it aligns FY 2026
Municipal Fees with previous feedback and intent from Finance Committee.
ENVIRONMENTAL REVIEW
project which may result in a potentially significant physical impact on the environment. CEQA
Guidelines section 15378(b)(4).
APPROVED BY:
April 7, 2026 www.paloalto.gov
Discussion of Electrification State Caps and Additional Discretionary Subsidies
Finance Committee
1
Electrification Fees and Subsidy Levels
Solar & Energy
Storage (PV/ESS)
State-capped fees
~226K Estimated Impact*
Electric Service
& HVAC Permits
Discretionary subsidies
~75K Estimated Impact*
EV Charging
Stations (EVCS)
Process streamlining
Pending AB 1820
•Purpose: Discuss potential subsidies, and subsidy sources, for various
electrification activities in context of current financial forecast
•Goal: Provide feedback on potential subsidies as they relate to the
City’s overall financial framework; incorporate feedback into FY 2027
Operating Budget and FY 2027 Municipal Fee Schedule
*Updated figures based on Q1-Q3 FY2026 activity levels.
2
Background
•FY 2027’s Budget projects a $14.9 million General Fund deficit
•Balancing strategies include exploring new revenue sources, $7 million
in General Fund reductions, Capital Improvement Fund reductions,
pension cost contributions, and use of stabilization reserves.
•State Cap currently applies to certain solar and energy storage system
fees – this impacts Development Services’ cost recovery levels and
thereby costs the General Fund via lower revenues as well
2
Background (continued)
•Planning and Development Services underwent fee study to inform fee
levels for FY 2026 Municipal Fee Schedule; aligned costs of services with
full cost-recovery
•Through April 2025 discussion with Finance Committee, certain
electrification fees were identified for subsidies; inadvertently not
subsidized as part of 2026 Municipal Fee Adoption
•Financial Forecast has changed significantly since April 2025
•Discussion tonight is centered on those fees, and next steps across three
categories:
•State Capped (limited) fees (Photovoltaic/Solar, ESS)
•Electric Service and HVAC Systems
•Electric Vehicle Charging Stations (EVCSs)
3
State Caps – Photovoltaic (PV/Solar) and ESS
•State Law limits what cities can charge for photovoltaic (solar) systems and
energy storage systems without written finding
•Currently limited to state caps for PV/Solar and ESS which maintains
alignment with neighboring jurisdictions
•This alignment is also consistent with 2025 Finance Committee interest in
subsidizing this activity, but precludes Development Services from reaching
full cost-recovery
Alternative Option: Recent fee study provides necessary documentation
should City choose to pursue written finding to achieve full cost recovery,
can offer rebates through Utilities programs to lower applicant cost
4
Discussion and Next Steps
•Either follow the state caps (limits) for Photovoltaic and Energy Storage
Systems OR pursue a written finding that would allow the City to exceed
that cap and attain 100% cost recovery
•What level of cost-recovery should be pursued?
•Should subsidies be applied; if so, what funding source e.g.
General Fund or rebated through Utilities Programs?
•Additional discretionary subsidies for Electric Service and HVAC Permits
– subsidize or attain 100% cost recovery
•If subsidized, what is the funding source?
•Proposed streamlining of EVCS charges and implementation through
FY2027 Municipal Fee process