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HomeMy WebLinkAboutStaff Report 2604-6204CITY OF PALO ALTO Climate Action and Sustainability Committee Friday, April 17, 2026   Agenda Item     1.Review and Discussion of Scope of Policy Research and Analysis Planned for 2026-2027 S/CAP Work Plan Items CA13, CA14, and CA16 focused on the Regulatory and Financial Strategies and Scenarios for Community-wide Electrification; 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: April 17, 2026 Report #:2604-6204 TITLE Review and Discussion of Scope of Policy Research and Analysis Planned for 2026-2027 S/CAP Work Plan Items CA13, CA14, and CA16 focused on the Regulatory and Financial Strategies and Scenarios for Community-wide Electrification; CEQA Status – Not a Project This item will be a late packet publication on 4/9/26. 9 3 6 0 Climate Action and Sustainability Committee Staff Report From: City Manager Report Type: ACTION ITEMS Lead Department: Public Works Meeting Date: April 17, 2026 Report #:2602-5956 TITLE Review and Discussion of Scope of Policy Research and Analysis Planned for 2026-2027 S/CAP Work Plan Items CA13, CA14, and CA16 focused on the Regulatory and Financial Strategies and Scenarios for Community-wide Electrification; CEQA Status – Not a Project RECOMMENDATION This is a discussion item to engage the Climate Action and Sustainability Committee (CASC) about regulatory options staff intends to explore and scenarios and strategies it intends to model, and to collect feedback to ensure the scope aligns with community priorities. No action or recommendation is requested. EXECUTIVE SUMMARY This report outlines the key elements staff plans to evaluate in developing policy options for community-wide electrification, including potential regulations, scenarios for the pace of electrification, the City’s role and strategies, and related issues such as carbon pricing and the transition from gas. Staff intends to complete this analysis by the end of 2026, with the goal of CASC and UAC review in December 2026 or Q1 2027. To facilitate this rapid timeline, staff plans to seek feedback from the CASC in June on the policy options to be analyzed and the scope of the analysis to ensure it effectively enables CASC, UAC, and City Council policy review and decision making. To enable development of these policy options staff is seeking CASC feedback on regulatory approaches staff is considering integrating into the policy options. The report includes a survey of regulations and pricing approaches used in other jurisdictions; some outside of California. Not all elements reviewed will necessarily be feasible for final policy packages due to legal, operational, or business constraints. However, staff is seeking CASC feedback on the list of regulatory items to explore—especially priorities, gaps, or concerns—and will incorporate that input when returning with specific policy packages for analysis, ideally before the Council’s 9 3 6 0 summer break. Feedback is intended to ensure staff work is focused and the prospective detailed analysis completed is in alignment with expectations. BACKGROUND 1 As part of the 2023-2025 S/CAP Work Plan4 staff worked with a consultant, E3, to establish an S/CAP Funding Model and supporting input data to model the costs, benefits, and funding needs of different scenarios and strategies for community-wide electrification.2 3 which includes Climate Action work plan items CA 13 (Develop Funding and Financing Strategies for Consideration), CA 14 (Regulatory Measures), and CA 16 (Cost-Based Pricing of Non-Electric Decarbonization and Inefficient Electrification). This staff report outlines how staff intends to further these work items over the course of this year. 4 and October 17, 20255 meetings, respectively, suggested that while only about 40% of gas utility costs were associated with the fixed costs of distributing gas, meaning they did not necessarily decline with declining gas usage, reductions in those costs would require very high levels of electrification. It would take very high levels of electrification before there were enough gas mains without usage that could be abandoned and result in reductions in costs of operating the distribution system. This transitional cost will be critical to consider in any strategic analysis. ANALYSIS 1 https://www.paloalto.gov/climateaction 2 Climate Action and Sustainability Committee Special Meeting, December 13, 2025; Agenda Item #A; SR #2507- 5025, https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=84030&dbid=0&repo=PaloAlto 3 City Council, March 2, 2026; Agenda Item #9; SR #2602-5985, https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=86664&dbid=0&repo=PaloAlto 4 Utilities Advisory Commission, October 1, 2025; Agenda Item #2; SR #2502-4137, https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=84155&dbid=0&repo=PaloAlto 5 Climate Action and Sustainability Committee, October 17, 2025; Agenda Item #2; SR #2507-5022, https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=83904&dbid=0&repo=PaloAlto 9 3 6 0 scenarios for community-wide electrification and the funding needs for each. These scenarios gave insight into the financial dynamics of community-wide electrification, but were not actionable, in part because they were based on a 2024 policy environment. End of life replacement regulations, where cost-effective A building emissions savings ordinance, where efficiency or electrification measures are funded (or completed, if preferred) upon building sale Building performance standards, where larger commercial buildings are required to meet efficiency or emissions standards that tighten over time Rental habitability standards that require landlords to implement a certain level of energy efficiency over time. Staff would explore whether and how such standards could be used for electrification Tenant “right to plug” rules requiring landlords to allow tenants to install EV charging unless they provide it themselves. Rules like these could be paired with City programs to make such installations easier for both tenants and landlords. 9 3 6 0 Staff would pair regulatory options with City program strategies to develop policy options that vary in the pace at which the community achieves its emissions goals. Staff would return with these policy options for CASC feedback in June before completing modeling to ensure they cover a complete range of policy options the CASC believes the City Council would want to consider. The policy options would include an updated “business as usual” baseline for what electrification would occur absent any City regulatory or programmatic actions, and would include the infrastructure investment needed to support that electrification under the baseline scenario. It would then include several other policy options, including: Options that maintain current levels of electrification program spending, though adapted to maximize cost-efficiency and complemented by local regulations, with a prediction of how quickly the community would achieve its emissions goals at that level of spending. Policy options designed to achieve specific targets, such as 80x35, 80x40, and 80x45 11 and Low Carbon Fuel Standard revenues), new taxes, or utility ratepayer revenues (e.g. through a surcharge), though the latter requires analysis of the rate impact and potential electrification-related cost for any given proposal. The legal requirements for these revenue sources, such as ballot measures, would be highlighted and the timelines for their implementation would be factored into the scenarios. Any uncertainties about these revenue sources (such as long-term availability of special revenue sources) would be factored in as well. 11 Cap and Invest was previously known as Cap and Trade. While the funding sources have been reauthorized through 2045, Air Resources Board rulemakings continue (https://ww2.arb.ca.gov/rulemaking/2026/cap-and- invest2026) and there continues to be uncertainty about revenue amounts and limitations on use of revenue. 9 3 6 0 There has been some discussion by the CASC and community environmental stakeholders about including a wider variety of global environmental costs within Palo Alto’s gas rates. It is possible that under high electrification scenarios declining sales could lead to an increase in gas rates if fixed costs were not reduced as quickly as sales declined, which could have a similar effect, though this is less likely in early years. The California constitution requires the City’s gas rates to reflect only the City’s cost to provide gas service to ratepayers, unless 2/3 of Palo Alto ratepayers approve adding additional costs to their rates. Attachment B includes a survey of different carbon pricing approaches. FISCAL/RESOURCE IMPACT STAKEHOLDER ENGAGEMENT 13 13 Climate Action and Sustainability Committee Special Meeting, December 13, 2025; Agenda Item #A; SR #2507- 5025, https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=84030&dbid=0&repo=PaloAlto 9 3 6 0 ENVIRONMENTAL REVIEW This update is for informational purposes only with no action requested by the CASC, and therefore it is not a project subject to review under the California Environmental Quality Act (CEQA). ATTACHMENTS Attachment A: Survey of Electrification Regulations Attachment B: Survey of Carbon Pricing Approaches APPROVED BY: Brad Eggleston, Director Public Works/City Engineer Attachment A 1 0 6 1 5 Survey of Electrification Regulations Activity/Trigger Regulation Description Examples Notes Energy use standards for new construction that take source energy into account, which ensures the carbon-related costs of mixed fuel homes are included in calculations Electric readiness when installing mixed fuel equipment EV charger / EV readiness requirements California statewide energy code, local amendments with more stringent standards Already in effect in Palo Alto, regulations regularly reviewed and improved. Electric readiness upon tenant improvement / unit