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HomeMy WebLinkAbout2025-10-17 Climate Action and Sustainability Committee Agenda PacketCLIMATE ACTION AND SUSTAINABILITY COMMITTEE Special Meeting Friday, October 17, 2025 Community Meeting Room & Hybrid 2:00 PM   Climate Action and Sustainability Committee meetings will be held as “hybrid” meetings with the option to attend by teleconference/video conference or in person. Information on how the public may observe and participate in the meeting is located at the end of the agenda. The meeting will be broadcast live on YouTube https://www.youtube.com/c/cityofpaloalto. VIRTUAL PARTICIPATION CLICK HERE TO JOIN (https://cityofpaloalto.zoom.us/j/85380918387) Meeting ID: 853 8091 8387 Phone: 1(669)900-6833   PUBLIC COMMENTS General Public Comment for items not on the agenda will be accepted in person for up to three minutes or an amount of time determind by the Chair. General public comment will be heard for 30 minutes. Additional public comments, if any, will be heard at the end of the agenda. Public comments for agendized items will be accepted both in person and via Zoom for up to three minutes or an amount of time determined by the Chair. Requests to speak will be taken until 5 minutes after the staff’s presentation or as determind by the Chair. Written public comments can be submitted in advance to city.council@PaloAlto.gov and will be provided to the Council and available for inspection on the City’s website. Please clearly indicate which agenda item you are referencing in your subject line. PowerPoints, videos, or other media to be presented during public comment are accepted only by email to city.clerk@PaloAlto.gov at least 24 hours prior to the meeting. Once received, the Clerk will have them shared at public comment for the specified item. To uphold strong cybersecurity management practices, USB’s or other physical electronic storage devices are not accepted. Signs and symbolic materials less than 2 feet by 3 feet are permitted provided that: (1) sticks, posts, poles or similar/other types of handle objects are strictly prohibited; (2) the items do not create a facility, fire, or safety hazard; and (3) persons with such items remain seated when displaying them and must not raise the items above shoulder level, obstruct the view or passage of other attendees, or otherwise disturb the business of the meeting.  1 October 17, 2025 Materials submitted after distribution of the agenda packet are available for public inspection at www.paloalto.gov/agendas. CALL TO ORDER   PUBLIC COMMENT Members of the public may speak in-person ONLY to any item NOT on the agenda. 1-3 minutes depending on number of speakers. Public Comment is limited to 30 minutes. Additional public comments, if any, will be heard at the end of the agenda.   STANDING VERBAL REPORTS A.Staff Comments B.Committee Member Comments and Announcements ACTION ITEMS   1.Recommendation to the City Council to Approve the Advanced Commercial Heat Pump HVAC Program Design Guidelines; CEQA Status -– Categorically Exempt Under CEQA Guidelines Section 153021 (Replacement of Existing Facilities), Replacement of Existing Rooftop HVAC Units with Heat Pumps is Categorically Exempt 2.Discussion of Preliminary Analysis of the Infrastructure Impacts Associated with Gas Decommissioning; CEQA Status - Not a Project FUTURE MEETINGS AND AGENDAS Members of the public may not speak to the item(s)   ADJOURNMENT      2 October 17, 2025 Materials submitted after distribution of the agenda packet are available for public inspection at www.paloalto.gov/agendas. PUBLIC COMMENT INSTRUCTIONS Members of the Public may provide public comments to teleconference meetings via email, teleconference, or by phone. 1.Written public comments may be submitted by email to city.council@PaloAlto.gov. 2.For in person public comments please complete a speaker request card located on the table at the entrance to the Council Chambers and deliver it to the Clerk prior to discussion of the item. 3.Spoken public comments for agendized items using a computer or smart phone will be accepted through the teleconference meeting. To address the Council, click on the link below to access a Zoom-based meeting. Please read the following instructions carefully. ◦You may download the Zoom client or connect to the meeting in- browser. If using your browser, make sure you are using a current, up-to-date browser: Chrome 30 , Firefox 27 , Microsoft Edge 12 , Safari 7 . Certain functionality may be disabled in older browsers including Internet Explorer. Or download the Zoom application onto your smart phone from the Apple App Store or Google Play Store and enter in the Meeting ID below. ◦You may be asked to enter an email address and name. We request that you identify yourself by name as this will be visible online and will be used to notify you that it is your turn to speak. ◦When you wish to speak on an Agenda Item, click on “raise hand.” The Clerk will activate and unmute speakers in turn. Speakers will be notified shortly before they are called to speak. ◦When called, please limit your remarks to the time limit allotted. A timer will be shown on the computer to help keep track of your comments. 4.Spoken public comments for agendized items using a phone use the telephone number listed below. When you wish to speak on an agenda item hit *9 on your phone so we know that you wish to speak. You will be asked to provide your first and last name before addressing the Council. You will be advised how long you have to speak. When called please limit your remarks to the agenda item and time limit allotted. CLICK HERE TO JOIN Meeting ID: 853 8091 8387 Phone: 1(669)900-6833 Americans with Disability Act (ADA) It is the policy of the City of Palo Alto to offer its public programs, services and meetings in a manner that is readily accessible to all. Persons with disabilities who require materials in an appropriate alternative format or who require auxiliary aids to access City meetings, programs, or services may contact the City’s ADA Coordinator at (650) 329-2550 (voice) or by emailing ada@PaloAlto.gov. Requests for assistance or accommodations must be submitted at least 24 hours in advance of the meeting, program, or service.  