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HomeMy WebLinkAboutStaff Report 2605-6419CITY OF PALO ALTO Climate Action and Sustainability Committee Friday, June 12, 2026   Agenda Item     1.Feedback on Strategies for Community-Wide Electrification to Model for Future City Council Consideration; CEQA Status - Not a Project Late Packet Report Added, Staff Presentation 1 1 7 7 7 Climate Action and Sustainability Committee Staff Report Report Type: ACTION ITEMS Lead Department: City Clerk Meeting Date: June 12, 2026 Report #:2605-6419 TITLE Feedback on Strategies for Community-Wide Electrification to Model for Future City Council Consideration; CEQA Status - Not a Project This item is a late packet publication released on 6/4/26. Climate Action and Sustainability Committee Staff Report From: City Manager Report Type: ACTION ITEMS Lead Departments: Public Works, Utilities Meeting Date: June 12, 2026 Report #:2603-6037 TITLE Feedback on Strategies for Community-Wide Electrification to Model for Future City Council Consideration; CEQA Status - Not a Project RECOMMENDATION This is a discussion item and no action is required. EXECUTIVE SUMMARY Staff performed studies in 2021 and 2025, as described in the Background section, to identify electrification opportunities and understand the financial aspects of community-wide electrification. The City also did pilots over the last few years to acquire real world experience to help staff and policy makers design electrification strategies. Staff now has the appropriate tools and knowledge to develop actionable policy options on community-wide electrification for City Council consideration. Staff is seeking feedback on a list of policy options to analyze while providing an overview of the modeling approach and methodology for context. Staff is seeking feedback from the Climate Action and Sustainability Committee (CASC) and the Utilities Advisory Commission (UAC) on the six policy options listed in the Analysis section before doing the modeling to ensure that the final results enable the CASC and UAC to provide policy recommendations to the City Council on which strategy or strategies to explore or pursue for community electrification and to understand how they would affect rates and affordability. BACKGROUND In April 2016, the City Council formally adopted the goal of an 80% reduction in GHG emissions relative to a 1990 baseline by 2030 (“80x30”) as a key climate target. In October 2022 it also incorporated an additional objective of achieving carbon neutrality by 2030 for the community.1 A key challenge identified in the S/CAP is securing the funding and financing necessary to scale up electrification programs. In early 2020, the City launched an S/CAP update to determine the goals and key actions needed to meet its sustainability goals, including the 80x30 goal. Staff presented the S/CAP Impact Analysis to Council on April 19, 2021,2 and the analysis was summarized by the City’s consultant, AECOM, in a June 7, 2021 memo.3 The analysis was able to identify 71% reductions from 1990 levels, as well as some key efforts for the City to focus on in the short term, acknowledging that more analysis was needed. The City Council initiated an S/CAP Funding Study to complete that analysis in the 2023–2025 Work Plan.4 The City retained a consultant team - Willdan, E3 (a Willdan company), and Rincon5 to complete an S/CAP Funding Model and study of the 80x30 goal as well as several complementary studies (an EV Charger Needs Assessment, studies of electrification opportunities in multifamily and non-residential buildings, and a Funding Source Survey). These studies identified electrification opportunities to achieve a full 80% reduction in emissions, provided input data and a model to evaluate different electrification rollout scenarios and their financial implications, and surfaced the need for program and financing models other than up- front incentives to reduce the cost to the City of community-wide electrification. The model showed, under a 2024 policy environment, that in a baseline future without electrification, the community will spend nearly $1.4 billion (present value) on replacing gas building equipment and internal combustion (ICE) engine vehicles with new gas equipment and ICE vehicles, and in doing so would pay more in utility bills and transportation expenses than if they had electrified. Installing electrified equipment instead to achieve 80% reductions on a 2030 timeline would require $2.1 billion in up-front investment (present value), nearly $700 million more, but this would be offset by $975 million in net savings (present value) for households and businesses over the next 20 years. 