or room remodel with hydronic heat system – ensure hydronic terminals can be resized to handle lower temp water. High temperature gas- fueled hydronic systems use smaller fans, and heat pumps cannot provide high enough temperature water for the smaller fans None found This is a potential form of electrification readiness to investigate that addresses commonly encountered challenges replacing gas hydronic systems. This may or may not be technically feasible upon review. New Construction and major remodels Major renovation ordinance (gas only allowed if electric cannot be done safely or feasibly) San Francisco implementing this effective July 1, 2026 Track ordinance AC→HP regulation: require either efficiency measures or a heat pump replacement upon replacement of an air conditioning unit Mountain View – already in effect (January 1, 2026) Palo Alto – becomes effective Jan 1, 2027 Already adopted by Palo Alto. Implementation planning in progress. Tracking lessons learned from other agencies’ implementations GWH->HPWH regulations: require either efficiency measures (e.g. solar water heating) or a heat pump water heater upon gas water heater replacement Cost-effectiveness study completed, but not aware of agencies adopting this Under consideration as part of 2026 Reach Code adoption End of life equipment replacement Building Electrification Savings Ordinance (BESO): Upon home sale, require efficiency or electrification measure implementation or funding for future implementation by buyer and seller City of Berkeley – already in effect (January 1, 2026) Potentially impactful, requires operational analysis, would require outreach to key stakeholders (e.g. realtors) Attachment A 1 0 6 1 5 Activity/Trigge r Regulation Description Examples Notes Zero NOx requirements based on air quality / public health regulatory authority Bay Area Air District Rule 9-6, effective January 1, 2027 Town of Los Altos Hills, currently in effect South Coast Air District currently in litigation about zero NOx regulation, do not recommend considering local regulations until resolved Building performance standards (BPS) – requiring buildings (generally larger buildings) to meet gradually tightening efficiency or emissions standards Statewide BPS in effect in Washington State, Colorado, Maryland, and Oregon City-level BPS in effect in Washington DC, New York City, Boston, St Louis California Energy Commission developing strategy for statewide BPS per SB 48 (2023) West Hollywood sole California city with BPS, others considering it Potentially impactful, requires more operational analysis Establish efficiency standards for housing for health and safety Boulder Smartregs program (since 2010) Potentially impactful, would require operational analysis Mandated electrification or electrification support Cooling habitability standard – require rental properties to be able to maintain indoor temperatures below a certain level (e.g. 82 degrees). In practice this can provide a pathway for heat pump installation. Arizona and Nevada: Phoenix, Tempe, Tucson, Clark County California Dept of Housing & Community Development recommends maximum safe indoor temps in report per AB 2091 Could consider as part of rental licensing program above 1 https://www.hcd.ca.gov/sites/default/files/docs/policy-and-research/plan-report/ab-209-policy-recommendations.pdf Attachment A 1 0 6 1 5 Activity/Trigger Regulation Description Examples Notes Clean Heat Standard - require gas utilities to achieve emissions reductions through various types of measures (efficiency, RNG / green hydrogen, electrification) subject to a cost cap State of Colorado Clean Heat Plans (22% emissions reduction by 2030, 2.5% ratepayer impact cost cap) This could be duplicative of the City’s existing emissions goals, but staff could evaluate what concepts could be adapted from CO regulations Limiting manufacturer sales of GHG emitting appliances California Air Resources Board (CARB) developing rules to limit GHG emitting appliances – not yet finalized or proposed to CARB board This type of regulation is more compelling at a state rather than local level End of gas date City of Half Moon Bay (by 2045) Staff would recommend completing gas transition and studies of funding for community electrification to inform a goal Make a plan to end gas service to a specific area based on a neighborhood vote CA investor-owned utility – pilot “Neighborhood Decarbonization Zones” per SB 1221 (2024) is being explored involving neighborhood consent to relieve obligation to serve for a neighborhood Mandated EV adoption, EV charger adoption, or EV / charging regulatory support EV charging in multi-family buildings at major event or by date certain Various agencies require EV readiness upon modification of parking or electrical No agencies found requiring retrofits by a date certain Considering EV readiness upon modification of parking or electrical as part of 2026 Reach Codes Recommend against requiring charging by a date certain until