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HomeMy WebLinkAboutStaff Report 2604-6322CITY OF PALO ALTO Climate Action and Sustainability Committee Friday, May 15, 2026   Agenda Item     1.Residential Electrification Status Update and Proposed Principles for Electrification Programs to Assist with Air District Regulation Compliance; 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: May 15, 2026 Report #:2604-6322 TITLE Residential Electrification Status Update and Proposed Principles for Electrification Programs to Assist with Air District Regulation Compliance; CEQA Status - Not a Project This item will be a late packet publication released on 5/7/26. 9 8 9 7 Climate Action and Sustainability Committee Staff Report From: City Manager Report Type: ACTION ITEMS Lead Department: Public Works Meeting Date: May 15, 2026 Report #:2604-6304 TITLE Residential Electrification Status Update and Proposed Principles for Electrification Programs to Assist with Air District Regulation Compliance; CEQA Status - Not a Project RECOMMENDATION This is a discussion item and no recommendation is requested. EXECUTIVE SUMMARY Staff is providing a presentation on the status of residential electrification efforts and requesting feedback from the Climate Action and Sustainability Committee (CASC) on proposed principles for electrification programs to assist with Air District regulation compliance. BACKGROUND The City has adopted a full-featured program to help people electrify their homes. Features include rebates for in-unit and central systems for single-family and multi-family homeowners, landlords, and condo associations who hire their own contractors as well as technical assistance and direct installation services available to single-family homeowners. Staff is working on expanding and improving rebates and technical assistance for multi-family central systems. The City Council has also approved a grant program to electrify affordable multi-family buildings that is generating strong interest. ANALYSIS On March 2, 20261 the City Council adopted several work items related to single-family and multi-family residential programs. These work items involve continuing and improving existing 1 City Council, March 2, 2026, Agenda Item 9, Staff Report 2602-5985, Review the 2024 Greenhouse Gas Inventory and S/CAP Key Performance Indicators Annual Progress Report, and Approve the 2026-2027 S/CAP Work Plan and Receive Six S/CAP Studies Recommended by the Climate Action and Sustainability Committee, https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=86664&dbid=0&repo=PaloAlto 9 8 9 7 programs through 2027 when Air District regulations take effect, while gradually shifting away from incentives to financing with all programs. In the single-family sector there is a focus on improving programs, shifting to financing, and using data to improve outreach, participation, and service delivery. In the multi-family sector the focus is on equitable electrification and multi-family EV charging, with a shift from incentives to financing. Table 1: Selected 2026-2027 S/CAP Work Plan Work Items Related to Single-Family Programs Related to Multi-Family Programs CA1. Continue Advanced Home Electrification Pilot CA2. Electrification as a Service or Financing Pilot CA3. Enhanced data tracking for home electrification CA4. Multifamily EV Charging Program CA5. Charging-as-a-Service (CaaS) or Other Financing CA6. Continue Affordable Multifamily Grant Program CA7. Multi-Family Technical Assistance 3 requiring that equipment manufactured after specific deadlines must not emit oxides of nitrogen (sometimes referred to as Zero NOx regulations) take effect in 2027, 2029, and 2031 and will affect residential buildings as listed below. The Air District is considering exemptions for income-qualified building owners and for complex projects. January 1, 2027: small water heaters (residential in-unit, some commercial) January 1, 2029: all space heating January 1, 2031: large central multi-family and commercial water heaters / boilers Align incentives regionally Continue incentives for all residents for the first year of Air District regulations (2027), even if subject to the regulations Prioritize incentives for those in need in future years, subject to budget availability and legal review o This could include both low-income and middle-income residents as well as those with complex projects exempt from Air District regulations o Longer-term, explore financing solutions with low / manageable monthly cost paid off at home sale for “high-equity” low- and middle-income homeowners 3 CASC, September 5, 2025, Staff Report 2507-5016, Consideration of Alternatives for City’s Role in Facilitating Compliance with Air District Zero NOx Requirements for Water Heaters, https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=46460&dbid=0&repo=PaloAlto 9 8 9 7 o The same approach could be used for homeowners with complex projects o Consider a copay or partial incentive rather than full incentive for low-income participants Shift from incentives to financing or electrification as a service (EaaS) for other residents after 2027, to the extent feasible When moving to financing, consider repayment incentives to accompany EaaS and/or 