1 City Council, October 3, 2022; Agenda Item #9; SR #14720, Acceptance of Sustainability and Climate Action Plan (S/CAP) Goals and Key Actions; Review of Proposed Reach Code Changes; Adoption of Resolutions Adopting Advanced Heat Pump Water Heater Program Guidelines, Creating and Funding Electrification Reserves, Amending the City’s Policy on the Use of Cap and Trade Allowance Revenues, and Adopting a Carbon Neutrality Goal; Approval of Budget Amendments in the Electric Fund, Gas Fund, and General Fund; and Direction to Staff to Amend the 2022 Utilities Legislative Guidelines, https://www.cityofpaloalto.org/files/assets/public/agendas-minutes- reports/agendas-minutes/city-council- agendas-minutes/2022/20221003/20221003accsm-amended-presentations.pdf#page=131 2 City Council, April 19, 2021, Report 12009, Council Review of the S/CAP Update Report, Provide Feedback on Poli cy Tools, and Direction to Staff to Implement an S/CAP Engagement Strategy, https://www.cityofpaloalto.org/files/ assets/public/v/3/agendas-minutes-reports/reports/city-manager-reports-cmrs/year-archive/2021/id-12009.pdf 3 Palo Alto Action Impact Memo, AECOM, June 7, 2021, https://www.paloalto.gov/files/assets/public/v/2/sustaina bility/reports/aecom-palo-alto-action-impact-memo_final_rev-210607.pdf 4 https://www.paloalto.gov/files/assets/public/v/1/sustainability/reports/2023-2025-scap-work-plan_final.pdf 5 City Council, January 16, 2024, Staff Report 2308-1939, https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=82633&dbid=0&repo=PaloAlto The City has also built knowledge and data from pilot programs that can inform this analysis, such as the Advanced Heat Pump Water Heater Pilot Program, multi-family electric vehicle technical assistance and incentive program, and commercial packaged HVAC pilot. This planning effort is taking place in the context of Bay Area Air District (Air District) regulations scheduled to take effect in 2027, 2029, and 2031 requiring the space and water heating equipment sold in the Bay Area emit no oxides of nitrogen, which, with current technologies, means electrification. The Air District is currently considering a set of exceptions to these regulations. Staff intends to factor these regulations into its modeling. ANALYSIS Staff intends to use the models, study data, and pilot program data to analyze the following six policy alternatives, and is looking for CASC and UAC feedback on whether these will give the City Council the range of options they need to direct staff on policy option(s) to explore further or pursue for community-wide electrification, and whether the model outputs provide the information the City Council will need to decide between the options. Staff believes that achieving 80% reductions on the 2030 timeline through equipment replacement in Palo Alto (as opposed to offsetting emissions without replacing equipment) would require community action well beyond what seems likely based on program results to-date of approximately 50% reduction in greenhouse emissions. The strategies below would provide a range of actionable alternatives on varying timelines for City Council consideration: 1. Baseline: Air District regulations go into effect as adopted, but the City discontinues programs and does not establish any new local regulations beyond those already in effect. 2. Income Qualified Focus: Air District regulations take effect and the City establishes programs for income-qualified residents 3. Regulations Only: Air District regulations take effect and the City establishes local regulations (residential building emissions savings ordinance and commercial building performance standards) instead of programs 4. Regulations plus Moderate Programs: Air District regulations take effect, the City establishes local regulations (residential building emissions savings ordinance and commercial building performance standards) and a moderate level of program assistance focused as cost-efficiently as possible to encourage adoption by community members not required to electrify by local or regional regulations. 5. Maximize End of Life Electrification: This scenario involves a combination of local regulations (residential building emissions savings ordinance and commercial building performance standards), and comprehensive programs to complement Air District regulations, with the intention of ensuring as many community members as possible electrify when their gas equipment reaches end of life. 6. Maximize Emissions Reduction: This alternative is the same as alternative five, but with additional incentives for community members who retire equipment early, with the goal of achieving emissions reductions earlier. These strategies provide a range of options for City action on community-wide electrification, from regulatory-heavy alternatives with lower City expenditures to alternatives requiring more revenue, but which are more likely to achieve 80% reductions on a shorter timeline. Staff are primarily seeking CASC and UAC feedback on these six policy alternatives. Study methodology To provide context for that discussion, staff is providing the following information about the study methodology. As part of its analysis staff will update underlying assumptions, including, but not limited to: • External funding source availability (Federal, State, etc.) • Grid modernization costs • EV adoption forecasts given the