City Council
Staff Report
From: City Manager
Report Type: ACTION ITEM
Lead Department: Utilities
Meeting Date: September 15, 2025
Report #:2501-4048
TITLE
Approval of a Third Phase Agreement with Northern California Power Agency for the Purchase of Battery Energy Storage Capacity from Trolley Pass Project LLC, over a Term of up to 20 Years for a Total Not to Exceed Amount of $161.7 Million; CEQA status: not a project under CEQA Guidelines sections 15378(a), (b)(5)
RECOMMENDATION
The Utilities Advisory Commission (UAC) and staff recommend that the City Council:
1. Authorize the City Manager, or their designee, to execute a Third Phase Agreement (Attachment A) with the Northern California Power Agency (NCPA) to purchase the output of a 50-megawatt (MW) share of a grid-connected battery energy storage system (BESS) owned by Trolley Pass Project LLC, a subsidiary of Aypa Power Development (Aypa), over a period of 20 years, at a total cost not to exceed $161.7 million;
2. Authorize the City Manager, or their designee, to execute on behalf of the City all related documents or agreements necessary to administer the Third Phase Agreement that are consistent with the Palo Alto Municipal Code and City Council-approved policies, including, but not limited to, collateral assignment agreements; and take any and all actions as are necessary or advisable to implement and administer the Third Phase Agreement; and,
3.Authorize the City Manager, or their designee, to approve and execute amendments to the Third Phase Agreement, as may be required from time to time, so long as the contract price and length of the agreement remain unchanged.
EXECUTIVE SUMMARY
Through a Request for Proposals (RFP) recently conducted by NCPA, the City can enter into an agreement to purchase energy storage capacity from Aypa's Trolley BESS Project. This agreement is for a 50 MW share of a grid-connected battery energy storage system (BESS) over 20 years, at a cost not to exceed $161.7 million. The project is expected to begin operations in June 2029.
The proposed contract is intended to help the City ensure continued compliance with its resource adequacy (RA) capacity procurement obligations and to provide a financial hedge against the market price exposure created by the solar resources in the City’s supply portfolio. The recommendation aligns with the City's 2023 Integrated Resource Plan (IRP) and will help satisfy requirements under Assembly Bill (AB) 2514 regarding energy storage procurement.
While the market for renewable energy and storage has seen price increases recently due to strong demand, supply chain issues, inflation, and tax and trade policy uncertainties, staff analysis indicates that the Trolley project will provide net financial benefits to the City. The contract is structured with NCPA acting as an intermediary, and participating NCPA members will enter into Third Phase Agreements with NCPA. The City will not be at risk of paying for output that is not delivered.
BACKGROUND
The proposed contract will help the City’s electric utility satisfy one of its core needs: resource RA capacity to meet its RA procurement requirements. This recommendation is also consistent with the new resource acquisition schedule outlined in the City’s 2023 IRP. Furthermore, this report and the recommendation to procure BESS capacity from the two projects will enable the City to satisfy its requirements under Assembly Bill (AB) 2514 to regularly evaluate the cost- effectiveness of energy storage.1
Load Requirements
The City’s overall electricity consumption in 2024 was 922 gigawatt-hours (GWh), which represents a 12% increase (100 GWh) from the level in 2021. While this is a substantial amount of load growth in such a short period of time, it tracks closely with the load projections that staff presented in the 2023 IRP, as illustrated by Figure 1 below. While the trajectory of future load remains uncertain, staff anticipates some level of additional growth due to the City’s aggressive building and transportation electrification efforts, as well as reports of potential new data center projects from some of the City’s commercial customers.