incentive-free business models for multi-family EV charging can be tested. Attachment A 1 0 6 1 5 Activity/Trigger Regulation Description Examples Notes Tenant “right to plug” – require landlords to allow tenants to install EV charging at their own expense France, Code de la construction et de l’habitation (CCH) Article L113-16. Similar code in Germany. Already included in California State Law (CA Civil Code 1947.6), local outreach could increase use. Ultra-low emissions driving zone – tax vehicles that do not meet certain emissions standards London Complex administratively, would require change in CA law to allow this Emissions-based parking charges – charge vehicles that do not meet certain emissions standards more for parking permits London, various boroughs Potentially impactful, may require change in state law to permit this. Limit manufacturer sales of gasoline vehicles State of California Advanced Clean Cars II regulation – currently stalled due to Federal actions being litigated This type of regulation is more compelling at a state level Attachment B Survey of Carbon Pricing Approaches Pricing Approach Examples Notes Carbon Offset Gas: reflecting in the gas rates the cost of complying with mandated participation in the regional Cap and Trade program plus purchasing offsets eligible for certification by the California Air Resources Board City of Palo Alto current practice Already in effect in Palo Alto. This is the baseline approach for carbon pricing. Carbon Offset Gas with Different Offset Mix: Purchasing different products than currently purchased to offset natural gas. Some types of carbon offsets or carbon removal products are more expensive than the lowest cost options on the market. If these are more durable, more scalable, have more market potential, or are more robustly verifiable than other offsets, the community may consider the higher cost may worthwhile. Requires more investigation, but some kinds of carbon dioxide removal like biochar or direct air capture currently cost more than offsets currently purchased for the Carbon Offset Gas portfolio Additional research required to identify alternative offsets. Carbon Tax (or Tax and Dividend): Taxing carbon emissions to reflect the estimated cost impacts of emitting carbon and using the funds either to fund emissions reduction programs or to return them to community members. This differs slightly from California’s Cap and Trade program in that the price is set administratively or legislatively rather than using an allowance trading market mechanism to set the price. Examples include the City of Boulder, CO Climate Tax1 on gas and electricity, British Colombia’s tax and dividend system, national carbon taxes in Finland, Sweden, and other European Union countries. Staff has heard stakeholder interest in understanding this approach. . A possible design feature could be a tax only on usage above a certain amount, or with exemptions for income- qualified community members Voluntary Carbon Pricing Program: Drawing on the history of voluntary action in Palo Alto, staff can also evaluate whether a voluntary carbon fee on gas, perhaps one that directed funds for use solely on the property for which the fees were assessed, could be feasible. PaloAltoGreen (voluntary green electricity program that ended in 2013) Staff can evaluate a variety of options: opt-in or opt-out programs, or programs required to participate in certain City electrification programs. 1 https://bouldercolorado.gov/climate-tax-frequently-asked-questions Attachment B Pricing Approach Examples Notes Renewable Gas Procurement: Staff can also evaluate renewable natural gas procurement requirements. Renewable natural gas use is a carbon-free alternative to electrification, and incorporating it into the gas portfolio would reflect the true cost of achieving emissions reduction while continuing to use natural gas. California requires investor-owned utility biomethane purchases equal to about 12% of core demand by 2030. Vermont, Oregon, Quebec, and British Columbia have similar standards Lack of a short-term market for renewable gas results in a risk of stranded assets under a high electrification scenario where gas demand reduces rapidly, since long-term purchases are generally required. Clean Heat Standard: This Colorado program is similar to a renewable gas procurement requirement in that it requires gas utilities to achieve emissions reductions, but it allows for reductions to be achieved through other measures (e.g. electrification, gas efficiency, or methane capture) in addition to renewable natural gas. State of Colorado Clean Heat Standard, similar regulations in Vermont, Illinois, and New Jersey This may be less applicable to the City of Palo Alto, which has control over its gas utility and what electrification programs the City offers, but staff can review this standard for any concepts that could apply locally. Agenda Item 1: Feedback on Regulatory and Financial Strategies for Community-Wide