3 October 17, 2025 Materials submitted after distribution of the agenda packet are available for public inspection at www.paloalto.gov/agendas. California Government Code §84308, commonly referred to as the "Levine Act," prohibits an elected official of a local government agency from participating in a proceeding involving a license, permit, or other entitlement for use if the official received a campaign contribution exceeding $500 from a party or participant, including their agents, to the proceeding within the last 12 months. A “license, permit, or other entitlement for use” includes most land use and planning approvals and the approval of contracts that are not subject to lowest responsible bid procedures and have a value over $50,000. A “party” is a person who files an application for, or is the subject of, a proceeding involving a license, permit, or other entitlement for use. A “participant” is a person who actively supports or opposes a particular decision in a proceeding involving a license, permit, or other entitlement for use, and has a financial interest in the decision. The Levine Act incorporates the definition of “financial interest” in the Political Reform Act, which encompasses interests in business entities, real property, sources of income, sources of gifts, and personal finances that may be affected by the Council’s actions. If you qualify as a “party” or “participant” to a proceeding, and you have made a campaign contribution to a Council Member exceeding $500 made within the last 12 months, you must disclose the campaign contribution before making your comments.  4 October 17, 2025 Materials submitted after distribution of the agenda packet are available for public inspection at www.paloalto.gov/agendas. Climate Action and Sustainability Committee Staff Report Report Type: ACTION ITEMS Lead Department: City Clerk Meeting Date: October 17, 2025 Report #:2510-5274 TITLE Recommendation to the City Council to Approve the Advanced Commercial Heat Pump HVAC Program Design Guidelines; CEQA Status -– Categorically Exempt Under CEQA Guidelines Section 153021 (Replacement of Existing Facilities), Replacement of Existing Rooftop HVAC Units with Heat Pumps is Categorically Exempt This will be a late packet report published on October 9, 2025. Item 1 Item 1 Staff Report        Item 1: Staff Report Pg. 1  Packet Pg. 5 of 27  Climate Action and Sustainability Committee Staff Report Report Type: ACTION ITEMS Lead Department: City Clerk Meeting Date: October 17, 2025 Report #:2510-5275 TITLE Discussion of Preliminary Analysis of the Infrastructure Impacts Associated with Gas Decommissioning; CEQA Status - Not a Project This will be a late packet report published on October 9, 2025. Item 2 Item 2 Staff Report        Item 2: Staff Report Pg. 1  Packet Pg. 6 of 27  Climate Action and Sustainability Committee Staff Report From: City Manager Report Type: ACTION ITEMS Lead Department: Public Works Meeting Date: October 17, 2025 Report #:2507-5024 TITLE Recommendation to the City Council to Approve the Advanced Commercial Heat Pump HVAC Program Design Guidelines; CEQA Status – Categorically Exempt Under CEQA Guidelines Section 15302 (Replacement of Existing Facilities) RECOMMENDATION Staff recommends that the Climate Action and Sustainability Committee recommend the City Council approve the Advanced Commercial Heat Pump HVAC Pilot Program Design Guidelines. EXECUTIVE SUMMARY As part of the City’s Sustainability and Climate Action Plan (S/CAP), staff launched a pilot program in summer 2024 to encourage commercial customers to replace gas-fired packaged HVAC units with electric heat pump HVAC systems.1 To date, 14 customers have enrolled in the pilot, six projects have secured permits, and three projects have been completed. Preliminary results confirm that heat pump replacements are technically feasible and ranged from an 18% savings in up-front cost to a 40% additional cost compared to like-for-like gas system replacements. When there is additional cost, voluntary adoption can be difficult without financing options. Early projects also highlighted permitting challenges that add to overall project costs and complexity. While these requirements are necessary for safety and compliance, they can discourage voluntary adoption. A study of non-residential building equipment performed by a City consultant indicated heat pump replacements may result in bill savings, but this is yet to be confirmed by the projects in progress. Building on these lessons, staff proposes an Advanced Commercial Heat Pump HVAC (HPHVAC) Pilot Program. The goal of the program would be to replace direct incentives with scalable financing options while providing optional technical assistance. The program is designed to 1 https://www.paloalto.gov/Departments/Utilities/Electrification/Business-Electrification/Commercial-Heat-Pump- HVAC-Program Item 1. Item 1 Late Packet Report        Item 1.: Staff Report Pg. 1  Packet Pg. 7 of 27  reduce barriers to adoption while maintaining compliance with all applicable permitting requirements. BACKGROUND The City’s S/CAP identifies building electrification as a primary strategy for achieving community-wide greenhouse gas (GHG) reductions. Commercial buildings account for 16% of the City’s total natural gas use, with packaged HVAC units representing about 70% of commercial space-heating systems. In summer 2024, staff introduced a pilot program to incentivize early adoption of heat pump HVAC systems funded by up to $1.2 million in Public Benefits (Research and Development) funding. Incentives were temporarily increased for the first 10 complete projects. The program was designed to generate cost and performance data, inform customer decision-making, and identify barriers to broader adoption. Results to date show: 14 customers enrolled in the pilot 6 projects permitted 3 projects completed While technically successful, the pilot demonstrated that incremental costs remain a major adoption barrier for property owners. On average, cost estimates for electric heat pump HVAC systems were approximately 22% higher than comparable gas system quotes, ranging from 18% below to 40% higher. Among the three completed projects, the average increase in final cost relative to the initial estimate for electric heat pump HVAC installations was $34,024, and the average project cost was $244,751. The average price per ton for the installed heat pump HVAC units was $9,819. Contractor and customer feedback further indicated that, outside of the program, many customers replacing gas packaged HVAC units do not obtain permits. Permitting requirements identified through the pilot included: Structural engineering studies on roof integrity for rooftop units. Sound studies to demonstrate compliance with noise standards. Visual screening/line-of-sight reviews. Fire Department permits, including hazardous materials documentation and equipment labeling. Because participation in the pilot required securing all necessary permits, this added an average of $3,118 in permit costs plus a variable amount of cost in consulting and contractor fees to comply, sometimes in the tens of thousands of dollars. Since only three participants in the program have completed projects so far, staff has limited data points. One community member Item 1. Item 1 Late Packet Report        Item 1.: Staff Report Pg. 2  