1 The City’s most recent AB 2514 Energy Storage Report (Staff Report 12142, April 2021) found that “neither energy storage within the City nor on the transmission system [is] cost effective for the utility or its customers as a whole,” and therefore the City declined to establish an energy storage procurement target at the time. However, it also noted that staff “will continue to monitor this rapidly maturing space and continue looking for specific projects which by virtue of their location could provide extraordinary resiliency, lower carbon emissions, and/or lower distribution system costs,” and that staff will evaluate utility-scale storage proposals and “will move forward with competitive projects that complement CPAU’s existing supply portfolio.” This report serves as an update to this 2021 report’s analysis on the cost-effectiveness of utility-scale energy storage resources, with staff now finding them to provide a net benefit to the City.
Staff Report 12142: https://www.cityofpaloalto.org/files/assets/public/v/1/agendas-minutes-reports/reports/city- manager-reports-cmrs/year-archive/2021/id-12142.pdf
Figure 1: Actual and Projected Load Compared to 2023 IRP Load Projections RA Requirements
In response to the severe electricity shortages, rolling blackouts, and increasing wholesale electricity prices that gripped the state during the energy crisis of 2000-2001, in 2004 California adopted an official RA program. The purpose of the program is to ensure the safe and reliable operation of the electric grid by requiring utilities to procure and maintain sufficient generating capacity – including from BESS facilities – to meet statewide peak demand plus a planning reserve margin (currently around 15%). While the City currently meets its system RA obligations, approximately 50 MW of RA capacity from its largest hydroelectric resource is at risk starting as early as 2027 due to potential regulatory changes.
The Market for Energy Storage and Renewable Energy in California California's renewable energy and storage market has evolved significantly over the past decade due to shifting state and federal policies. While solar and storage prices steadily declined from 2010 to 2020, they have begun to increase in recent years. This market shift is attributable to: (a) strong demand driven by the state's ambitious procurement requirements for renewable energy, RA, and storage; (b) pandemic-related supply chain issues and inflation; and (c) recent volatility in federal trade policy and uncertainty surrounding future federal tax incentives for renewable energy and storage projects.
In 2022, Congress passed the Inflation Reduction Act (IRA), which provided generous benefits to developers of renewable energy and storage projects, and which extended those benefits into the 2030s. However, in July 2025 Congress passed a wide-ranging domestic policy law that
dramatically scales back those benefits for solar and wind projects and adds new restrictions on the incentives for energy storage and other renewable resources. Furthermore, the U.S. has recently imposed a shifting series of tariffs on imports coming from most countries, including very steep ones on goods coming from China – which is a major producer of solar cells, lithium- ion batteries, as well as the raw materials and components that go into those products. This unprecedented level of policy uncertainty facing the renewable energy and storage industry in the U.S. has caused many project developers to put their development efforts on hold and has led others to raise the prices of the projects they are marketing.
Despite these challenges, renewable energy and storage capacity continue to grow steadily, as utilities strive to meet their various procurement requirements and ensure system reliability in the face of growing loads. Today, California has approximately 20,000 MW of utility-scale solar capacity in operation2, along with approximately 30,000 MW of behind-the-meter solar capacity.3 The state’s BESS capacity has also exploded, going from just 771 MW in 2019 to over 15,000 MW operating today.4
ANALYSIS
Results of NCPA’s 2024 Renewable Energy and Storage RFP In early 2024, NCPA5 issued an RFP for new renewable and/or carbon-free generating resources and energy-storage resources. 6 By the submission deadline in April 2024, NCPA had received a total of about 30 proposals, all of which were for solar and/or BESS facilities. Palo Alto staff evaluated these proposals, primarily based on the economic value provided by each project relative to its cost, narrowing the list down to a handful of projects. During the evaluation, some projects were removed from consideration after securing contracts with other buyers.
Ultimately, Palo Alto staff expressed strong interest in the Trolley contract, as well as a portion of a 200 MW solar-plus-storage project located in Fresno County. Unfortunately, after months of negotiations between the project developer and NCPA and member utility staff, the solar-plus- storage discussions broke down due to an inability to agree to terms related to the risks associated with interconnection delays and tariff price risk. As a result, staff will pursue other avenues in the coming months for procuring additional renewable energy capacity.
Aypa’s Trolley BESS Project Summary
Aypa submitted several BESS project proposals into NCPA’s 2024 RFP, including the Trolley project. Trolley is a planned 400 MW BESS project located in San Bernardino County, near the 2 Energy Information Administration: https://www.eia.gov/state/analysis.php?sid=CA 3 Solar Energy Industries Association: https://seia.org/wp-content/uploads/2025/03/California-3.pdf 4 Governor’s office: https://www.gov.ca.gov/2025/05/19/since-governor-newsom-took-office-californias-battery- storage-has-increased-1944-and-just-achieved-a-major-milestone/ 5 NCPA is a not-for-profit Joint Powers Agency whose membership includes municipalities, a rural electric cooperative, and other publicly owned entities, including the City of Palo Alto. The mission of NCPA is to provide members cost effective wholesale power, energy-related services, and advocacy on behalf of public power consumers through joint action.
6 Section 2.30.340(d) of the City’s Municipal Code permits the City to procure wholesale utility commodities and services through public agencies, including NCPA.
City of Rancho Cucamonga. The project is at an advanced stage of development, with an executed interconnection agreement (with Southern California Edison), and a Full Capacity Deliverability Status (FCDS) designation from the California Independent System Operator (CAISO), allowing its capacity to count towards RA obligations. It is expected to begin operating in June 2029.
The 20-year Energy Storage Services Agreement (ESSA) with Aypa has a contract price of $12.71/kW-month. However, due to current federal tax and trade policy uncertainty, the agreement allows Aypa to seek a slight price increase (up to 6%) within the next year if an independent evaluator confirms it's necessary for project viability due to cost increases such as changes in tax law or supply chain problems beyond Aypa's control. Even with a potential price increase, the Trolley project remains competitive with other BESS proposals presented to NCPA and is still projected to offer a net financial benefit to the City over its contract term.
Due to the high penetration levels of solar generation in California (particularly Southern California), there are often wide intraday price spreads between the solar-heavy mid-day hours and the more expensive evening hours, when load tends to increase just as solar generation tapers off. BESS facilities are perfectly positioned to capture this value opportunity, charging during the low-priced midday period and discharging during the high-priced evening hours. 7 Despite the significant increase in California’s BESS capacity over the last several years, solar generation capacity continues to grow at an even faster rate, suggesting that this value opportunity is likely to persist or even expand in the future.
The Trolley project's estimated net energy arbitrage value over the contract term will roughly equal its contract cost, based on a long-term forecast of energy prices at its location and a model of the battery's four-hour charging/discharging pattern. The project will also provide valuable RA capacity to the City. Assuming the project’s RA capacity value equals NCPA's current monthly Capacity Pool Program prices, staff estimates the project's overall net value to be approximately $7.70/kW-month, or $4.63 million annually for a 50 MW share.
Other NCPA members seeking a share of the Trolley project include the Cities of Santa Clara (200 MW), Redding (45 MW), Alameda (10 MW), and several smaller members. Staff recommends that Palo Alto contract for a 50 MW share of the Trolley project, primarily due to the RA needs of the City’s existing resource portfolio (as discussed further below). If Palo Alto receives a 50 MW share, NCPA members will collectively be contracting for 320 MW of the project’s total 400 MW capacity.
7 The Trolley BESS project will be scheduled by NCPA in a way that maximizes the total net revenue it produces – whether in the ancillary services (regulation up/down) market, or in the energy market. Most likely it will be used in the “energy arbitrage” manner described here, charging during the lowest priced hours of the day and discharging during the highest priced hours. It will not explicitly operate as a “load-following” resource (i.e., one that attempts to balance the City’s load and resource supplies), because the City’s portfolio has a high concentration of solar generation it tends to have surplus supplies during the lowest priced hours of the day, and therefore the BESS will likely have the effect of balancing the City’s load and generation supplies.