changing policy landscape (e.g. California legislation such as Advanced Clean Cars II with uncertain status) • Gas and electric rate projections • Appliance annual energy usage • Fuel price forecasts • EV up-front and operational costs Staff will model the policy options using these updated assumptions and produce the following outputs: • The City revenue need for each modeled strategy • The rate of emissions reduction and the year in which 80% reductions are achieved • The projected contributions of different regulations and programs to emissions reductions Staff will then model the impact on utility rates and household expenses of using different types of revenue sources to fill the City revenue need for each scenario. Staff will consider which among the following revenue sources best fits each policy option. Not every revenue source will be used in every scenario, and all options will require legal feasibility analysis once sufficient detail becomes available: • Utility restricted revenues – Electric Public Benefits Charge, Electric Cap and Invest, Gas Cap and Invest, and Low Carbon Fuel Standard 6 6 Staff will update the forecasts for these revenue sources, which are declining (except Public Benefits). All sources have restrictions on how they can be used. In addition, these sources can be used to fund sustainability efforts (e.g . renewable energy) that the City is currently funding from ratepayer revenue, which would reduce rates, as an alte rnative to funding electrification efforts, or for climate credits to reduce bills. The tradeoffs between the different • Parcel tax • Utility bill funding Utility bill funding (e.g. utility user’s taxes, climate action surcharge, on-bill 0% financing, rate increases) alternatives can be individually modeled. Each potential funding source may not ultimately be deemed viable. For example, simply increasing electric rates to fund transportation and building electrification has potential issues with Prop 26 and creation of subsidies between customers classes. Any increase in the electric utility bills to raise revenue would need to be balanced against potentially disincentivizing electrification and impacts on affordability. Analysis will incorporate the regulatory options and carbon pricing alternatives discussed at the April 17, 2026 CASC meeting7 and will take into account how the structure of electric rates can affect electrification cost effectiveness. The impact on gas rates from the Gas Transition Study will be incorporated as that study proceeds, noting that preliminary results showed that gas main abandonment may not occur until late in the process of community-wide electrification, as discussed with the UAC and CASC at their October 1, 2025 8 and October 17, 2025 meetings,9 respectively. This means gas rates could increase as a result of widespread electrification unless an alternative revenue source for gas system maintenance were identified. FISCAL/RESOURCE IMPACT Staff intends to do these studies using in-house staff as much as possible, with about 0.5 FTE of staff time expected through December 2026. Staff has set aside up to $50,000 for consultant assistance if needed, but does not anticipate needing all of this funding, and is aiming to complete the study without using any outside assistance. The non-salary expenses, if any, are being funded by General Fund sustainability budgets while staff time is funded by those same sustainability budgets and Utilities funds and Utilities uses of these special revenues were discussed by the City Council on May 12, 2025 (Agenda Item 5, Staff Report 25 03-4421, Discussion of Strategies for the Use of Low Carbon Fuel Standard, Electric and Gas Cap and Trade, and Electric and Gas Public Benefits Revenues, https://recordsportal.paloalto.gov/WebLink/DocView.aspx?i d=83394&dbid=0&repo=PaloAlto 7 Climate Action and Sustainability Committee, April 17, 2026, Report 2602-5956, Review and Discussion of Scope o f 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, https://cityofpaloalto.prime gov.com/meetings/ItemWithTemplateType?id=11567&meetingTemplateType=2&compiledMeetingDocumentId=1 9142 8 Utilities Advisory Commission, October 1, 2025, Report 2502-4137, Discussion of Preliminary Analysis of the Infras tructure Impacts Associated with Gas Decommissioning, https://cityofpaloalto.primegov.com/meetings/ItemWithT emplateType?id=9137&meetingTemplateType=2&compiledMeetingDocumentId=17000 9 Climate Action and Sustainability Committee, October 17, 2025, Report 2507-5022, Discussion of Preliminary Anal ysis of the Infrastructure Impacts Associated with Gas Decommissioning, https://cityofpaloalto.primegov.com/mee tings/ItemWithTemplateType?id=9481&meetingTemplateType=2&compiledMeetingDocumentId=17155 restricted revenue funds (e.g. Electric Public Benefits Charge, Electric Cap and Invest, and Gas Cap and Invest) STAKEHOLDER ENGAGEMENT Staff has engaged the City Council, Council Committees, and the public on financial strategies for electrification in various venues over several years. Staff presented the S/CAP Impact Analysis to Council on April 19, 2021,10 which was also provided to the public in a webinar format.11 The S/CAP Ad Hoc Committee, established in 2021, included community stakeholders and discussed financial strategies for individual programs and community-wide electrification. The S/CAP Funding Study, in progress through 2024 and 2025, was discussed with the City Council’s Climate Protection Ad Hoc Committee in October 2024 and December 2024. The City Council’s CASC held a discussion of the study in April 2025,12 followed by a public workshop on December 13, 2025 13 where the final results were discussed and community ideas and feedback on next steps were solicited. More detail on the history of community engagement on this topic can be found in the staff report for the December 13, 2025 CASC meeting. Staff is discussing these policy options with the Climate Action Working Group on June 11, 2026 and will provide a verbal update on the group’s feedback. Staff anticipates continuing to solicit community feedback through the CASC, the Working Group, and the UAC while this analysis continues. Following the analysis results, more extensive outreach may be needed depending on the strategy or strategies the City Council directs staff to explore further or pursue. ENVIRONMENTAL REVIEW The discussion of this item by CASC and UAC is not a project as defined by CEQA because the discussion of electrification strategies for modeling does not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment. CEQA Guidelines section 15378(b)(4). APPROVED BY: Brad Eggleston, Director Public Works/City Engineer Alan Kurotori, Utilities Director 10 City Council, April 19, 2021, Report 12009, Council Review of the S/CAP Update Report, Provide Feedback on Poli cy Tools, and Direction to Staff to Implement an S/CAP Engagement Strategy, https://www.cityofpaloalto.org/files/ assets/public/v/3/agendas-minutes-reports/reports/city-manager-reports-cmrs/year-archive/2021/id-12009.pdf 11 https://www.youtube.com/watch?v=kZB4P7tLvrg&list=PLJ0x6PDuVXlPJ2o1qIlEXINb8rQ8HNMid&index=17 12 Climate Action and Sustainability Committee, April 4, 2025, Report 2503-4398, Discussion of Preliminary Sustain- ability and Climate Action Plan (S/CAP) Funding Study Results, https://cityofpaloalto.primegov.com/meetings/Item WithTemplateType?id=7672&meetingTemplateType=2&compiledMeetingDocumentId=13682 13 Climate Action and Sustainability Committee, December 13, 2025, Report 2507-5025, Workshop on Economics of Large-Scale Community Electrification, Challenges, and Innovative Program Strategies for the Single-Family Sector, https://cityofpaloalto.primegov.com/meetings/ItemWithTemplateType?id=10206&meetingTemplateType=2&com piledMeetingDocumentId=18032 Agenda Item 1: Evaluating Strategies for Community-Wide Electrification Joint Climate Action & Sustainability Committee and Utilities Advisory Commission Meeting June 12, 2026 www.paloalto.gov 2 2Acting Now for A Resilient Future paloalto.gov/ClimateAction Background and Goals •2021 Impact Analysis –Identified 72% carbon emissions reductions from 1990 levels –Found some high potential near-term programs to focus on in 2023-2025 S/CAP Work Plan •2025 S/CAP Studies –Identified 80% carbon emissions reductions, informed 2026-2027 Work Plan –Modeled 80% reductions on a 2030 timeline using 2024 assumptions –Improved understanding of financial dynamics of community-wide electrification •Achieved to date (2024 GHG inventory): 50% reductions from 1990 levels (thanks to Carbon Neutral Electricity), of which 10% more is offset by Carbon Offset Gas •Goals for current study –Use model from 2025 studies and knowledge gathered to provide City Council a range of actionable strategies for community-wide electrification on different timelines, with updated assumptions representing current policy environment 3 3Acting Now for A Resilient Future paloalto.gov/ClimateAction Findings from Studies and Actions To-Date •While good voluntary program designs can accelerate adoption they can only do so much and regulations are also needed •When dealing with programs at community scale, up-front incentives require funding that exceeds City capacity – need more cost-efficient designs •Based on 2024 assumptions, the illustrative scenarios analyzed in the 2025 study found that electrification was a net community benefit, meaning that: –While the up-front investment in new electric equipment to meet the 80% goal on a 2030 timeline is more than the up-front investment to replace existing gas equipment in kind, –Electrification was lower cost on a lifecycle basis – the long-term savings in gas and gasoline offset the increased up-front investment 4 4Acting Now for A Resilient Future paloalto.gov/ClimateAction Underlying Assumptions to be Updated •External funding source availability (Federal, State, etc.) •Grid modernization costs •EV adoption forecast –Remove effect of California legislation (e.g. Advanced Clean Cars 2) with uncertain status •Gas and electric rates •Appliance annual