City Council
Staff Report
From: City Manager
Report Type: INFORMATION REPORTS
Lead Department: Administrative Services
Meeting Date: June 15, 2026
Report #:2512-5673
TITLE
City of Palo Alto's Energy Risk Management Report for the first half of Fiscal Year 2026 (July 1, 2025 - December 31, 2025) CEQA Status – Not a Project
RECOMMENDATION
This is an informational report, and no City Council action is required.
EXECUTIVE SUMMARY
Staff continues to manage electricity and natural gas purchases in compliance with the City’s Energy Risk Management Policies, Guidelines, and Procedures. During the first half of FY 2026, Staff used fixed-price forward contracts, spot market purchases, diversified supply sources, and counterparty credit monitoring to reduce exposure to market volatility, supply disruptions, and counterparty defaults. As of December 31, 2025, the City’s fixed-price electricity purchases were $1.44 million above market value; however, active monitoring confirms this exposure remains within Energy Risk Management Guidelines.
These risk management actions strengthen cost stability, support reliable service delivery, and help protect the City from sudden price increases or replacement power costs. Staff also monitors reserve adequacy, liquidity, Expected Default Frequency, credit ratings, and market conditions to identify emerging risks before they materially affect operations or financial planning. Electric and Gas Supply Operations Reserves remain above FY 2026 minimum guideline levels, providing continued capacity to absorb market, operational, and infrastructure-related pressures. Staff identified no exceptions to the Energy Risk Management Policies, Guidelines, or Procedures during this reporting period.
BACKGROUND
The purpose of this report is to inform the Council about the status of the City’s energy portfolio and transactions executed with energy suppliers. The City’s Energy Risk Management Policy requires that staff report on a semi-annual basis on: 1) the City’s energy portfolio; 2) the City’s credit and market risk profile; 3) portfolio performance; and 4) other key market and risk information.
The City’s most recent Energy Risk Management Report covered the second half of FY2024 (January 1, 2024 – June 30, 2024). That report stated there were no exceptions to the City’s Energy Risk Management Policies, Guidelines, or Procedures in the second half of FY2024.
Following the issuance of that report, the regular reporting cadence established under the Energy Risk Management Policy was temporarily paused due to staffing transitions.1 To maintain transparency and provide continued oversight during this transition period, staff reports included relevant updates regarding the City’s energy portfolio, market conditions, portfolio performance, and associated credit and market risk exposures, which are described below:2
Fixed-price forward electricity purchases continue to reduce exposure to hourly market volatility by securing future supply at known prices. There were five purchase transactions from NextEra Energy, an approved counterparty with a Master Agreement with the City. These purchases were of minimal credit exposure.
Staff proposed the Trolley Battery Energy Storage System project with the counterparty, Aypa Power. Although Aypa did not have a credit rating or an extensive balance sheet, the agreement mitigated credit risk through cash or letter-of-credit collateral and payment terms tied to available capacity. Aypa's collateral requirement was initially $20 million. Once the project begins operating in June 2029, the collateral requirement will be $32 million throughout the term of the agreement.
1 Energy Risk Management Report for the second half of Fiscal Year 2024; March 24, 2025; \Clerk's Office\Staff Reports\City Council\2025\2025-03-24 Mar 24\Staff Report 2411-3789 2 Resolution 10204; Transact Electric Supplies to Meet the City’s Electrical Loads Under Electric Master Agreements, Under Specified Terms and Conditions During Calendar Years 2025 Through 2039, Inclusive; December 16, 2024: \Clerk's Office\Resolutions\2024 (#10142 - 10210)\RESO 10204 Staff Report 2411-3830; Utilities Quarterly Report for FY25-Q1; February 5, 2025; \Clerk's Office\Staff Reports\Utilities Advisory Commission\2025\2025-02-05 Feb 5\Staff Report 2411-3830 Staff Report 2411-4066; Utilities Quarterly Report for FY25-Q2; April 2, 2025; \Clerk's Office\Staff Reports\Utilities Advisory Commission\2025\2025-04-02 Apr 2\Staff Report 2411- 4066 Staff Report 2506-4778; 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; July 9, 2025; \Clerk's Office\Staff Reports\Utilities Advisory Commission\2025\2025-07-09 July 9\Staff Report 2506-4778 Staff Report 2501-4079; Utilities Quarterly Report for FY 2025- Q3/4; October 1, 2025; \Clerk's Office\Staff Reports\Utilities Advisory Commission\2025\2025-10-01 Oct 1\Staff Report 2501-4079 Resolution 10204 increased the electric Master Agreement transaction cap from $50 million to $75 million because supplier transaction volumes had approached the prior limit and are expected to increase over the next 12 to 15 years. This change improves procurement flexibility while maintaining oversight in accordance with the City’s Energy Risk Management policy.
As of March 2026, responsibility for Energy Risk Management and related reporting functions transitioned to the City’s current Risk Manager in the Administrative Services Department. This report re-establishes the City’s Energy Risk Management reporting cadence and provides an overview of the City’s energy portfolios, transactions, and risk exposures for the first half of FY2026 (July 1, 2025 – December 31, 2025).
The City’s Energy Risk Management Policy describes the organizational structure, authority, and processes for monitoring, measuring, and controlling market risks. “Market risks” include price and counterparty credit risk. These are risks the City is exposed to regularly when procuring electric supplies and, to a lesser extent, gas supplies, which are purchased at market rates via a monthly index price. The City’s Energy Risk Management function, whose role is to monitor and mitigate the energy market risks, is a part of the Administrative Services Department. This semi-annual report of FY 2026 Energy Risk Management contains information on the following:
Electricity Supplies
Hydroelectricity
Fixed-Price Forward Electricity Purchases
Gas Supplies
Counterparty Credit Risk
Electric Forward Mark-to-Market Values
Electric and Gas Supply Operations Reserves Adequacy
Exceptions to Energy Risk Management Policies, Guidelines, or Procedures
ANALYSIS
Electricity Supplies
To serve the City’s electric supply demands, the City utilizes a diversified portfolio of electric supply resources, including hydroelectric generation, long-term renewable energy contracts, fixed-priced wholesale purchases, and participation in the electric spot market. This diversified procurement strategy increases reliability, supports long-term cost stability, mitigates exposure to market volatility, and strengthens the City’s energy risk management framework.
Hydroelectric resources from the Calaveras and Western Hydroelectric Projects provide the City with long-term, carbon-free electricity that supports sustainability initiatives and reduces the City’s reliance on higher-cost market purchases. These hydroelectric resources are highly flexible and help balance the grid’s load and supply fluctuations. The City receives additional revenue as a result of these resources providing these grid stabilization services.
Renewable Energy contracts facilitate long-term electricity procurement from landfill gas converted to electricity, wind, geothermal, and solar resources. These contracts support the City’s commitment to clean energy and reducing greenhouse gas (GHG) emissions by 80%, as outlined in the 2022 Sustainability and Climate Action Plan.5 Wholesale purchases through fixed-price forward market contracts secure future electricity supplies at predetermined pricing. These contracts reduce the City’s financial exposure to energy market volatility and sudden price escalations, improving long-term budget stability and procurement planning.
The energy spot market addresses short-term demand fluctuations in the event of supply constraints or unforeseen operational conditions. Spot market purchases and sales, made at prevailing market prices, enable the City to reduce its exposure to potential supply shortfalls, therefore supporting continuity and reliability of electric service to the community.
The projected monthly load and supply sources and expected purchases of electricity supplies for 24 months from January 2026 to December 31, 2027, in gigawatt-hours (GWh), are shown in Figure 1. Hydroelectricity and solar are the predominant sources in the projection, complemented by wholesale purchases and other renewable energy sources. The negative bars represent wholesale market sales of excess electricity. These sales are a result of the City having large energy surpluses in the spring and summer seasons from our hydroelectric and solar resources. Selling surpluses during those periods enables the City to effectively mitigate financial and load exposures in the fall and winter seasons, when energy supplies are significantly lower.