Packet Pg. 8 of 27  was quoted over $10,000 to complete a sound study, while another completed the study for a negligible increase to their overall project quote. One community member incurred a $5,000 cost for hazardous materials services. Another was looking at potential increases of over $10,000 related to roof structural calculations related to the HVAC roof attachment method. Staff is continuing to gather information on how these additional consulting and engineering services needs increase project costs, and ways to help community members comply at lower cost. These requirements are necessary to ensure safety, compliance, and community standards, but the additional project costs and time can sometimes create uncertainty and frustration for customers. Two customers withdrew from the program due to the cost and permitting requirements, despite the enhanced rebates. ANALYSIS Staff drew on its experience with the current HVAC enhanced rebate program,3 research done as part of the S/CAP Funding Study and corresponding Non-Residential Building Sector Study (which are not yet final), and some interviews (participants, contractors, a financing provider, and a consultant) as detailed in the Stakeholder Engagement section below, to develop the Program Design Guidelines for the Advanced Commercial Heat Pump Heating, Ventilation, and Cooling (HVAC) Pilot Program (Program Design Guidelines) in Attachment A. Staff has learned from its existing program how to navigate the permitting process and the associated costs. The studies gave staff indications that packaged space heating electrification should provide long- term utility bill savings. In the participant and business partner interviews, staff found potential interest in financing, particularly on-bill financing, and especially if it enabled the cost of improvements that benefit tenants to be passed through to them based on the bill savings they would realize. Customers consistently noted that they would not have been able to pursue these projects without the boosted incentive, underscoring the importance of strong financial support for large-scale upgrades. They noted the short payback period needed for a property investor to do these projects. They also appreciated the technical guidance provided by the third-party electrification engineering consultant, Prospect Silicon Valley, highlighting the value of ongoing technical assistance for complex projects such as heat pump HVAC. In addition, customers valued the hands-on support and direct communication offered by Utilities and Planning and Development Services staff on permitting matters, which further facilitated successful project completion. 3 https://www.paloalto.gov/Departments/Utilities/Electrification/Business-Electrification/Commercial-Heat-Pump- HVAC-Program Item 1. Item 1 Late Packet Report        Item 1.: Staff Report Pg. 3  Packet Pg. 9 of 27  The Program Design Guidelines generally address the following topics: Financing and Incentives One of the main challenges in the non-residential sector is the short payback period (2-4 years) required by most private investors before making a building or energy investment. Based on staff modeling using information from the S/CAP Funding Study and Non-Residential Building Sector Study (not yet final), the payback period for electrification of packaged HVAC units that cost 10% to 15% more than gas units would be 12 to 17 years. This means that even though these projects potentially provide a net benefit, they will not get done without some assistance. To date, staff has primarily used incentives. Incentives work if they are high enough, but high incentives are not a scalable solution for electrifying all of Palo Alto’s packaged HVAC units. In an Advanced HVAC Pilot Program staff would explore other approaches, primarily financing with on-bill repayment. Staff is in talks with a potential provider and has built the functionality in its billing system for on-bill repayment. Building owners prefer on-bill repayment, which they treat as an operating expense. They may be more willing to engage with this type of financing than traditional financing. Building owners also hesitate to make significant energy investments that save money for their tenants rather than themselves. Staff is exploring a potential tool called “electrification as a service” to address this. Modeled on “efficiency as a service” programs some energy efficiency companies run, an “electrification as a service” feature would involve the customer repaying some or all of the financing provided by the City or a 3rd party with a charge that does not exceed their utility bill savings. This may enable the placement of the charge on commercial tenant utility bills, with the right agreements in place, enabling the recovery of some of the costs for energy improvements from tenants, who experience utility bill reductions as a result. Funding sources and program structure are still being explored, though as noted in the Fiscal Impact section, some money is set aside for a program like this from Gas Cap and Trade revenues in the FY 2026 budget. These financing and “as a service” features, if feasible, may lead to more financially efficient, attractive commercial energy programs, that minimize the use of incentive funding. Technical Assistance The technical assistance envisioned for the Advanced Commercial HPHVAC Pilot Program is similar to that provided in the existing HP HVAC Pilot Program. These services included: Evaluating electrification project designs, including conducting preliminary reviews of project designs for Heat Pump HVAC installations and performing limited design checks on equipment, engineering plans, and project specifications. Providing electrification technical guidance, including offering non-biased, expert technical advice to CPAU commercial customers and validating equipment selections to ensure projects meet technical standards. Item 1. Item 1 Late Packet Report        Item 1.: Staff Report Pg. 4  Packet Pg. 10 of 27  Providing electrification cost guidance, including performing savings calculations and general project cost evaluations, assessing financial feasibility, and providing cost insights for customer projects. The consultant, Prospect Silicon Valley, provided electrification technical advisory services to three commercial customers to support their Heat Pump HVAC projects. Without the consultant’s guidance, these projects would likely have been delayed for years, potentially causing the customers to miss rebate opportunities or drop out of the program entirely. To support the successful adoption of commercial Heat Pump HVAC projects, there is also a clear interest in some form of assistance finding qualified contractors. The guidelines envision some form of complementary contractor