0% financing: o Provide repayment assistance for all interested residents through 2028 to match repayments to budget savings, if budget permits o In the longer term, constrain assistance to what is affordable at community scale o Allow, but don't require renter participation in EaaS or on-bill financing when landlords electrify When considering new regulations affecting the residential sector, consider how they will interact with Air District regulations. Look for complementary effects and coordinate exceptions and applicability FISCAL/RESOURCE IMPACT $5.3 million in additional funding was approved in the FY 2026 budget for residential electrification programs in progress or currently under development, funded from Gas Cap and Trade and Low Carbon Fuel Standard revenues. The proposed FY 2027 budget for single-family and multi-family programs is aligned with these proposed principles and is being presented to the Finance Committee on May 5, 2026. STAKEHOLDER ENGAGEMENT Residential electrification has been an area of focus for the CASC, its predecessor Ad Hoc Committees, and the Working Group since 2020 and a variety of public discussions have been held on the topic. Prior to that, residential electrification was a focus of the City Council when considering Reach Codes, and public outreach was performed as part of each code cycle. On September 5, 20255 staff met with CASC on this topic and met with the Working Group on September 3, 2025. A public workshop was held on Saturday, December 13, 2025. Staff is meeting with the Climate Action Working Group prior to the May 15, 2025 CASC meeting and will provide an update on feedback received. In addition, staff has been coordinating with neighboring community choice energy providers to ensure regional alignment and is tracking regional progress on consideration of this issue. 5 CASC, September 5, 2025, Staff Report 2507-5016, Consideration of Alternatives for City’s Role in Facilitating Compliance with Air District Zero NOx Requirements for Water Heaters, https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=46460&dbid=0&repo=PaloAlto 9 8 9 7 ENVIRONMENTAL REVIEW ATTACHMENTS APPROVED BY: Agenda Item 1: Residential Electrification Status Update and Principles for Program Assistance with Air District Regulation Compliance Climate Action and Sustainability Committee May 15, 2026 www.paloalto.gov 2 2Acting Now for A Resilient Future paloalto.gov/ClimateAction Residential Programs •Electrify My Home Program features (Single Family) –Full service direct install, with fixed prices for heat pump space heating, water heating, cooking, dryers, and efficiency measures. •Cost covered for Low Income –Rebates heat pumps, heat pump water heaters, induction cooktops, and gas disconnection –Technical assistance for people hiring their own contractors –NEW - Portable induction cooktop rebate and loaner program •More renter services being explored –Emergency water heater replacement service (HPWH) •Working on pilot financing program 3 3Acting Now for A Resilient Future paloalto.gov/ClimateAction Residential Regulations •New construction: Statewide “Hourly Source Energy” requirement for new homes and major remodels takes emissions into consideration –Has effect of removing energy calculation disadvantage for all-electric homes implicit in prior energy calculation standards –In previous years City has had higher Hourly Source Energy standards –Waiting on completion of statewide studies for 2026-2028 code cycle to see whether City will be able to adopt higher standards in this code cycle as well •Other remodels: “Flex Path” requirements adopted in fall 2025 require remodels >1000 sf to adopt efficiency or electrification measures •Air Conditioning: Starting 2027, efficiency measures or electrification using a heat pump is required for air conditioning replacements 4 4Acting Now for A Resilient Future paloalto.gov/ClimateAction Key Program Statistics •Residential Electrification Progress –770 HPWHs from all programs (Full Service, REAP, Rebate & Emergency) since Oct. 2022. –180 Heat Pump HVAC systems (rebates) –33 gas meter removals –NEW: 5 Induction Cooking rebates (launched 3/18/2026) •Annualized HPWH / HVAC compared to est. total turnover –In 2025, heat pump water heaters replaced about 21% of gas water heaters being replaced –In 2025, heat pumps replaced an est. 13% of gas furnaces being replaced* * Based on 20 year average product lifetime for gas heating & 15 years for water heaters, among 15,500 homes. 5 5Acting Now for A Resilient Future paloalto.gov/ClimateAction Key Program Statistics •Affordable housing grant program – interested participation: –Thirteen sites, four different providers –Interest in central water heating electrification at 12 sites serving 760 units (41% of all multi- family dedicated 100% affordable rental housing) –Interest in in-unit electrification at four sites serving 315 units (17% of all multi-family dedicated 100% affordable rental housing) –One commercial kitchen electrification project 6 6Acting Now for A Resilient Future paloalto.gov/ClimateAction •Continued programs to drive adoption and assist with Air District reg compliance, with a particular focus on equity •Shift from incentives to financing •Focus on EV charging for multi-family with some building electrification support 2026-2027 Residential Work Plan Priorities Key Themes Single-Family Residential CA1. Continue Advanced Home Electrification Pilot Program CA2. Electrification as a Service or Financing Pilot CA3. Enhanced data tracking for home electrification Multi-Family Residential CA4. Multifamily EV Charging Program CA5. Charging-as-a-Service (CaaS) or Similar Financing Pilot CA6. Continue Affordable Multifamily Grant Program CA7. Multi-Family Technical Assistance 7 7Acting Now for A Resilient Future paloalto.gov/ClimateAction Upcoming Air District Regulations •January 1, 2027 – small water heaters (residential in-unit, some commercial) –Water heaters manufactured after January 1, 2027 and sold in the Bay Area must be Zero NOx –Exemptions currently being developed by Air District staff – low-income and complex projects –Possible delay of effective date – potentially Oct 1, 2027 – to implement exemptions –Regional discussions about incentives and communication in progress •January 1, 2029 – all space heating •January 1, 2031 – large water heaters (large central residential and commercial) 8 8Acting Now for A Resilient Future paloalto.gov/ClimateAction Estimated Residential Impacts, 2027 Air District Regs Type of Resident Est. # homes Est. % of homes Likely Compliance Req. Low-income single-family home/condo owners 1,670 6%Exempt Middle-income single-family home owners 1,420 6%Compliance requirement, exceptions for complex projectsOther single-family home owners 8,100 31% Single-family landlord 4,300 17% Middle-income condo owners 150 1%Compliance requirement if they have an in-unit water heater, exceptions for complex projects Other condo owners 860 3% Apartment / condo landlords 9,500 37% •Staff estimates about 16,000 homes with individual water heaters •About 40% (6,400) likely to be exempt – estimated 430 water heaters per year –Low-income residents –Residents with complex projects •Remaining 9,600 homes – likely turnover of about 640 water heaters per year 9 9Acting Now for A Resilient Future paloalto.gov/ClimateAction Proposed Principles for Electrification Assistance •Align incentives regionally •Continued incentives for all residents for the first year of Air District regulations (2027), even if subject to the regulations •Prioritize incentives for those in need in future years –Could include both low-income and middle income, those with complex projects –Longer-term, explore financing solutions with low / manageable monthly cost paid off at home sale for “high-equity” low- and middle-income homeowners –Same approach could be used for homeowners with complex projects –Consider copay or partial incentive for low-income participants •Shift from incentives to financing, electrification as a service (EaaS) for other residents after 2027 10 10Acting Now for A Resilient Future paloalto.gov/ClimateAction Proposed Principles for Electrification Assistance •When moving to financing consider repayment incentives to accompany EaaS and/or 0% financing –In 2026 through 2028 repayment assistance for all interested residents, if budget permits –in the longer term constrain assistance to what is affordable at community scale –Allow, don't require renter participation in EaaS or on-bill financing when landlords electrify •When considering new regulations affecting the residential sector, consider how they will interact with Air District regulations –look for complementary effects –coordinate exceptions and applicability Alternative: Do not provide subsidies once Air District regulations go into effect. 11 11Acting Now for A Resilient Future paloalto.gov/ClimateAction Working Group Feedback •Assistance will likely be needed for regulatory success •Simple could be better in the early years as the market adjusts to the new rules •Landscape will be complex in the early years (e.g. availability of gas water heaters manufactured before regulation effective date) •Up-front subsidies make things simple – financing can be complex –Many water heaters are changed out in an emergency – simplicity helps –But incentives raise market prices, are less financially sustainable –Could focus on those who are exempt (low-income, complex projects), but these distinctions may be challenging in the early years –If providing incentives, signal when they will end or be adjusted •Conversely, moving to financing quickly could establish a financially sustainable course early on – need to make it as simple and attractive 12 12Acting Now for A Resilient Future paloalto.gov/ClimateAction For Committee Consideration •Do these proposed principles align with Committee’s understanding of the Council’s overall objectives for community electrification? •In the early years: focus on simplicity (e.g. up-front subsidies to all) or financial sustainability (limit subsidies to certain groups and/or focus on financing)? •When targeting / limiting assistance, who do we focus on (e.g. low-income, middle-income, people with exemptions for complex projects)? •Do we align with the region, even if that means providing less assistance than we might choose if deciding on our own? Or lead with our own proposal? •Any other concerns or recommended changes to the principles? Thank You!