5 2022 Sustainability and Climate Action Plan; June 5, 2023; \Clerk's Office\Staff Reports\City Council\2023\Staff Report 2303-1158 Hydroelectricity
In an average year, the City receives about 40% of its energy via hydroelectricity from the Calaveras project in Calaveras County and the Western project in the Central Valley corridor.
The cost of hydroelectricity received from Calaveras and Western is higher in $/MWh than the market value of electricity during on-peak hours. This cost is offset by gains during off-peak hours, which are at no cost to the City. The Calaveras project currently incurs higher costs than the Western project due to debt service related to the facility's construction. Once the debt is retired in 2032, the City is expected to benefit from lower ongoing project costs and improved value relative to prevailing electricity market prices. This will strengthen long-term rate stability and reduce the City’s exposure to market price volatility. Calaveras also provides the City with resource adequacy (RA) capacity and ancillary services (e.g., the ability to regulate energy output when the electric grid needs change), which are critical for load management and continuity of service. The values of RA capacity and ancillary services are not reflected in the mark-to-market calculation.
Fixed-Price Forward Electricity Purchases
All fixed-priced forward contracts mark-to-market (MTM) values are tracked by City staff.
Staff track the value that would be lost due to a counterparty failing to deliver on its Figure 1: Load and supply sources and purchases of electricity supplies for 24 months
contractual commitments, forcing the City to purchase replacement electricity in the market to reduce the impact of financial risk exposures.
As of December 31, 2025, the City secured fixed-priced electricity purchase contracts totaling 150,875 MWh for delivery over the next 15 months at an average price of $64.54 per MWh.
The City contracted these purchases with one of its approved counterparties: NextEra Energy Resources, which is rated Baa1 with a stable outlook by Moody’s. This rating and outlook adhere to PAMC Section 2.30.340.7
The City secured fixed-priced electricity sales contracts totaling 76,640 MWh over the next 20 months at an average price of $47.70 per MWh. The City contracted these sales to three of its approved counterparties: SENA, which is rated Ba1 with a stable outlook by Moody's; BP Energy Company, which is rated Ba1 with a stable outlook; and NextEra Energy Resources.
The 6-month MTM value of the City’s forward transactions for wholesale power was $-1.44 million for the first half of FY2026. While this negative MTM indicates the market value of these supplies was lower than the contract cost (for energy purchases), the MTM remains within the credit risk limits set by the Energy Risk Management Guidelines and presents minimal risk to the City’s financial outlook.
The City continues to track the mark-to-market value of its forward contracts.
The electric forward volumes in MWh, and MTM positions for each electric supplier by month of delivery for all forward fixed-price electricity contracts over the 6-month period ending December 31, 2025 are shown in Figure 2 and Figure 3.
7 Palo Alto Municipal Code(PAMC) Section 2.30.340 – Contracts for Wholesale Utility Commodities and Services https://codelibrary.amlegal.com/codes/paloalto/latest/paloalto_ca/0-0-0-61721
Gas Supplies
To serve the City’s natural gas needs, the City purchases gas on the monthly and daily spot markets.9 The City purchases all its forecasted gas needs for the month ahead at a price based on the published monthly spot market index price for that month. Within the month, the City’s gas operator, EDF Trading North America LLC, who is rated Ba1 with a stable outlook by Moody’s Credit Ratings, buys and sells gas to match the City’s daily needs if the actual daily usage is different from the forecasted daily usage. Those daily transactions are made at an average price based on the published daily spot market index. The monthly rate adjustment mechanism helps mitigate the City’s exposure to natural gas price volatility and minimizes counterparty risk exposure for the gas utility.
Counterparty Credit Risk
Staff monitors and reports on counterparty credit risk based on the major credit rating agencies’ (Moody’s and Fitch) scores. In accordance with the City’s policy and guidelines, a credit rating of Baa3 investment grade, or its equivalent, is the minimum recommended credit rating for counterparties.
It is important to note that, for contracts with renewable energy companies, Council waived the investment grade credit rating requirement of Section 2.30.340(d) of the Palo Alto Municipal Code, which applies to energy companies that do business with the City. In addition, the City structures Power Purchase Agreements with renewable energy companies based on “take or pay contracts”, and includes a firm liquidated damages provision. “Take or pay contracts” eliminate costs to the City if the energy purchased is not delivered due to delays or other events, caused by or in part by the counterparty. This contract basis reduces the City’s exposure to short-term market volatility and fluctuating spot market prices by providing the City with long-term price certainty and supply reliability. The liquidated damages provision mitigates performance risk in the event the counterparty fails to perform, and the City is forced to procure replacement power.
The City follows credit rating agency standards when establishing the acceptable threshold for Expected Default Frequency (EDF) of counterparties. The current threshold is 0.8%; this reflects a relatively low probability of default consistent with counterparties considered financially stable and operationally reliable.
The credit risk analysis for electric counterparties with whom the City has executed Master Agreements is summarized in Table 1. As of December 31st, 2025, Avangrid Renewables Holdings, Inc. and Silicon Valley Clean Energy Authority exceed the City’s maximum recommended EDF threshold. However, because the City does not have any outstanding transactions with these counterparties, there is no current credit exposure that would require an exception to the Energy Risk Management Policy. The policy only applies when the City is entering into or maintaining transactions with a counterparty whose EDF exceeds 9 Natural gas spot market purchases allow the City to procure gas at prevailing market prices, address short-term operational needs, supply imbalances or unanticipated changes in energy demand. the recommended limit. . Staff is monitoring Avangrid Renewables Holdings, Inc. and Silicon Valley Clean Energy Authority’s EDF on a quarterly basis. Counterparties experiencing minor increases in EDF, such as Powerex, BP, and SENA, will also be monitored by Staff. Staff will continue to report findings to City Council in this semi-annual report.
The credit risk analysis for gas counterparties with whom the City has executed Master Agreements is summarized in Table 2. As of December 31st, 2025, the City’s gas counterparties have maintained credit ratings that exceed City policy and guidelines minimums. Although the counterparties' EDF exceed the City's preferred threshold of 0.8%, staff continue to monitor these counterparties on an as-needed basis and, at a minimum, annually evaluate changes in financial condition, market activity, and overall creditworthiness. Gas counterparties generally have lower operational and financial exposures due to their ability to store gas, access liquid replacement markets, and more readily secure alternative supply arrangements in the event of a counterparty default. In addition, gas markets are typically less volatile and less time- sensitive, reducing the potential impact of supply distribution or contract failure.
The transactions with and credit exposure of the City’s electric and gas suppliers is summarized in Table 3. As of December 31, 2025, the City’s counterparty credit exposure remained within established counterparty credit limits. SENA and BP had positive mark-to-market positions of approximately $0.4M and $0.025M, respectively, creating minimal current credit exposure to the City. These amounts remain well below the approved exposure limits of $30.0M for SENA and $20.0M for BP. NextEra had a negative mark-to-market position of approximately $1.9 million, which represents an unfavorable market position for the City but does not create Table 1: Credit Risk Analysis of Approved Electric Counterparties as of 12/31/2025 Counterparty Name Credit Rating EDF Outlook Ratings Agency Issue Date BP Energy Company Ba1 0.96 Stable Moodys 12/31/2025
Constellation Energy Generation, LLC Aa2 0.03 Stable Moodys 12/31/2025 Avangrid Renewables Holdings, Inc. Ba1 1.01 Developing Moodys 12/31/2025 NextEra Energy Baa1 0.64 Stable Moodys 12/31/2025
PacifiCorp Baa2 0.15 Stable Moodys 12/31/2025
Powerex Baa1 0.97 Stable Moodys 12/31/2025
Shell Energy North America Ba1 0.96 Stable Moodys 12/31/2025 Turlock Irrigation District AA- Stable Fitch 12/31/2025 Silicon Valley Clean Energy Authority B2 3.97 Developing Moodys 12/31/2025 Table 1: Credit Risk Analysis of Approved Gas Counterparties as of 12/31/2025 Counterparty Name Credit Rating EDF Outlook Ratings Agency Issue Date EDF Trading North America Ba1 0.97 Stable Moodys 12/31/2025 Powerex Baa1 0.97 Stable Moodys 12/31/2025
Shell Energy North America Ba1 0.96 Stable Moodys 12/31/2025 ConocoPhillips Aa2 0.04 Stable Moodys 12/31/2025
BP Energy Company Ba1 0.96 Stable Moodys 12/31/2025
current counterparty credit exposure. Staff will continue to monitor mark-to-market values, credit ratings, and exposure limits as part of ongoing Energy Risk Management oversight.
Electric and Gas Supply Operations Reserves Adequacy
Electric and Gas Supply Operations Reserve levels remain adequate to support ongoing utility operations; however, both utilities continue experiencing financial pressures associated with infrastructure investments, CIP expenditures, and market volatility. The projected FY2026 Operations Reserve balance for Electric is $41.6M, which is below the target guideline of $49.6M, but is above the minimum guideline of $33.3M. The projected FY2026 Operations Reserve for Gas is $12.1M, which is below the target guideline of $14.1M, but above the minimum guideline of $9.4M.
Staff, in coordination with Energy Risk Management, continue to monitor reserve adequacy, liquidity exposure, and funding strategies.
Reserve Levels for Electric and Gas
The projected reserves of the Electric utility for FY 2026 as of December 31, 2025 is shown in Table 4.
Table 3: Transactions and Credit Exposure of Counterparties as of 12/31/2025 (in $000's) Counter Party Name
Cost of
Outstanding
Transactions
Market Value of
Transactions
Mark-to-
Market (MTM)
Supplier Credit
Exposure Limit
MTM < Credit
Limit? Credit Rating
SENA (1,785) (1,370) 414 30,000 Yes Ba1 BP (169) (144) 25 20,000 Yes Ba1 NextEra 7,980 6,101 (1,879) 15,000 Yes Baa1 The Electric Utility’s projected FY 2026 ending reserves total $125.9 million, compared to $127.2 million in FY 2025. Operations Reserves are projected to decrease from $46.6 million to $41.6 million, below the FY 2026 target guideline of $49.6 million, but above the minimum guideline of $33.3 million. Reserve levels continue to reflect financial pressures associated with grid modernization projects, CIP expenditures, infrastructure funding needs, and temporary cash flow demands prior to anticipated bond financing in FY 2027.
Staff continues to monitor reserve levels, cash flow impacts, and funding strategies as planned CIP expenditures and infrastructure commitments increase operational funding demands. Staff Table 4: Electric: Projected Reserves for Fiscal Year End 2026 as of December 31, 2025) FY 2025 Actual FY 2026 Projected
Starting Reserves
Operations Reserves 32,219 46,581
Hydro Stabilization Reserve 17,400 18,767
Electric Special Projects Reserve 22,649 30,149
Capital Reserves 880 880
Electrification Reserve 4,500 2,037
Other 26,229 28,784
Total Starting Reserves 103,877 127,198
Revenues
Net Sales 186,620 199,175
Wholesale Revenues 44,275 45,316
Other Revenues and Transfers In 13,181 12,010
Total Revenues 244,076 256,501
Expenses
Electric Supply Purchases 115,701 134,879
Operating Expenses 72,394 84,956
Capital Expenses 40,857 35,591
Total Expenses 228,952 255,426
Ending Reserves
Operations Reserves 46,581 41,634
Hydro Stabilization Reserve 18,767 18,767
Electric Special Projects Reserve 30,149 31,169
Capital Reserves 880 5,880
Electrification Reserve 2,037 2,037
Other Reserves 28,784 26,373
Total Ending Reserves 127,198 125,860
Operations Reserve Guidelines
Minimum Guideline 28,181 33,306
Target Guideline 42,271 49,960
Maximum Guideline 56,361 66,613
Electric Supply and Distribution
completed a $5.0M transfer from the Supply Operations Reserve to the Distribution Operations Reserve in FY 2025 and is evaluating an additional transfer of up to $5.0M in FY 2026 to support near-term infrastructure and CIP funding needs. While these actions support operational liquidity and service delivery, they also reduce available reserve capacity during periods of wholesale power market volatility, lower-than-forecasted electric sales revenue, or unplanned operational events.
To mitigate the impact of lower reserve capacity, Staff continue to evaluate reserve replenishment strategies, future transfer needs, year-end financial results, and the timing of planned debt issuance for grid modernization projects.
The projected reserves of the Gas utility for FY 2026 as of December 31, 2025 are shown in Table 5.
The Gas Utility’s projected FY 2026 ending reserves total $19.0M, compared to $19.6M in FY 2025. Operations Reserves are projected to increase from $9.9M to $12.1M; however, the FY 2026 balance remains below the target guideline of $14.2M. Reserve levels continue to reflect Table 5: Gas Projected Reserves for Fiscal Year End 2026 as of December 31, 2025) FY 2025 Actual FY 2026 Projected
Starting Reserves
Operations Reserve 4,257 9,897
Supply Rate Stabilization - -
Distribution Rate Stabilization - 1,049
CIP Reserve -
Cap-and-Invest Reserve 13,568 15,046
Debt-Service Reserve 313 326
Other 14,776 8,281
Total Starting Reserves 32,914 34,599
Revenues
Total Revenues 60,176 79,185
Total Revenues 60,176 79,185
Expenses
Total Supply Purchases 19,159 22,084
Total Supply and Distribution Operations 17,427 19,231
Debt Service 776 802
CIP Expenses 8,176 19,499
Other 558 573
Total Expenses 46,096 62,189
Transfers
General Fund 10,918 9,735
Cap-and-Invest Reserve 1,326 3,068
Other 2,370 1,952
Total Transfers 14,614 14,755
Ending Reserves
Operations Reserve 9,897 12,139
Supply Rate Stabilization - -
Distribution Rate Stabilization 1,049 2,413
CIP Reserve - -
Debt-Service Reserve 326 326
Other 8,281 4,140
Total Ending Reserves 19,553 19,018
Operations Reserve Guidelines
Minimum Guideline 8,636 9,443
Target Guideline 12,953 14,164
Maximum Guideline 17,271 18,886
Gas Supply and Distribution
financial pressures associated with natural gas market volatility, capital improvement program (CIP) expenditures, and infrastructure funding needs.
Utilities staff continue monitoring reserve levels, cash flow impacts, and funding strategies as projected FY 2026 CIP expenditures increase from $8.2M in FY 2025 to $19.5M in FY 2026.
Planned reserve transfers of up to $1.5M will support near-term infrastructure and CIP funding needs, but will also reduce available contingency funding for unplanned operational, market, or infrastructure-related events.
Several financial and operational risks continue to warrant monitoring, including wholesale natural gas market volatility, lower-than-forecasted revenues, rising infrastructure costs, and timing risks associated with reserve replenishment. Utilities staff, in coordination with Energy Risk Management, will continue monitoring reserve adequacy, liquidity exposure, and funding strategies to help maintain stable operations and support long-term infrastructure investment needs.
Exceptions to Energy Risk Management Policies, Guidelines, or Procedures The only exception made was when Council waived the investment grade credit rating requirement of Section 2.30.340(d) of the Palo Alto Municipal Code for Aypa Power. There were no other exceptions to the Energy Risk Management Policies, Guidelines, or Procedures to report during the first half of FY 2026.
ENVIRONMENTAL REVIEW
This report is for informational purposes only with no action required by the Council.
APPROVED BY:
Lauren Lai, Administrative Services Director