Accurately predicting the net value of any 15- or 20-year contract is challenging due to significant uncertainties in future energy and RA prices, which are influenced by macroeconomic conditions, regulations, and regional power market dynamics. Furthermore, the Trolley contract has added economic valuation uncertainty due to the potential for a slight contract price increase discussed above even after execution. Nonetheless, staff anticipates the resource will be a beneficial long- term investment for the City.
Contract Structure
The Trolley agreement is structured as a direct contract between NCPA and the project developer, Aypa. To enable NCPA to enter into this agreement, participating NCPA members must execute Third Phase Agreements with NCPA, which specify the rights and obligations of NCPA and participating members regarding governance and administration of the agreement.
These Third Phase Agreements also obligate the participating members to pay their contract percentage share of all project costs, including administrative services costs, scheduling coordination costs, and all other costs related to the ESSA. The City and NCPA utilized the same contractual arrangement in 2023 for the Calpine geothermal agreement.
Palo Alto’s Electric Supply Portfolio with the Trolley Project As noted earlier, the Trolley project will provide the City with valuable RA capacity and a financial hedge against intraday market price volatility. In addition, adding this BESS capacity to the City’s supply portfolio aligns with the City’s adopted 2023 Integrated Resource Plan (IRP).
However, because BESS facilities only store (rather than generate) energy, this resource will not have any impact on the City’s renewable portfolio standard (RPS) position. Additionally, BESS facilities actually consume a small amount of energy, due to the 10-15% roundtrip efficiency losses that are inherent to batteries. This minimal effect on the City’s load-resource balance is illustrated by the small gray bars below the x-axis in Figure 2.
As Figure 2 illustrates, starting in 2029 staff projects that the City’s load will exceed the volume of generation supplies that are currently under contract, and these deficits are projected to grow over time as existing contracts expire and the City’s load increases. Staff is actively working to acquire resources to fill these deficit positions – for example, by initiating discussions with two of the City’s existing suppliers about extending wind and landfill gas PPAs that are set to expire in the next few years. NCPA is also preparing to issue another RFP in early 2026 for new renewable energy and storage resources, and Utilities staff will again actively participate in this process to pursue new generation supplies.
Figure 2: Projected Annual Load and Energy Supplies with Trolley As a load-serving entity within the CAISO balancing authority, the City must comply with Resource Adequacy (RA) market obligations. CAISO RA requirements specify the annual and monthly generating capacity levels the City must procure for local, system, and flexible RA needs – which are based on the City’s projected peak load plus a planning reserve margin (PRM). The City currently satisfies its RA requirements by leveraging its own resources, participating in NCPA's Capacity Pool Program, and engaging in bilateral transactions with other market participants. The BESS capacity from the Trolley contract will contribute to the City's system RA requirements.
Figures 3 below indicates that the City currently has system RA surpluses of approximately 50 MW per month. The recommended share of the Trolley contract would increase the City’s system RA surplus position by 50 MW. Note, however, that roughly half of the RA capacity that the City receives from its largest single resource (representing about 50 MW from the Western Base Resource hydroelectric contract) is at risk as early as 2027 due to potential regulatory changes.
Figure 3: Annual Average System RA Balance Forecast with Trolley Consistency with IRP’s Recommended Plan
In 2023, in accordance with state law, the City adopted an Integrated Resource Plan (IRP) that included an extensive analysis of its future load and resource needs. The IRP’s Recommended Plan called for acquiring 25 MW of new solar generation capacity in both 2030 and 2031 (followed by additional volumes in the late 2030s and early 2040s), plus some BESS capacity in the early 2040s8. Approving the Trolley contract aligns with the IRP’s recommendations, although the BESS capacity will come online about a decade sooner than planned. This deviation is justified by the potential loss of significant RA capacity from the City’s existing supply portfolio—a possibility that was not apparent in 2023 – and the strong financial merit of the Trolley contract.