list, and possibly even providing services to contractors, such as the ability to use a City financing program or a contact for trying to understand common permitting pitfalls. Permit Assistance and Streamlining Early projects in the current enhanced rebate HVAC pilot have highlighted several permitting- related challenges that informed the design guidelines and will inform program design: Many gas-for-gas replacements proceed without permits, avoiding compliance costs that are unavoidable for heat pump projects participating in a City program. Noise reports are required for all projects (per PAMC 18.42.190(B)(iii)). Equipment must be no louder than 15 dB above local ambient noise levels at 25 feet. Hiring an acoustical engineer can cost thousands of dollars and adds time to the overall project timeline. Structural engineering analysis is required for all rooftop packaged HVAC projects. These studies incur a cost and sometimes trigger additional work that needs to be completed for safety reasons. Screening requirements add cost, and may result in additional roofing loads, which could then incur the cost of a roof structural analysis. If a roof upgrade is required, that can be prohibitively costly and can stop a project. Fire Department requirements related to HVAC and hazardous materials permits, equipment labeling, and integration with fire alarm systems need more communication to applicants up front. Planning and Development Services and the Fire Department have been active in helping the Climate Action Team understand permitting requirements and discussing potential approaches to ease compliance costs and workload. FISCAL/RESOURCE IMPACT $1.1 million was approved in the FY 2026 budget5 for the Advanced Commercial HPHVAC Pilot Program, funded by Gas Cap and Trade revenues, which will support incentives if needed, 5 https://www.paloalto.gov/Departments/Administrative-Services/City-Budget Item 1. Item 1 Late Packet Report        Item 1.: Staff Report Pg. 5  Packet Pg. 11 of 27  outreach, technical assistance, and 3rd party program operation. Launch and operation of the program is expected to require approximately 0.75 FTE, which will be performed by existing staff and will include program design and operation, outreach, customer care, and establishment and operation of a financing and on-bill repayment program if implemented. Staff will continue to explore opportunities to leverage State and Federal funds if available. STAKEHOLDER ENGAGEMENT Staff engaged with pilot program participants, HVAC contractors, property managers, and lenders to inform program design. Key feedback highlighted the need for financing options, accessible technical expertise, and contractor familiarity with permitting processes. Detailed notes from the program are included in Attachment B. Staff will meet with the Climate Action Working Group in advance of the CASC meeting and will share feedback at that meeting. Further stakeholder engagement will be needed as staff develops more detailed program designs. ENVIRONMENTAL REVIEW The proposed program is categorically exempt from the California Environmental Quality Act (CEQA) under CEQA Guidelines section 15302 (Replacement of Existing Facilities). Replacement of existing HVAC equipment with more efficient units constitutes a minor alteration to existing facilities and is consistent with the S/CAP adopted in June 20237 and Comprehensive Plan adopted in November 2017.8 ATTACHMENTS Attachment A: Design Guidelines for Advanced Commercial Heat Pump HVAC Program Attachment B: Summary of Results To-Date from HVAC Enhanced Rebate Pilot Program APPROVED BY: Brad Eggleston, Director Public Works/City Engineer 7 https://www.paloalto.gov/City-Hall/Sustainability/SCAP 8 https://www.paloalto.gov/Departments/Planning-Development-Services/Housing-Policies-Projects/2030- Comprehensive-Plan Item 1. Item 1 Late Packet Report        Item 1.: Staff Report Pg. 6  Packet Pg. 12 of 27  Program Design Guidelines for Advanced Heating, Ventilation, and Cooling (HVAC) Pilot Program These design guidelines are meant to guide development of a financially accessible Advanced Packaged HVAC Pilot Program for non-residential customers. Program goals and scope The program should: 1. Ease electrification of non-residential packaged HVAC units 2. Pilot financial designs that can be deployed community-wide with little or no additional funding from the City 3. Enable participation by a wide range of contractors, building types, and landlord-tenant arrangements for payment of energy bills 4. Address landlord/tenant split incentives while being economically attractive to both landlords and tenants Program financial design To ensure the program is cost-effective, legally viable, and scalable: 1. It should provide financing rather than up-front incentives, and ideally financing that will encumber a property owner’s balance sheet as little as is feasible, such as on-bill repayment out of utility bill savings 2. Financial incentives may be offered only if legally appropriate and available, and are intended to be offered on a temporary basis. 3. Repayment of any financing offered should come from those who benefit, which could include both tenants and landlords 4. Should not increase tenant utility bills 5. Should be accessible to a range of contractors 6. Should incorporate risk management measures to control risks to the City Program technical design To keep program costs lower and easier for participants, staff should explore: 1. Streamlining of permit processes 2. Technical and permitting assistance for participants 3. Contractor training on program rules and operation 4. A courtesy contractor list Item 1. Attachment A - Design Guidelines for Advanced Commercial Heat Pump HVAC Program        Item 1.: Staff Report Pg. 7  Packet Pg. 13 of 27  Commercial Heat Pump HVAC Program Update September 16, 2025 Current Enrollment As of September 16, 2025, a total of 14 customers applied for the Commercial Heat Pump HVAC Pilot program. Applicants have primarily learned about the pilot through the Business Electrification Technical Assistance Program, the Business Customer Rebate Program website, and the Commercial and Industrial Energy Efficiency Program. Customers become eligible for rebate approval only after submitting all required documentation and securing an approved permit. Of the 14 applicants, seven have initiated the permitting process with the City, and six have received their permits. One customer has received their permit but has not submitted project cost estimates, resulting in only five customers being officially approved at this stage. To date, three customers have completed installations and received program rebates. Detailed project information for these installations is provided in a subsequent section of this report. Two