City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: Utilities
Meeting Date: April 15, 2024
Staff Report: 2403-2724
TITLE
Staff Recommends Increasing the Budget for the Advanced Heat Pump Water Heater Pilot Program by $846,000 to Increase Participation with Higher Rebates, and Amend the Fiscal Year Budget Appropriation for the Gas Fund; CEQA Status: Not a Project under CEQA Guidelines Section 15378(b)(5)
RECOMMENDATION
Staff recommends that Council:
1. Increase the budget for the Advanced Heat Pump Water Heater (HPWH) Pilot Program by $846,000 to increase participation.
2. Amend the Fiscal Year 2024 Budget Appropriation (requires a 2/3 vote) for the following:
a. Gas Fund
i. Increase the Contract Services expenditure appropriation by $846,000; and
ii. Decrease the Gas Cap and Trade Reserve by $846,000.
EXECUTIVE SUMMARY
Last year staff launched the City’s pilot Heat Pump Water Heater program offering expert help to residents install a better water heater. The City handles the permits, contractors, and installation for program participants. This program is one of many home electrification tools available to Palo Alto residents to support a greener community and advance the Council’s Climate Change & Natural Environment - Protection & Adaptation 2024 priority.
Since November 1, 2023 the City has offered discounted pricing for its full-service HPWH program due to the availability of State incentive funds. This lower pricing has helped increase participation in the program, noting as of April 1, 2024 there are nearly 350 participants. Staff recommends increasing the program budget by $846,000 to continue to offer lower pricing for the full-service program. The list below shows the up-front cost to the participant for that program over time:
•Participant up-front cost at program launch (March 2023): $2,700 + site preparation costs (about $1,000 on average)
•Current pricing (as of November 1, 2023): $1,900 + a $1,500 credit toward site preparation costs, which covers 100% of the site preparation costs for most customers •Tentative pricing if additional budget is approved (with this action): $2,300 + $1,000 credit toward site preparation costs
Should Council approve the budget action as part of this staff report, this would mean program participants savings of up to $6,060, versus today’s savings (with State incentives) of up to $7,100.
With this budget amendment staff would also increase the rebate for those residents who hire their own contractors. Analysis of 2023 projects showed that customers paid, on average, $1,000 less when they used the full-service program instead of hiring their own contractor. Staff believes encouraging more contractors to install HPWH in Palo Alto will help the community electrify more quickly in the future, advancing the Council’s sustainability goals set through the City’s Sustainability Climate Action Plan (S/CAP). With this additional budget, staff would change the rebate from the current level ($2,300) to a graduated rebate (55% of project costs up to $3,500).
BACKGROUND
The City of Palo Alto launched the Advanced Heat Pump Water Heater (HPWH) Pilot Program in March 2023. It included two alternatives for participants: 1) hire your own contractor and get a $2,300 rebate, or 2) participate in the full-service program. The full service HPWH program provides an end-to-end advisory and installation service to homeowners to switch from a gas water heater to a HPWH at a discounted price. The program also offers an on-bill financing option with 0% interest to lower the upfront cost to customers. As of March 7, 2024 over 300 people have contracted for a HPWH through the program, 266 through the full-service program and 57 through the rebate program. With the current pace of new signups, the City is on track to do around 250 to 300 installations per year, equivalent to about 25% of the water heaters replaced each year. On November 1, 2023 the State launched TECH Clean California, a statewide initiative designed to accelerate heat pump adoption. Homeowners statewide could receive incentives of $3,100 to $3,800 for HPWHs installed by TECH-certified contractors, which could be paired with local rebates like Palo Alto’s. The City was also able to incorporate this new incentive into the Full-Service HPWH program to lower the price of that program to $1,900. The City also added up to $1,500 in credits for site preparation work such as long conduit runs, relocation of the water heater, etc. Even though it lowered the program pricing, the City was still able to reduce the amount of incentive funding it committed to each installation due to the large State incentives provided. The City saved roughly $170,000 from November 1, 2023 through March 7, 2024 when the State incentive budget was exhausted. The improved pricing helped drive program participation. At least 60 customers who had previously dropped out of the program rejoined upon learning about the new incentives and more favorable pricing. The incentive also increased the percentage of people who signed a contract after initially signing up, rather than leaving the program. However, on March 7, the TECH Clean CA program announced that the funds had been fully expended. Available funds declined more rapidly than expected, likely due to the unexpected addition of multi-family central water heating to the program.