Also, in the IRP staff noted that an important goal in new resource acquisitions was to diversify the City’s supply portfolio and reduce its seasonal and intraday market price exposure. Given that Palo Alto’s current electric supply portfolio lacks large-scale energy storage capacity, the recommended addition of 50 MW of BESS capacity will significantly diversify the City’s resource mix. And with a significant concentration of solar resources in both the City's supply portfolio and the broader CAISO grid, the addition of this BESS capacity will allow NCPA to balance the City’s load while substantially mitigating the City's exposure to daily low-priced hours. 8 Specifically, the Recommended Plan included 25 MW of 4-hour BESS capacity in 2041, 25 MW of 10-hour BESS capacity in 2043, and 25 MW of 8-hour BESS capacity in 2045.
Risk Management Assessment
In general, businesses in the renewable industry often lack extensive financial and operational track records, and due to their capital-intensive nature, they tend to be highly leveraged as well.
Aypa fits this pattern, in that it does not have a credit rating or an extensive balance sheet.
However, it is a Blackstone portfolio company with a proven history of developing energy storage and hybrid (solar-plus-storage) renewable projects across North America, with 35 projects completed or under construction.
To mitigate the credit risk associated with the supplier, the contract requires that Aypa provide a significant amount of collateral (in the form of cash or a letter of credit)9, which would protect the City and the other offtakers in a scenario where the facility is unable to produce the contracted output and the market price of the replacement storage capacity is higher than the price of this resource. And crucially, under the terms of the proposed contract the City is not at risk for paying for output that is not delivered. The City will only be obligated to pay if Trolley’s capacity is available to be used for RA compliance and energy arbitrage purposes.
FISCAL/RESOURCE IMPACT
Council approval of this Third Phase Agreement will grant the City the rights to a 50 MW share of the Trolley BESS, with a total not-to-exceed amount of $8.08 million/year during the 20-year contract term (which is expected to begin in June 2029). Funding for the purchase of the Trolley output will be included in the Electric Utility Fund budget beginning in FY 2029.
STAKEHOLDER ENGAGEMENT
Utilities staff and the City Attorney’s Office coordinated with NCPA staff as well as staff from other participating NCPA member agencies to negotiate the terms of the contract with Aypa.
Utilities staff also consulted with Administrative Services Department staff to assess the credit risk associated with this contract.
At its July 9, 2025 meeting, the UAC reviewed staff’s recommendation to contract for a 50 MW share of the Trolley BESS project. Commissioners inquired about how the project will be operated and various contract provisions, the expected impacts on the renewable energy and storage industry from the recent passage of new federal domestic policy laws, and the risks the City may face through this agreement. Following this discussion, the UAC voted unanimously (7-0) to recommend that the City Council approve the staff recommendation.
ENVIRONMENTAL REVIEW
The City Council’s recommendation to approve the Trolley Third Phase Agreements does not meet the definition of a project under the California Environmental Quality Act (CEQA), pursuant 9 The collateral requirement will initially be $20 million for NCPA’s share of the contract, increasing to $40 million on January 1, 2028. Once the project begins operating, the collateral requirement will be $32 million throughout the term of the agreement.
to CEQA Guidelines sections 15378(a) since Palo Alto’s purchase of capacity and storage under this Agreement has no potential to result in a physical change to the environment, and 15378(b)(5), since entering the agreement is an administrative action of government that will not result in physical changes to the environment. The Seller, Trolley Pass Project, LLC, is responsible for obtaining CEQA approvals from Rancho Cucamonga, the Lead Agency, under Article 13 of the Agreement. The City has no obligation to make any purchases under the Agreement until CEQA approvals for the underlying Project are complete, the judicial review period for CEQA challenges has passed, or such challenges, if any, have been dismissed.
ATTACHMENTS
Attachment A: Third Phase Agreement with NCPA for the Trolley BESS Project APPROVED BY:
Alan Kurotori, Utilities Director
Staff: Jim Stack, Ph.D, Senior Resource Planner