Electrification Analysis Climate Action and Sustainability Committee April 17, 2026 www.paloalto.gov 2 2Acting Now for A Resilient Future paloalto.gov/ClimateAction Overview •2023-2025 S/CAP Work Plan’s S/CAP Funding Study gave financial insights, but assumptions need updating and actionable policy options need to be modeled •Several 2026-2027 S/CAP Work Plan work items address this need –CA 13 (Develop Funding and Financing Strategies for Consideration) –CA 14 (Regulatory Measures) –CA 16 (Cost-Based Pricing of Non-Electric Decarbonization and Inefficient Electrification) •Goals for today: –Provide overview of climate action strategic planning effort using S/CAP Funding Model –Get feedback on the list of regulatory and carbon pricing options listed in the report –Any general questions or comments on the method or timeline for the analysis, though this will be discussed in more detail in June 3 3Acting Now for A Resilient Future paloalto.gov/ClimateAction Regulatory Options to Consider Recommended for further considerationRegulatory Option Description and Whether Recommended for Further Consideration Now New construction and major remodel regulations Energy standards, electric readiness, EV charging requirements, hydronic system electrification readiness Consider End of life replacement regs Require electrification or deep efficiency at end of life Consider Emissions Savings Ordinance Fund electrification / efficiency on home sale (like Berkeley)Consider Building Performance Standards Require large buildings to reduce emissions over time Consider Rental habitability standards Require minimum efficiency or electrification in rental units Consider Clean heat standard Require gas utility to achieve emissions reductions Manufacturer sales standards Require manufacturers to shift sales portfolio gradually from gas End of gas date Staff recommends gas transition & S/CAP policy modeling first Neighborhood gas removal Neighbors vote to remove gas EV charging by date certain Pilot financing programs before mandating EV charging by a date Tenant “right to plug”Use State regulations to encourage tenant-driven EV upgrades Consider Low-emissions driving/parking Fees to drive or park vehicles in certain areas with EVs excluded 4 4Acting Now for A Resilient Future paloalto.gov/ClimateAction Carbon Pricing Approaches to Research Recommended for further considerationCarbon Pricing Approach Description and Whether Recommended for Further Research Now Carbon Offset Gas Program Currently in effect in Palo Alto – environmental charges include both State Cap and Trade allowances and City gas offset purchases Different offset mix for Carbon Offset Gas Program Focus on offsets and carbon dioxide removal like new forestry, biochar, or direct air capture that are not the lowest cost options Research Carbon Tax or Tax & Dividend No research needed, simple to model, requires 50% or 2/3 vote Voluntary Carbon Pricing Voluntary charge, possibly used just for the property in question Research Renewable gas procurement Investigate viability of renewable gas purchases for gas supply. Significant challenges include need for long -term contracts and lack of a short-term market Research Clean heat standard Require gas utility to achieve emissions reductions Research 5 5Acting Now for A Resilient Future paloalto.gov/ClimateAction Analysis Outline Updated assumptions (e.g. EV adoption forecast, Federal policy, grid modernization costs) S/CAP Funding Model Policy options to model (includes timeline, regulations, carbon pricing, programs) Gas Transition Study modeling City revenue need Individual community member impacts Utility rate impacts 6 6Acting Now for A Resilient Future paloalto.gov/ClimateAction Next Steps •June 2026: –Staff to return for CASC feedback on 1) draft policy options staff intends to analyze and 2) proposed schedule for CASC, UAC, and City Council review •Q3 2026: –City Council (and possible UAC) review of the draft policy options, City Council approval –Staff work on updating S/CAP Funding Model assumptions, other preparatory work •Q4 2026: –Staff completes modeling of policy options •Dec 2026 and/or Q1 2027: –CASC, UAC review of modeling results, rate impacts, recommend next steps to City Council –City Council review 7 7Acting Now for A Resilient Future paloalto.gov/ClimateAction Working Group Feedback •Questions about various topics, including –When an end of gas date would be considered –Timeline for making progress on regulations –How to structure end of life regulations consistent with EPCA –Why additional research was not needed on a carbon tax •Feedback –General support for the list, especially emissions savings ordinance and building performance standards –Comment that tenant right to charge could help drive EV charger adoption –Comments about considering a decommissioning charge –Comment opposing using offsets or renewable gas to drive carbon pricing –Comment that a carbon tax could provide some General Fund funding Thank You!