participants have unenrolled from the program. In one case, a customer required an emergency replacement and proceeded with equipment available through their contractor, which did not meet the program’s efficiency requirements. In the second case, permitting requirements significantly increased project costs, approximately doubling the original estimate, leading the customer to withdraw. Table 1 provides a summary of the status and progression of all pilot participants. Table 1. Current Program Participation for the Commercial Heat Pump HVAC Program Cost Analysis Item 1. Attachment B - Summary of Results To-Date from HVAC Enhanced Rebate Pilot Program        Item 1.: Staff Report Pg. 8  Packet Pg. 14 of 27  The tables below address the current cost comparisons between project estimates, project costs, and rebate amounts. Table 2 compares heat pump HVAC quotes and gas quotes received from 10 customers against project cost estimates developed by Peninsula Clean Energy (PCE) in its 2021 commercial electrification analysis. PCE’s estimates were based on average equipment and labor costs at the time, calculated per ton across three equipment size categories: less than 5 tons, 5–10 tons, and 15–20 tons. On average, heat pump HVAC project estimates were 21.8% higher than gas quotes. Table 2. Heat Pump HVAC Project Estimate Comparison Between Gas, Electric Heat Pump, and Peninsula Clean Energy Predicted Costs Project 2 High Quotes Explained: • $6,980 out of the total cost is related to a heat pump water heater, meaning part of the total project estimate was associated with another project this customer plans to do simultaneously. • The address has a split system (one condenser and four heating units spread through the building) serving the downstairs and it requires more ducting and equipment. o The upstairs units use existing ducting, which is lower cost, because they are replacing a gas rooftop unit (RTU) with a heat pump packaged unit Project 5 Quotes Explained: This customer’s total project cost is significantly higher than usual for a project like this. This is because this customer redid their ducting and piping, which also resulted in added carpentry and painting costs. They also had additional electrical work done. • This is the percentage split cost breakdown of the $541,000 project total. o Carpentry, painting and electrical 21% o Equipment (condensers outdoor units and fan coils with new stats) 13% Item 1. Attachment B - Summary of Results To-Date from HVAC Enhanced Rebate Pilot Program        Item 1.: Staff Report Pg. 9  Packet Pg. 15 of 27  o Piping (drain pans, condensate piping and hard copper piping for long runs) Labor and material 28% o HVAC & Refrigerant (line sets, refrigerant and duct connections, including new plenums) Labor and material 37% Project 8 Low Gas Quote Explained: This participant did not address the cost differential in his documentation. The contractor who provided him with these quotes has been unresponsive, so he is now going to reach out to a new potential contractor to receive new quotes. Project 10 Quotes Explained: This participant’s higher heat pump HVAC quote reflects several factors: higher equipment and material costs compared to the gas alternative, additional work such as line setting, conduit, and breaker installation, and higher anticipated permitting expenses. In contrast, the gas quote did not account for replacement of the AC units. If those costs had been included, the “like-for-like” comparison would have been closer. Completed Project Details As of September 16, 2025, three customers have fully completed their projects. Table 3-5 highlights the cost comparison between these customer’s initial quote, final project cost, and rebate paid. Table 3. Dollar Comparison Between Project #1’s Quote, Project Cost, and Rebate Please note that this customer’s total project cost is less than the original price estimate received in the quote because the customer negotiated a lower cost when hiring the contractor to work on multiple projects at once. The City’s rebate covered 96% of this customer’s project cost. Item 1. Attachment B - Summary of Results To-Date from HVAC Enhanced Rebate Pilot Program        Item 1.: Staff Report Pg. 10  Packet Pg. 16 of 27  Table 4. Dollar Comparison Between Project #5’s Quote, Project Cost, and Rebate This customer’s costs increased from the original quote due to added work by the contractor and permitting costs, which were $1,268.90. The City’s rebate covered 17% of this customer’s project cost. Table 5. Dollar Comparison Between Project #7’s Quote, Project Cost, and Rebate This customer’s total project cost was higher due to the addition of a phase 2 to their project and the $1,437.84 permit fee. This addition came after the quotes were processed and phase 1 was completed. Item 1. Attachment B - Summary of Results To-Date from HVAC Enhanced Rebate Pilot Program        Item 1.: Staff Report Pg. 11  Packet Pg. 17 of 27  The reason for their decision to replace another unit was due to the increased rebates offered by CPAU and the ease of completing phase 1. Due to the added unit on this project, their rebate came out to be $43,750, which covered 67% of their total project cost. Installation Location for HP HVAC Equipment At this time, we do not have complete data on the installation locations of the heat pump HVAC equipment for all applicants. Among those who have submitted site plans or permit information, four projects consist of rooftop HVAC units. Due to the structure of the rooftop, three projects are ground- level installations. The installation location for the remaining 6 active participants is currently unknown. It is also possible that some customers may install equipment in both rooftop and ground locations, but this has not been confirmed. Table 6 below summarizes the number of customers in each category. Table 6. Locations of Installed Heat Pump HVAC Equipment Summary of Permitting Comments As of September 15, 2025, 7 customers have applied for the commercial heat pump HVAC permit through the City’s Planning and Development Services (PDS) Department. Here is a consolidated list of corrective comments provided to the customers and their contractors from the City’s PDS Department. Many customers who participated in the pilot program received similar feedback on their permit submissions. Learning about these recurring comments help us understand where there are gaps in permitting instructions and opportunities on where we can smooth out the process for customers. When submitting plans, PDS wants all details to be accurate and documentation to be complete, including manufacturer’s specs that match the project plan details, showing where equipment and electrical panels will be located, and clearly labeling the mechanical and electrical scope. Plans must show property lines and setbacks. For rooftop equipment, engineers need to confirm the roof can Item 1. Attachment B - Summary of Results To-Date from HVAC Enhanced Rebate Pilot Program        Item 1.: Staff Report Pg. 12  Packet Pg. 18 of 27  handle the added weight, show how it will be anchored, and provide details on ductwork, drains, and demolition. Wood blocks (sleepers) aren’t allowed unless fully roofed over. The City also checks for noise and safety. Equipment must meet local noise limits, and an acoustical engineer’s report or post-installation testing is required. Fire safety permits are needed for both refrigerant removal and installation, and the Fire Department requires notes on the plans and how the HVAC system connects with the fire system in the building. A special inspection form must also be submitted, listing contractors, agencies, and required safety checks. Overall, the City’s goal is to make sure projects are well-documented, safe, and considerate of the community. Based on the permitting requirements outlined above, some customers were able to provide details on the additional costs some of these requirements added to their projects. For the structural analysis, one customer’s initial cost for this study was around $25,000. There is a possibility there will be an added cost of $12,000-$15,000 if the City’s PDS requires additional analysis for the curbs. For the HazMat permitting, one customer was quoted $5,000. This is not confirmed though, since the customer hasn’t completed this portion of the permit yet. There has been mixed feedback on the added cost for the sound engineering analysis. One customer was told the cost would be “insignificant.” On the other hand, another customer was quoted $10,000-$12,000. It has been challenging to pinpoint the exact cost of each study because most engineers group the costs in the final invoice. We are waiting for more feedback on these items as projects move forward. Item 1. Attachment B - Summary of Results To-Date from HVAC Enhanced Rebate Pilot Program        Item 1.: Staff Report Pg. 13  Packet Pg. 19 of 27  Climate Action and Sustainability Committee Staff Report From: City Manager Report Type: ACTION ITEMS Lead Department: Public Works Meeting Date: October 17, 2025 Report #:2507-5022 TITLE Discussion of Preliminary Analysis of the Infrastructure Impacts Associated with Gas Decommissioning; CEQA Status - Not a Project RECOMMENDATION This is a discussion item and no recommendation is requested. Staff is briefing the Climate Action and Sustainability Committee (CASC) on preliminary results from the Gas Transition Study to hear questions from the CASC that could inform future work on the analysis and to provide information that could inform S/CAP work planning and financial planning efforts. EXECUTIVE SUMMARY Achieving the community’s greenhouse gas emissions reductions goals requires extensive reductions in building emissions. Regardless of how quickly the community reaches these goals, impacts on the gas utility’s financial structure and physical operations are expected. Staff is studying those impacts. Item 5.D. in the S/CAP workplan, “Gas Utility Financial and Operating Plan”, seeks to develop a financial and operating plan for declining gas utility sales that maintains safety and solvency while providing affordable gas service to remaining gas uses. The study will simulate different patterns of electrification throughout Palo Alto, identify opportunities for gas main and service abandonment and operational efficiencies, and estimate abandonment costs, changes in operational costs, and customer class cost allocations. It will prioritize gas system safety and identify parts of the gas system that may need to be retained for operational reasons even after substantial parts of the system have electrified. Staff is sharing preliminary results from the first part of the Gas Transition Study with the CASC so staff can adjust course as needed as they work to complete the study. Item 2. Item 2 Late Packet Report        Item 2.: Staff Report Pg. 1  Packet Pg. 20 of 27  BACKGROUND Staff reviewed the methodology for this analysis with the CASC at its June 13, 2025 meeting1 and with the Utilities Advisory Commission (UAC) at its September 3, 2025 meeting. The study involves multiple steps: 1. Build a system model for the gas utility to evaluate the system effects of gas main removal. This step was completed in April 2025. 2. Develop a model of which homes are connected to which mains and estimating what equipment is in each home based on gas consumption. This step is complete. 3. Simulate different levels of electrification and identifying the number of mains that can be abandoned and validate using the gas system model. 4. Categorize costs by how they decline, based on declining gas sales, gas meter disconnections, and gas main abandonment then estimate the impact of varying levels of electrification on gas utility costs, other utility costs, and General Fund costs. 5. Evaluate impacts on customer groups and identify any groups that could be especially impacted in the transition without careful planning. 6. Identify potential mitigations to any issues the analysis above identifies. The scenarios to be analyzed include the following levels of electrification: Scenario Gas Sales Reduction Residential Space and Water Heating Electrification Small and Medium Non- Residential Space and Water Heating Electrification Medical and Industrial Electrification* 1 20%25%25%0% 2 40%50%50%0% 3 60%75%75%0% 4 80%100%100%0% * In practice, some electrification will occur in this sector, but staff does not have good visibility on the potential for electrification in this space due to the prevalence of unique / process loads Staff already completed phases one and two of the methodology (develop a gas model and estimate type of equipment in each home) and is currently completing phases three and four, simulating different levels of electrification and evaluating the impact on gas utility costs. 