energy usage •Fuel price forecasts (e.g. higher gasoline prices, updated natural gas forecasts) •EV up-front and operational costs •Revenue sources (as described on slide 8) 5 5Acting Now for A Resilient Future paloalto.gov/ClimateAction Defining Community Electrification Strategic Options •Level of City programmatic support and local regulations assumed to be in effect •Presence or absence of: –Carbon pricing –Subsidies to mitigate gas rate increases (e.g. a separate revenue source used to provide bill credits to mitigate impact of gas rate increases on low-income residents) –Assumed electric rate design (e.g. the ways in which fixed/demand charges vs. energy charges affect electrification cost-effectiveness) •Projected electrification adoption rates due to –City programs –Local, Regional, and State regulations –Gas and electric pricing (reflecting the cost to serve) 6 6Acting Now for A Resilient Future paloalto.gov/ClimateAction Strategic Alternatives to Model Alternative Description Air District Regs? Local Programs Local Regulations Early Retirement Incentives? 1.Baseline Outreach, no programs/regulations √--- 2. IQ focus Income-qualified (IQ) programs only √IQ-only -- 3. Regulatory Local action: only regulations √-BESO + BPS - 4. Regulatory+Local regulations plus moderate programs to fill any regulatory gaps √Moderate – fill gaps BESO+ BPS 5. Maximize all- electric end of life Maximize electrification at end-of-life thru local programs, regulations √Programs for all BESO + BPS - 6. Maximize emissions cuts Enhanced incentives if people electrify equipment early √Programs for all BESO + BPS √ •Additional factors to model for each alternative: gas/electric/carbon pricing, revenue sources LEGEND: BESO = Building Emissions Savings Ordinance BPS= Building Performance Standards 7 7Acting Now for A Resilient Future paloalto.gov/ClimateAction Model Outputs •Model will output… –City revenue need for each modeled strategy –Projected electrification rates from City programs and local, regional, and State regulations –Resulting emissions reductions and year in which 80% reductions are achieved •Then staff will take City revenue need for each modeled strategy, assign one or more revenue sources and calculate: –Electric and gas rate impact –Impact on community member expenses •May do multiple runs per strategy with different revenue source combinations •Take into account carbon pricing and gas transition policies, electric rate design effects on community member expenses and City revenue needs 8 8Acting Now for A Resilient Future paloalto.gov/ClimateAction Proposed Revenue Options to Model •Not impacting utility bills –Parcel tax (or similar) •Impacting utility bills –Utility bill (e.g. electric and/or gas utilities users’ tax) –Utilities restricted revenues – Public Benefits, Cap and Invest, Low Carbon Fuel Standard –Utilities restricted revenues are declining (except Public Benefits) and have restrictions on how they can be used 9 9Acting Now for A Resilient Future paloalto.gov/ClimateAction Gas Transition Study and Gas Pricing Impacts •Gas Transition Study –Preliminary result: high levels of electrification required before many mains can be removed –Preliminary result: 40% of costs fixed (e.g. 25% sales reduction means 10% rate increase) –Creates policy choice: seek full cost recovery as electrification becomes more prevalent? Or seek alternate funding sources to provide some rate relief? Or some combination? •Carbon pricing –Various carbon pricing alternatives presented at April 17, 2026 CASC meeting –In early years, carbon pricing, could improve electrification cost-effectiveness. In later years, declining sales could raise gas prices (unless rate relief provided) even without carbon pricing •Implications for modeling –Will model gas rates with and without subsidies from alternative revenue sources –Model carbon pricing in early years, phase out as community-wide electrification picks up 10 10Acting Now for A Resilient Future paloalto.gov/ClimateAction Working Group Feedback •Questions about the six options, but overall feedback was that they made sense •Some discussion and Q&A about carbon pricing and gas decommissioning •Comment noting that if Air District regulations were delayed or did not move forward, that would affect the options – be prepared to model it •Comment about taking care to focus on affordability – look at sources of funding that do not impact utility bills – potential focus on a single area of electrification for progress •Do not delay work on other efforts (e.g. local regulations, financing) while completing the analysis 11 11Acting Now for A Resilient Future paloalto.gov/ClimateAction For Committee and UAC Consideration Do these strategic alternatives capture the range of policy options the City Council will need in front of them to decide on a long-term strategy? Strategic Alternatives: 1.Baseline 2.Income-Qualified Focus 3.Regulations Only 4.Regulations + Moderate Programs 5.Maximize End of Life Electrification 6.Maximize Emissions Reduction Thank You!