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HomeMy WebLinkAboutStaff Report 2512-5673CITY OF PALO ALTO CITY COUNCIL Special Meeting Monday, June 15, 2026 Council Chambers & Hybrid 5:30 PM     Agenda Item     D.City of Palo Alto's Energy Risk Management Report for the first half of Fiscal Year 2026 (July 1, 2025 - December 31, 2025) CEQA Status – Not a Project City Council Staff Report From: City Manager Report Type: INFORMATION REPORTS Lead Department: Administrative Services Meeting Date: June 15, 2026 Report #:2512-5673 TITLE City of Palo Alto's Energy Risk Management Report for the first half of Fiscal Year 2026 (July 1, 2025 - December 31, 2025) CEQA Status – Not a Project RECOMMENDATION This is an informational report, and no City Council action is required. EXECUTIVE SUMMARY Staff continues to manage electricity and natural gas purchases in compliance with the City’s Energy Risk Management Policies, Guidelines, and Procedures. During the first half of FY 2026, Staff used fixed-price forward contracts, spot market purchases, diversified supply sources, and counterparty credit monitoring to reduce exposure to market volatility, supply disruptions, and counterparty defaults. As of December 31, 2025, the City’s fixed-price electricity purchases were $1.44 million above market value; however, active monitoring confirms this exposure remains within Energy Risk Management Guidelines. These risk management actions strengthen cost stability, support reliable service delivery, and help protect the City from sudden price increases or replacement power costs. Staff also monitors reserve adequacy, liquidity, Expected Default Frequency, credit ratings, and market conditions to identify emerging risks before they materially affect operations or financial planning. Electric and Gas Supply Operations Reserves remain above FY 2026 minimum guideline levels, providing continued capacity to absorb market, operational, and infrastructure-related pressures. Staff identified no exceptions to the Energy Risk Management Policies, Guidelines, or Procedures during this reporting period. BACKGROUND The purpose of this report is to inform the Council about the status of the City’s energy portfolio and transactions executed with energy suppliers. The City’s Energy Risk Management Policy requires that staff report on a semi-annual basis on: 1) the City’s energy portfolio; 2) the City’s credit and market risk profile; 3) portfolio performance; and 4) other key market and risk information. The City’s most recent Energy Risk Management Report covered the second half of FY2024 (January 1, 2024 – June 30, 2024). That report stated there were no exceptions to the City’s Energy Risk Management Policies, Guidelines, or Procedures in the second half of FY2024. Following the issuance of that report, the regular reporting cadence established under the Energy Risk Management Policy was temporarily paused due to staffing transitions.1 To maintain transparency and provide continued oversight during this transition period, staff reports included relevant updates regarding the City’s energy portfolio, market conditions, portfolio performance, and associated credit and market risk exposures, which are described below:2 Fixed-price forward electricity purchases continue to reduce exposure to hourly market volatility by securing future supply at known prices. There were five purchase transactions from NextEra Energy, an approved counterparty with a Master Agreement with the City. These purchases were of minimal credit exposure. Staff proposed the Trolley Battery Energy Storage System project with the counterparty, Aypa Power. Although Aypa did not have a credit rating or an extensive balance sheet, the agreement mitigated credit risk through cash or letter-of-credit collateral and payment terms tied to available capacity. Aypa's collateral requirement was initially $20 million. Once the project begins operating in June 2029, the collateral requirement will be $32 million throughout the term of the agreement. 1 Energy Risk Management Report for the second half of Fiscal Year 2024; March 24, 2025; \Clerk's Office\Staff Reports\City Council\2025\2025-03-24 Mar 24\Staff Report 2411-3789 2 Resolution 10204; Transact Electric Supplies to Meet the City’s Electrical Loads Under Electric Master Agreements, Under Specified Terms and Conditions During Calendar Years 2025 Through 2039, Inclusive; December 16, 2024: \Clerk's Office\Resolutions\2024 (#10142 - 10210)\RESO 10204 Resolution 10204 increased the electric Master Agreement transaction cap from $50 million to $75 million because supplier transaction volumes had approached the prior limit and are expected to increase over the next 12 to 15 years. This change improves procurement flexibility while maintaining oversight in accordance with the City’s Energy Risk Management policy. Electricity Supplies Hydroelectricity Fixed-Price Forward Electricity Purchases Gas Supplies Counterparty Credit Risk Electric Forward Mark-to-Market Values Electric and Gas Supply Operations Reserves Adequacy Exceptions to Energy Risk Management Policies, Guidelines, or Procedures ANALYSIS revenue as a result of these resources providing these grid stabilization services. 