City Council
Staff Report
From: City Manager
Report Type: INFORMATION REPORTS
Lead Department: Utilities
Meeting Date: May 4, 2026
Report #:2604-6219
TITLE
Electric Grid Modernization FY 2026 Update; CEQA Status – Not a Project
RECOMMENDATION
Informational report regarding the City’s grid modernization efforts, no Council action is requested.
EXECUTIVE SUMMARY
Palo Alto Palo Alto’s Electric Grid Modernization Project (Grid-Mod) was developed to prepare the City’s electric grid in anticipation of building and transportation electrification and to improve system reliability. Palo Alto’s electric grid can be characterized as an efficient but aged system that has, in large part, reached the end of its useful life. Some in-service equipment was originally installed in the mid 1950’s and has served the City well over those 70+ years.
However, due to both the age of the electric system and electrification’s forecasted increased energy demands, the City’s grid must be reconstructed and modernized to serve these higher loads while maintaining system reliability.
To prepare for Palo Alto’s increased electric demands, it will be more cost effective to incorporating newer technologies, implementing current utility best practices, and preparing for higher adoption rates of self-generation, and energy storage at those system components are replaced. However, the age and size of Palo Alto’s system requires a large financial commitment, two to three times historical funding levels, over many years to replace aging infrastructure and support electrification. The initial estimate for Grid-Mod was approximately $300 million over a five-year period. Current staff estimates, with distribution upgrades (local transformers and secondary) paced to match customer participation, reach $342 million (present value) between FY 2026 and FY 2034. If all 12kV distribution upgrades are completed before FY 2034 staff-estimated costs for Grid-Mod through FY 2034 are $443 million (present value). Staff will need to integrate these estimates into strategic discussions regarding matching the community’s pace for electrification, how costs could vary depending on faster or slower rates of residential electrification, and how much aging infrastructure replacement is needed regardless of new electrification loads. Staff does expect installation costs to follow forecasted
inflation trends for construction costs. Additionally, as adoption rates ramp up staff expect to rely more heavily on contracted services that come with a higher cost than internal staff resources.
BACKGROUND
In 2020, the City set a goal to reduce GHG emissions 80% below 1990 levels by 2030 (80x30 goal). A 2020 analysis1 indicated that to meet the 80x30 goal, the City would need, among other things, to electrify all single-family homes by replacing natural gas equipment with efficient electric appliances and support electric vehicle charging. The 2020 study estimated peak demands from single-family dwellings at 8.5kW without consideration of home EV charging.
When including a single, level-2 EV charger, customer peak demands could rise to 19.5kW.
Compared to historical average peak demands of 1 to 2kW per home, residential electrification represents a significant new demand on CPAU’s distribution system. Due to the higher expected demands, Palo Alto’s electric system requires extensive upgrades to increase capacity while replacing aging equipment to improve system reliability.
To support the electrification of Palo Alto’s residential sector and rebuild the electric distribution system, the City Council adopted the FY 2025–2029 Capital Budget including an electric capital improvement budget of roughly $300 million for Grid-Mod projects. In FY 2025 CPAU began work within the initial Grid-Mod pilot area. Completed in mid-2025, this pilot area upgraded the distribution system for roughly 900 homes at a cost of roughly $10 million. At the same time, CPAU engineering staff began the planning process to replace and upgrade Colorado substation’s 60kV breakers, 115kV/60kV bank, eliminate legacy 4kV distribution systems, and other work related to aged facilities.
Through the completion of the distribution Grid-Mod pilot area, staff gained improved cost estimates, updated customer load expectations, and new approaches to support residential electrification projects. The pilot project also allowed engineering staff to identify additional substation and transmission upgrades necessary to support electrification and desired reliability improvements.