1 Climate Action and Sustainability Committee, June 13, 2025, Discussion of Gas Utility Transition Study Scoping, https://cityofpaloalto.primegov.com/meetings/ItemWithTemplateType?id=8207&meetingTemplateType=2&compil edMeetingDocumentId=14791 Item 2. Item 2 Late Packet Report        Item 2.: Staff Report Pg. 2  Packet Pg. 21 of 27  ANALYSIS The City’s consultant, Energeia, presented some preliminary results of study phases 2 and 3 (estimating gas equipment in each home and simulating different levels of electrification) in late August. Attachment A shows estimated quantities of gas equipment in single family homes and multi-family buildings based on gas usage. The preliminary results estimated 96% of single- family homes had at least one major gas appliance. About 85% of single-family water heating and 81% of single-family space heating is estimated to be gas-driven. About 61% of water heating and 50% of space heating equipment in multi-family buildings is estimated to use gas. This aligns with preliminary expectations in the process of community electrification, but these numbers will likely change as results are reviewed in more detail and any data errors or omissions are identified and fixed. Using these estimates the consultant simulated the levels of electrification included in the methodology. The consultant’s simulation found, preliminarily, that as electrification increased to the point that gas use was reduced 20% and 40% (which represents about 25% and 50% electrification of residential buildings and commercial buildings excluding medical and industrial), only a few mains could be abandoned. At 60% reduction in gas use, only about 10% of mains could be abandoned. Opportunities for gas main abandonment began to increase as reduction in gas use stepped from 60% to 80% (75% to 100% electrification of residential and commercial buildings excluding medical and industrial), with the number of mains eligible for abandonment increasing from 10% to 90%. At 80% gas use reduction, about 90% of residential mains were eligible for abandonment and most commercial area mains could be abandoned as well, leaving a small amount of infrastructure available for medical and industrial customers. These results are preliminary and this scenario is still being modeled in more detail. One key insight is that significant electrification and reductions in gas sales could take place before the cost reductions associated with abandoned mains are realized. As noted below, though, only about 40% of gas utility costs decline as gas mains are abandoned, so the rate impact will be limited to rate impacts associated with this portion of costs. In the next phase of the study staff will estimate the scale of potential rate impacts from this disparity between declines in sales and declines in costs. Staff will also refine the underlying simulations and develop tables to provide more detailed insights. A high-level overview of the assumptions and methodology behind the preliminary analysis is included in Attachment A. Staff has also begun phase four of the study, identifying which types of costs are expected to decline based on usage and which costs would require gas main abandonment to decline. A list of these costs is included in Attachment A. Gas supply, gas transmission, and environmental charges decline with the number of units of gas sold, as do demand side management (gas efficiency) and the General Fund transfer. Customer Service costs will eventually decline with gas disconnections. All of these costs together represent about 60% of the gas utility’s total Item 2. Item 2 Late Packet Report        Item 2.: Staff Report Pg. 3  Packet Pg. 22 of 27  costs. Other gas distribution costs, which represent the remaining 40% of the gas utility’s costs, do not decline with declining sales or customer disconnections. Nearly all gas distribution costs require gas main abandonment before they can be reduced, and they do not necessarily decline linearly. Attachment A includes a table showing all the different cost categories and how they decline. FISCAL/RESOURCE IMPACT Staff’s takeaway from these two sets of insights is that there are likely to be times during the gas transition when sales have decreased faster than costs, which could put upward pressure on rates if not managed properly. Solutions are needed to manage gas utility rates in the early and middle stages of electrification, which may include new revenue sources or taxes. Determining feasible and legal alternatives will be an important part of the next phase of work in 2026 as the Gas Transition Study is continued. In addition, staff will need to evaluate whether any customer classes experience disproportionate impacts and ensure solutions address those issues. And lastly, the study will need to estimate potential impacts on income-qualified customers as well. Special utility revenue sources like Gas Cap and Trade, Electric Cap and Trade, and Gas and Electric Public Benefits are likely insufficient to manage the gas rate impacts even if this use aligns with the regulatory requirements. Preliminary S/CAP Funding Study data3 (presented at the April 4, 2025 CASC meeting) showed that there are some scenarios in which community benefits from electrification would exceed community costs, including lost gas revenue. Staff and its consultants will complete more detailed estimates of the cost and revenue impacts to the gas utility at various levels of electrification as part of the Gas Transition Study. Staff plans to estimate the cost impacts of various levels of electrification and the impact on various customer classes in the coming months and will return to the UAC and CASC in early 2026 with the results and a list of potential mitigations for any impacts as part of the Gas Transition Study. The study is still in progress, but staff estimates total cost of $150,000 in consulting services ($60,000 for building a gas model and $90,000 for rate analysis and scenario simulation) and about 0.3 FTE in staff time (0.15 FTE from Utilities Water-Gas-Wastewater Engineering and 0.15 FTE from the Utilities Resource Management Division and the Climate Action Team combined). 3 Climate Action and Sustainability Committee, April 4, 2025, Discussion of Preliminary Sustainability and Climate A ction Plan (S/CAP) Funding Study Results, https://cityofpaloalto.primegov.com/meetings/ItemWithTemplateType?i d=7672&meetingTemplateType=2&compiledMeetingDocumentId=13682 Item 2. Item 2 Late Packet Report        Item 2.: Staff Report Pg. 4  Packet Pg. 23 of 27  STAKEHOLDER ENGAGEMENT This topic was discussed by the UAC at its November 20205 and January 20216 meetings, and since then the need to more carefully assess the costs of transitioning the gas utility has been raised in several meetings of the UAC, S/CAP climate stakeholders, the Council subcommittees focused on climate contexts, and at City Council. The UAC discussed these preliminary results at its October 1, 2025 meeting. Commissioners found the preliminary findings to be validating of their insight expressed at previous meetings that it would be challenging to get whole blocks to disconnect. There was a request to include an 80% gas sales reduction scenario done using a Monte Carlo simulation of gas disconnection rather than just setting residential and small and medium non-residential equipment electrification rates to 100%. There was appreciation expressed for the clarification that 60% of gas utility costs would decline with sales, that only 40% was fixed, but also a request to model those percentages under different gas price assumptions, since commodity prices fluctuate. They also asked questions about current rates of electrification and future plans to accelerate electrification. One Commissioner asked that there be eventual consideration of the pros and cons of trying to sell the gas utility as an option for controlling the potential impact on gas rates of high levels of electrification. Commissioners provided feedback on how to communicate some of the insights more effectively. ENVIRONMENTAL REVIEW The CASC’s discussion of this topic does not meet the California Environmental Quality Act’s definition of a project, pursuant to Public Resources Code Section 21065, and no environmental review is required. ATTACHMENTS Attachment A: Assumptions, Methodology, and Preliminary Key Results from Gas Transition Study Currently in Progress APPROVED BY: Brad Eggleston, Director Public Works/City Engineer 5 Staff Report ID#11639, November 4, 2020, Discussion of Electrification Cost and Staffing Impacts on the City of Pa lo Alto's Electric and Gas Distribution Systems, http://cityofpaloalto.org/civicax/filebank/blobdload.aspx?BlobID=7 8897 6 Staff Report ID#11751, January 6, 2021, Discussion of Projected Electrification Impacts on Gas Utility System Average Rates, https://www.cityofpaloalto.org/files/assets/public/agendas-minutes- reports/agendasminutes/utilities-advisory-commission/archived-agenda-and-minutes/agendas-and-minutes- 2021/01-06-2021special/01-06-21-uac-item-1.pdf Item 2. Item 2 Late Packet Report        Item 2.: Staff Report Pg. 5  Packet Pg. 24 of 27  Attachment A Assumptions, Methodology, and Preliminary Key Results from Gas Transition Study Currently in Progress This attachment gives a high-level overview of various inputs, estimates, assumptions, methodological detail, and some key preliminary results for the Gas Transition Study. Estimated Quantities of Gas Equipment in Single-Family Homes Based on Gas Use Staff’s consultant, Energeia, used anonymized gas usage information from all homes and businesses in Palo Alto to estimate what gas equipment was in the homes. Seasonal usage patterns were used to estimate water heating and space heating gas use. Other data used included home sizes and whether the County Assessor’s data for the parcel noted a pool. Multi-family building equipment was estimated by looking at the combined gas use for the entire building, including the house accounts, to determine whether space and water heating equipment was centrally located or in units and whether that equipment was gas or electric. Equipment in commercial buildings was not estimated, but basic estimates of how much gas was used for space heating vs. water heating were created. Based on that information the following very preliminary estimates for populations of gas equipment were generated. Note that the total number of single-family and multi-family units identified are a bit lower than would be expected based on other sources, indicating the need to review the underlying inputs for missing data. Note that multi-family gas equipment accounts are expected to be significantly lower than the number of multi-family units in Palo Alto, since many apartment units do not have dedicated gas meters, having electric or central gas space heating and central gas water heating. Equipment # units % gas % electric Single family Water heating 13,077 85% 15% Space heating 82% 18% Multi-family Water heating 3,963 61% 39% Space heating 50% 50% Gas Utility Costs and How Electrification Would Affect them The table below lists the different costs the gas utility incurs, what percentage of the utility’s costs each category represented in FY 2024, and what factors would lead to each category of costs declining. Item 2. Attachment A - Assumptions, Methodology, and Preliminary Key Results from Gas Transition Study Currently in Progress        Item 2.: Staff Report Pg. 6  Packet Pg. 25 of 27  Attachment A Cost Category Varies Based On % of Gas Utility Cost (FY24) Decreases when Commodity, Transportation, and Environmental Sales 41% Sales decline General Fund Transfers Sales 15% Sales decline Demand Side Management Sales 1% Sales decline Customer Service # Customers 4% Customers disconnect Operations and Maintenance (incl. Engineering) Miles of main, main age 16% Lengths of main are abandoned, especially older materials or steel Capital Investment (incl. Engineering) Miles of Main needing Replacement 13% Lengths of main needing replacement are abandoned Administrative Overhead: Mostly staffing 7% Enough lengths of main abandoned that the gas utility needs fewer staff Supply Management Does not vary 2% Gas is no longer used in Palo Alto Debt Service Debt service schedule 1% Debt is paid off Rent Square footage of gas receiving stations 1% Gas is no longer used in Palo Alto Estimated Gas Main Abandonment Opportunity for Different Electrification Levels The City’s consultant ran the following simulations, which loosely aligned with the scenarios discussed with the Climate Action and Sustainability Committee and Utilities Advisory Commission: Scenario Gas Sales Reduction Residential Space and Water Heating Electrification Small and Medium Non- Residential Space and Water Heating Electrification Medical and Industrial Electrification* 1 20% 25% 25% 0% 2 40% 50% 50% 0% 3 60% 75% 75% 0% 4 80% 100% 100% 0% * In practice, some electrification will occur in this sector, but staff does not have good visibility on the potential for electrification in this space due to the prevalence of unique / process loads Item 2. Attachment A - Assumptions, Methodology, and Preliminary Key Results from Gas Transition Study Currently in Progress        Item 2.: Staff Report Pg. 7  Packet Pg. 26 of 27  Attachment A The consultant found the following after simulating several iterations of random electrification among the sectors noted above. The chart below shows the number and percentage of gas mains with the number of connections shown on the x axis. So, for example, under the 60% scenario about 300 mains (about 10%) had no connections and could be removed, while over 500 mains (about 20%) had only one connection. And the number of mains with no connections increased from almost none under the 20% scenario to about 40 in the 40% scenario, over 300 in the 60% scenario, and the vast majority of mains in the 80% scenario. More work is needed to identify the miles of main that can be removed in each scenario, how many mains need to be retained for operational purposes, and how many mains have minimal gas usage and could be retired with the right outreach and incentives to the connected building owners. Item 2. Attachment A - Assumptions, Methodology, and Preliminary Key Results from Gas Transition Study Currently in Progress        Item 2.: Staff Report Pg. 8  Packet Pg. 27 of 27