5 5 2022 Sustainability and Climate Action Plan; June 5, 2023; \Clerk's Office\Staff Reports\City Council\2023\Staff Report 2303-1158 Hydroelectricity In an average year, the City receives about 40% of its energy via hydroelectricity from the Calaveras project in Calaveras County and the Western project in the Central Valley corridor. The cost of hydroelectricity received from Calaveras and Western is higher in $/MWh than the market value of electricity during on-peak hours. This cost is offset by gains during off-peak hours, which are at no cost to the City. The Calaveras project currently incurs higher costs than the Western project due to debt service related to the facility's construction. Once the debt is retired in 2032, the City is expected to benefit from lower ongoing project costs and improved value relative to prevailing electricity market prices. This will strengthen long-term rate stability and reduce the City’s exposure to market price volatility. Calaveras also provides the City with resource adequacy (RA) capacity and ancillary services (e.g., the ability to regulate energy output when the electric grid needs change), which are critical for load management and continuity of service. The values of RA capacity and ancillary services are not reflected in the mark-to-market calculation. Fixed-Price Forward Electricity Purchases All fixed-priced forward contracts mark-to-market (MTM) values are tracked by City staff. Staff track the value that would be lost due to a counterparty failing to deliver on its Figure 1: Load and supply sources and purchases of electricity supplies for 24 months contractual commitments, forcing the City to purchase replacement electricity in the market to reduce the impact of financial risk exposures. 7 7 Palo Alto Municipal Code(PAMC) Section 2.30.340 – Contracts for Wholesale Utility Commodities and Services https://codelibrary.amlegal.com/codes/paloalto/latest/paloalto_ca/0-0-0-61721 Gas Supplies 9 The City purchases all its forecasted gas needs for the month ahead at a price based on the published monthly spot market index price for that month. Within the month, the City’s gas operator, EDF Trading North America LLC, who is rated Ba1 with a stable outlook by Moody’s Credit Ratings, buys and sells gas to match the City’s daily needs if the actual daily usage is different from the forecasted daily usage. Those daily transactions are made at an average price based on the published daily spot market index. The monthly rate adjustment mechanism helps mitigate the City’s exposure to natural gas price volatility and minimizes counterparty risk exposure for the gas utility. st, 2025, Avangrid Renewables Holdings, Inc. and Silicon Valley Clean Energy Authority exceed the City’s maximum recommended EDF threshold. However, because the City does not have any outstanding transactions with these counterparties, there is no current credit exposure that would require an exception to the Energy Risk Management Policy. The policy only applies when the City is entering into or maintaining transactions with a counterparty whose EDF exceeds 9 Natural gas spot market purchases allow the City to procure gas at prevailing market prices, address short-term operational needs, supply imbalances or unanticipated changes in energy demand. the recommended limit. . Staff is monitoring Avangrid Renewables Holdings, Inc. and Silicon Valley Clean Energy Authority’s EDF on a quarterly basis. Counterparties experiencing minor increases in EDF, such as Powerex, BP, and SENA, will also be monitored by Staff. Staff will continue to report findings to City Council in this semi-annual report. st, 2025, the City’s gas counterparties have maintained credit ratings that exceed City policy and guidelines minimums. Although the counterparties' EDF exceed the City's preferred threshold of 0.8%, staff continue to monitor these counterparties on an as-needed basis and, at a minimum, annually evaluate changes in financial condition, market activity, and overall creditworthiness. Gas counterparties generally have lower operational and financial exposures due to their ability to store gas, access liquid replacement markets, and more readily secure alternative supply arrangements in the event of a counterparty default. In addition, gas markets are typically less volatile and less time- sensitive, reducing the potential impact of supply distribution or contract failure. Table 1: Credit Risk Analysis of Approved Electric Counterparties as of 12/31/2025 Counterparty Name Credit Rating EDF Outlook Ratings Agency Issue Date BP Energy Company Ba1 0.96 Stable Moodys 12/31/2025 Constellation Energy Generation, LLC Aa2 0.03 Stable Moodys 12/31/2025 Avangrid Renewables Holdings, Inc. Ba1 1.01 Developing Moodys 12/31/2025 NextEra Energy Baa1 0.64 Stable Moodys 12/31/2025 PacifiCorp Baa2 0.15 Stable Moodys 12/31/2025 Powerex Baa1 0.97 Stable Moodys 