ANALYSIS
As mentioned above, a large portion of Palo Alto’s 80x30 climate goal depends on electrification of Palo Alto’s residential sector. To do so requires upgrading the distribution system for roughly 25,000 residential customers. Initial plans for these upgrades anticipated a seven-year build and a systematic approach of completing upgrades within distinct grids. In practice, staff found that a more strategic and customer-responsive approach is warranted, along with prioritizing system upgrades to substations and sub-transmission systems. 1 City of Palo Alto (2020), Preliminary Analysis of the Utility Costs & Staffing Impact to Electrify All Single-Family Residences in Palo Alto
Elimination of Legacy 4kV Systems While Increasing Capacity Palo Alto currently serves roughly 2,900 customers through two separate legacy 4,000-volt (4kV) systems. These two isolated systems (no ties to adjacent substations) rely on aging facilities installed in the 1950s and 1960s. As this equipment ages, it has a higher likelihood of in-service failures resulting in more frequent customer power outages. Due to the isolation of the two 4kV systems, a major failure could result in a prolonged outage to many Palo Alto electric customers.
Staff have refocused efforts to convert these remaining areas of 4kV distribution system to the City’s standard voltage of 12,000volt (12kV). In upgrading these facilities, staff are building additional capacity to allow for residential building electrification and future EV charging.
Building these upgrades at the time of 4kV conversions lowers costs and prepares the distribution system for future efficient electric appliances and home EV charging.
Building Upgrades When and Where Needed
During Grid-Mod’s pilot phase, the City’s initial plan was to complete system capacity upgrades in a systematic way, crossing the City east to west. Early on, Staff found that this approach either delayed residential projects or placed large improvement costs onto residents if their electrification efforts didn’t align with Grid-Mod’s planned roll out. To address this, staff began upgrading small but targeted sections of the distribution system to align with building permits related to electrification. This approach creates a more strategic and surgical approach to upgrading the distribution system. Adopting a “when and where” approach requires more flexibility from CPAU engineering and construction but is customer focused and provides the opportunity to delay costly system upgrades until electric customers are ready to replace gas appliances or install EV chargers. Additionally, the “when and where” approach allows engineering staff to improve reliability by advancing the replacement of existing distribution transformers loaded beyond their design ratings under the Grid-Mod Project.
In completing distribution system upgrades for residential building permits, engineering staff are re-evaluating expected residential peak demands and equipment that can help to limit or reduce peak demands, ultimately lowering costs to electrify. Many homeowners seeking electrification and EV charging are installing multiple charging ports (between 7kW to 11kW each). Initial planning of Grid-Mod did not anticipate providing full Level-2 charging for multiple EVs per dwelling. To allow residential customers multiple charging points while reducing system demands, CPAU engineering is implementing port sharing technology to allow multiple cars to be plugged in simultaneously but limiting aggregated charging demands to no more than 11kW per dwelling. Implementing this technology provides cost savings to the Grid-Mod project and limits the overall strain on CPAU’s grid.
Replacing Aging Substation Equipment
Palo Alto owns and operates nine substations, some of which continue to rely on equipment installed in the 1950s and 1960s. In recent years, the City has experienced increased failures, and staff expects the rate of these failures to increase until the equipment is replaced. Both the Hopkins (installed 1967) and East Meadow (installed 1955) substations are beyond their expected life and should be reconstructed to maintain system reliability. Additionally, the Hopkins and East Meadow substations are 4kV stations and cannot be quickly restored following a major equipment failure. Staff are beginning the design phase to replace both Hopkins and East Meadow substations to mitigate the risk of failed equipment while increasing system capacity to serve the higher demands of electrified homes. Due to four-to-five-year lead times of substation power transformers, these projects will begin the design phase in FY 2026 but will not complete construction until FY 2030 or after. Once completed, the reconstructed East Meadow and Hopkins substations allow offloading (transferring of customer loads to adjacent substations) the Colorado substation to facilitate needed equipment replacements within that substation.
The Colorado Substation also includes legacy equipment that has lasted beyond its expected life. Notable are the 60kV oil-circuit breakers, transformer Bank #3, system protection and controls, and distribution feeder outlets. As the City’s single interconnection point with PG&E’s transmission system, this station is critical to delivering power to the community. While a traditional and more rapid replacement approach would be a like-for-like replacement, due to the criticality of this station and the scope of needed improvements, CPAU engineering staff are completing a master plan to improve overall reliability while increasing capacity. The master plan will allow implementation of current utility best practices versus the existing construction of this 1970s era substation. The master plan also allows pre-planning the sequence of construction, a critical step as the substation will need to continue to serve customer loads while under construction.
Upgrading Sub-Transmission Systems to Improve Reliability During the summer of 2025, CPAU engineering staff tasked Flynn Consultants to complete an initial reliability analysis of the City’s sub-transmission loops. These 60,000 volts (60kV) loops provide redundant paths to each substation allowing sections of sub-transmission to fault and de-energize without creating sustained customer outages. The analysis showed that under peak or near peak loading conditions, the near instantaneous removal of segments of sub- transmission results in equipment overloads before staff can intervene. Overloads in overhead conductors can shorten remaining equipment life, elongate (sag) the wires reducing safety clearances from vegetation and nearby equipment and cause wider scale power outages.
While the original Grid-Mod project did not speak to transmission upgrades, staff are planning to complete a minimum of three miles of overhead sub-transmission reconductoring for replacement before the end of FY 2029. Replacing these sections of conductor will mitigate overloads and improve system availability under planned or unplanned outages. During the design phase for these reconductors, staff will assess advanced conductors that operate at higher temperatures and increased ampacities. The higher ampacity allows for increased loads without requiring significant upgrades to the existing wood transmission poles.
Tentative Project Schedule
Table 1 below provides an illustrative timeline for key Grid-Mod projects on a shortened timeline. The timelines shown in table 1 match Grid-Mod’s initial seven-year planned timeline but are heavily dependent upon material delivery times. The largest schedule impact is substation transformer delivery times estimated at four to five years from executed purchase orders. Staff’s availability to design and manage reconstruction projects will also limit project timelines.
Table 1: Timeline for Key Grid-Mod Projects
Table:1 – General timelines for key Grid-Mod Projects in support of electrification alongside estimated project costs adjusted for inflation.
The illustrative schedule in Table 1 indicates the starting and finish dates of various projects and work categories. Substation projects will require major material purchases in FY 2026 and FY 2027 to allow construction completion dates within FY 2031 or later. To fully implement a “When and Where” approach to the 12kV distribution system, staff is recommending planning for a longer reconstruction timeline. This approach allows CPAU electric engineering staff to focus on accelerating critical system rebuilds, such as the 4kV system, sub-transmission, and the Colorado substation which have a greater impact on overall system reliability. Additionally, employing the “When and Where” approach to the 12kV distribution rebuild could allow increased revenues from electrification to fund upgrades, softening future rate increases.
Below in Table 2, an illustrative timeline is presented for the key Grid-Mod projects along with estimated spend rates. Under this option, timelines remain the same as shown in Table 1 except Grid-Mod’s 12kV distribution upgrades have been scaled back to reflecting spending rates under a “When and Where” approach. Staff’s recommendation for 12kV distribution rebuilds will transition from a planned advanced replacement of equipment to a process which meets customer needs as they are ready to convert to efficient electric heating sources and home EV charging. This will lower near term spending and the need to issue debt by building the system as the load increases are occurring.
Project Description FY2026 FY2027 FY2028 FY2029 FY2030 FY2031 FY2032 FY2033 FY2034 Sub-Transmission Reconductor
4kV Substation Conversions
Colorado Substation Upgrades
Adobe Creek Substation Upgrades
Colorado 12kV Substation Upgrades
4kV Distribution Conversions
Grid-Mod 12kV Distribution Upgrades
Grid-Mod Estimate Costs w/ inflation
($ Millions) $32 $47 $78 $57 $59 $99 $92 $28 $30
Table 2: Key Grid Mod Projects and Expected Spend Rates Table:2 - General timelines for key Grid-Mod Projects with 12kV upgrades spread out over a longer period but tied directly to residential customers speed to install efficient electric appliances. Estimated project costs adjusted for inflation.
As shown in Table 2, staff’s recommendation significantly reduces near-term costs for Grid- Mod, deferring those costs to later years when the pace of residential electrification and revenues increase. This spending forecast reduces the expected five-year spend for Grid-Mod from $272 million to $154 million.
FISCAL/RESOURCE IMPACT
The completion of the Grid Modernization Project requires the City to commit, over many years, significant funding and resources. The original 2023 estimate for Grid-Mod was approximately $300 million within a seven-year period. Staff’s recommended approach to Grid- Mod results in funding estimates over the next five years (inclusive of FY 2026) of $154 million (see Table 2), roughly $118 million less than projects and timelines approved in the current CIP.
As many Grid-Mod projects will extend past the planning horizon, estimated costs through FY 2034 are just under $400 million. Through early planning and design phases, CPAU engineering staff will continue to refine and update project scopes and related cost estimates. Staff will endeavor to reduce project timelines and costs, while maintaining the overarching project goal of improving system reliability and building capacity for building and transportation electrification.
This level of rapid construction will require debt financing for most or potentially all Grid-Mod projects. In parallel with the annual budgeting process, staff will solidify Grid-Mod’s five-year CIP and develop a funding strategy for issuing debt. Due to the expected multi-year build, based on expected spend rates, multiple debt issuances are expected over the next eight years.
STAKEHOLDER ENGAGEMENT
This item was presented to Palo Alto’s Utilities Advisory Commission (UAC) on January 7th, 20263, and at the Climate Action & Sustainability Ad Hov Committee (CASC) on March 6th, 3 UAC Staff Report 2512-5638 Fiscal Year 2026 Mid-Year Electric Grid Modernization Update and Presentation https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=85181&dbid=0&repo=PaloAlto Project Description FY2026 FY2027 FY2028 FY2029 FY2030 FY2031 FY2032 FY2033 FY2034 Sub-Transmission Reconductor
4kV Substation Conversions
Colorado Substation Upgrades
Adobe Creek Substation Upgrades
Colorado 12kV Substation Upgrades
4kV Distribution Conversions
Grid-Mod 12kV Distribution Upgrades
Estimate Costs w/ inflation
($ Millions) $16 $37 $37 $25 $40 $60 $86 $59 $32
20265. During these meetings the UAC & CASC indicated support to align the pace of distribution system reconstruction with the pace of Palo Altans’ adoption of electrification. The UAC Commissioners noted that the slower pace will help maintain lower electric rates which ultimately supports fuel switching. The UAC further noted that it will be important to support the implementation of S/CAP initiatives and any resulting programs that ramp up fuel switching.
Both bodies generally agreed that a certain level of residential customer demand should be funded under the Grid Modernization effort. They indicated that larger demands, beyond what would be identified as average or acceptable load for a fully electrified home, should be funded directly by the property owner. However, both the UAC and CASC requested more data and analysis before setting this threshold. Staff are working to collect data and perform this additional analysis and will return to the UAC for further consideration.
The UAC and CASC both touched methods to incentivize residents to manage demands through new or emerging technologies (vehicle to grid, smart panels, EV plug sharing, etc.) and how staff are preparing to incorporate, as practical, these technologies to lessen the amount of system capacity being funded by Grid-Mod. Currently staff are requiring managed EV charging to limit each residential dwelling to no more than a total of 60amps for EV charging. This requirement won’t limit the number of vehicles that can plug in simultaneously, just the maximum energy draw for charging.
Members of the UAC and CASC also touched on potential rate structures and how alternate rates structures could incentives customer behaviors to limit peak system demands. Members of the CASC also questioned how the planned expenditures could be broken down further to demonstrate what portion of funding is necessary for equipment replacements (regardless of capacity), what portion is improving system reliability, and what portion is funding capacity expansions. While the intent of the presentation to the UAC and CASC was to focus on the projects, estimated costs, and timelines and did not speak in depth on project need or benefits, staff will consider how to include this information into the budget approval process.
ENVIRONMENTAL REVIEW
This informational report is not a project under CEQA and does not require environmental review. The physical construction of the Grid-Mod project is categorically exempt from the California Environmental Quality Act (CEQA) pursuant to CEQA Guidelines 15301 (repair, maintenance of existing facilities) and 15302 (replacement or reconstruction of existing facilities).
APPROVED BY:
Alan Kurotori, Director of Utilities
5 CASC Staff Report 2602-5990 Gird Modernization Update and Presentation https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=86701&dbid=0&repo=PaloAlto