To avoid program disruption staff is devoting some of the $170,000 savings noted above to maintain the current program pricing until Council is able to act on this staff recommendation.
ANALYSIS
Cost of installation continues to be a key decision in whether to install a heat pump water heater over gas water heater.
To maintain the momentum of residents taking advantage of the full-service program staff is recommending pricing of $2,300 (for a standard 65 gallon HPWH) and an up to $1000 credit for site preparation measures.
To keep the rebate program competitive with the full-service program staff would like to change the rebate to be 55% of project costs up to a maximum of $3,500. These actions would require an additional $846,000 in funding to cover the remaining ~700 HPWH installations to meet the pilot program target of 1,000 HPWH.
Staff evaluated several alternatives, as shown in Table 1, below.
Table 1: Pricing Alternatives Considered and Budget Required Option Pricing (65 gallon HPWH) Funding Need
1: Return to original pricing $2,700, no site prep allowance None 2: Maintain Current Pricing $1,900 + $1,500 site prep allowance $1.63 million 3: Lower pricing + site
preparation credit
$2,300 + $1000 site prep allowance $850,000
4: Original pricing + site
preparation credit
$2,700 + $1000 site prep allowance $560,000
The following chart gives an example of how the revised pricing in the staff recommended alternative 3 would work for a participant in the full-service program. Assuming a 65-gallon HPWH with an up-front City-contracted cost of $7,561 and $1,000 in site preparation expenses, the $1,000 site preparation credit and the $5,261 in City discounts would yield a participant cost of $2,300. Most customers will also be eligible for a 30% federal tax credit (up to $2,000), which would result in a total customer cost of $1,610.
This is well below the average cost to install a conventional gas water heater, which is estimated at $2,000 or more. However, even the up-front price without the tax credit is competitive with a gas water heater. Since it may be difficult for many participants to psychologically factor in the tax credit when making decisions, staff believes it is important for the up-front cost to remain competitive. And those participants who would like to pay even less up-front can take advantage of the $1,200 on-bill financing loan and pay $1,100 up-front with a $20/month charge on their electric bill for five years, which staff expects to be partially or fully offset by utility bill savings from switching from gas to electricity.
FISCAL/RESOURCE IMPACT
Staff recommends an appropriation of $846,000 in the FY 2024 Electric Fund operating budget to fund the Advanced Heat Pump Water Heater Pilot Program, offset by a reduction of $846,000 from the Gas Fund’s Gas Cap and Trade Reserve, which is projected to be at $12.1 million at the end of fiscal year (FY) 2024 ($11.2 million after the proposed withdrawal, assuming program participants use the entire $846,000). New revenue for this reserve is expected to be $2 million to $3 million per year through FY 2029. The existing reserve, the new revenue, and other available funding sources like the Low Carbon Fuel Standard reserve and revenues and the Electric Utility Cap and Trade and Public Benefits reserves and revenues should provide enough funding for other decarbonization programs in addition to this program, even if this additional budget for the HPWH program is approved.
STAKEHOLDER ENGAGEMENT
Staff reviewed this proposal with the Council Ad Hoc Climate Protection Committee, which unanimously recommended approval. Staff continues to engage key stakeholders and S/CAP working group members about this program and other elements of our S/CAP implementation.
Communications and outreach continues to build community awareness about the benefits of the HPWH program, including recently sending a postcard to all households in Palo Alto.
Notable that as part of our digital advertising, interest and value in the program is highest when
discussing savings to residents and taking actions to protect our planet. Program website can be found at www.cityofpaloalto.org/switch.
ENVIRONMENTAL REVIEW
Council’s approval of the Advanced Heat Pump Water Heater Program budget is not subject to CEQA review, as an administrative government activity that will not result in any direct or indirect physical change to the environment (CEQA Guidelines section 15378(b)(5)). Potential environmental impacts of the Advanced Heat Pump Water Heater Program were analyzed as part of the Sustainability and Climate Action Plan (S/CAP) Addendum to the Comprehensive Plan Environmental Impact Report. On June 5, 2023 (Staff Report #2303-1158) Council certified the Addendum, which found that the S/CAP programs would not result in any significant or substantially more severe effects beyond what was previously analyzed in the Comprehensive Plan EIR.
ATTACHMENTS
None.
APPROVED BY:
Dean Batchelor, Director of Utilities