12/31/2025 Shell Energy North America Ba1 0.96 Stable Moodys 12/31/2025 Turlock Irrigation District AA- Stable Fitch 12/31/2025 Silicon Valley Clean Energy Authority B2 3.97 Developing Moodys 12/31/2025 Table 1: Credit Risk Analysis of Approved Gas Counterparties as of 12/31/2025 Counterparty Name Credit Rating EDF Outlook Ratings Agency Issue Date EDF Trading North America Ba1 0.97 Stable Moodys 12/31/2025 Powerex Baa1 0.97 Stable Moodys 12/31/2025 Shell Energy North America Ba1 0.96 Stable Moodys 12/31/2025 ConocoPhillips Aa2 0.04 Stable Moodys 12/31/2025 BP Energy Company Ba1 0.96 Stable Moodys 12/31/2025 current counterparty credit exposure. Staff will continue to monitor mark-to-market values, credit ratings, and exposure limits as part of ongoing Energy Risk Management oversight. Reserve Levels for Electric and Gas Table 3: Transactions and Credit Exposure of Counterparties as of 12/31/2025 (in $000's) Counter Party Name Cost of Outstanding Transactions Market Value of Transactions Mark-to- Market (MTM) Supplier Credit Exposure Limit MTM < Credit Limit?Credit Rating SENA (1,785) (1,370) 414 30,000 Yes Ba1 BP (169) (144) 25 20,000 Yes Ba1 NextEra 7,980 6,101 (1,879)15,000 Yes Baa1 The Electric Utility’s projected FY 2026 ending reserves total $125.9 million, compared to $127.2 million in FY 2025. Operations Reserves are projected to decrease from $46.6 million to $41.6 million, below the FY 2026 target guideline of $49.6 million, but above the minimum guideline of $33.3 million. Reserve levels continue to reflect financial pressures associated with grid modernization projects, CIP expenditures, infrastructure funding needs, and temporary cash flow demands prior to anticipated bond financing in FY 2027. Staff continues to monitor reserve levels, cash flow impacts, and funding strategies as planned CIP expenditures and infrastructure commitments increase operational funding demands. Staff Table 4: Electric: Projected Reserves for Fiscal Year End 2026 as of December 31, 2025) FY 2025 Actual FY 2026 Projected Starting Reserves Operations Reserves 32,219 46,581 Hydro Stabilization Reserve 17,400 18,767 Electric Special Projects Reserve 22,649 30,149 Capital Reserves 880 880 Electrification Reserve 4,500 2,037 Other 26,229 28,784 Total Starting Reserves 103,877 127,198 Revenues Net Sales 186,620 199,175 Wholesale Revenues 44,275 45,316 Other Revenues and Transfers In 13,181 12,010 Total Revenues 244,076 256,501 Expenses Electric Supply Purchases 115,701 134,879 Operating Expenses 72,394 84,956 Capital Expenses 40,857 35,591 Total Expenses 228,952 255,426 Ending Reserves Operations Reserves 46,581 41,634 Hydro Stabilization Reserve 18,767 18,767 Electric Special Projects Reserve 30,149 31,169 Capital Reserves 880 5,880 Electrification Reserve 2,037 2,037 Other Reserves 28,784 26,373 Total Ending Reserves 127,198 125,860 Operations Reserve Guidelines Minimum Guideline 28,181 33,306 Target Guideline 42,271 49,960 Maximum Guideline 56,361 66,613 Electric Supply and Distribution completed a $5.0M transfer from the Supply Operations Reserve to the Distribution Operations Reserve in FY 2025 and is evaluating an additional transfer of up to $5.0M in FY 2026 to support near-term infrastructure and CIP funding needs. While these actions support operational liquidity and service delivery, they also reduce available reserve capacity during periods of wholesale power market volatility, lower-than-forecasted electric sales revenue, or unplanned operational events. The Gas Utility’s projected FY 2026 ending reserves total $19.0M, compared to $19.6M in FY 2025. Operations Reserves are projected to increase from $9.9M to $12.1M; however, the FY 2026 balance remains below the target guideline of $14.2M. Reserve levels continue to reflect Table 5: Gas Projected Reserves for Fiscal Year End 2026 as of December 31, 2025) FY 2025 Actual FY 2026 Projected Starting Reserves Operations Reserve 4,257 9,897 Supply Rate Stabilization -- Distribution Rate Stabilization -1,049 CIP Reserve - Cap-and-Invest Reserve 13,568 15,046 Debt-Service Reserve 313 326 Other 14,776 8,281 Total Starting Reserves 32,914 34,599 Revenues Total Revenues 60,176 79,185 Total Revenues 60,176 79,185 Expenses Total Supply Purchases 19,159 22,084 Total Supply and Distribution Operations 17,427 19,231 Debt Service 776 802 CIP Expenses 8,176 19,499 Other 558 573 Total Expenses 46,096 62,189 Transfers General Fund 10,918 9,735 Cap-and-Invest Reserve 1,326 3,068 Other 2,370 1,952 Total Transfers 14,614 14,755 Ending Reserves Operations Reserve 9,897 12,139 Supply Rate Stabilization -- Distribution Rate Stabilization 1,049 2,413 CIP Reserve -- Debt-Service Reserve 326 326 Other 8,281 4,140 Total Ending Reserves 19,553 19,018 Operations Reserve Guidelines Minimum Guideline 8,636 9,443 Target Guideline 12,953 14,164 Maximum Guideline 17,271 18,886 Gas Supply and Distribution financial pressures associated with natural gas market volatility, capital improvement program (CIP) expenditures, and infrastructure funding needs. ENVIRONMENTAL REVIEW APPROVED BY: