City Council
Staff Report
From: City Manager
Report Type: INFORMATION REPORTS
Lead Department: Administrative Services
Meeting Date: October 26, 2026
Report #:2512-5707
TITLE
City of Palo Alto's Energy Risk Management Report for the second half of Fiscal Year 2026 (January 1, 2026 – June 30, 2026) CEQA Status – Not a Project
RECOMMENDATION
This is an informational report, and no City Council action is required.
EXECUTIVE SUMMARY
From January through June 2026, the City maintained a diverse electricity portfolio that included hydroelectric generation, renewable contracts, fixed-price purchases, and market transactions. This approach supported reliable service and reduced dependence on any one resource or market condition. The portfolio stayed above minimum load-resource coverage levels, although excess supply in several spring and summer months required market sales.
Hydroelectric power from the Western and Calaveras projects remained a key source of carbon-free and flexible electricity. Changes in water conditions and operating assumptions affected expected supply and cost. Western hydro generation declined in April and May, increasing expected supply costs, but improved in June and reduced costs by $2.84 million. The City’s fixed-price hedge increased from 105% in January and February to 110% in May and June, providing strong protection from higher wholesale electricity prices and improving budget certainty. However, the hedge level also increased the risk of excess supply if demand is lower than forecast or hydro generation is higher than expected.
Staff continued to manage risk by monitoring load forecasts, hydro and renewable output, market prices, outages, and counterparty credit quality. Mark-to-market values for forward contracts remained negative, reflecting lower current market prices compared with existing contract prices; these values do not represent an immediate cash loss. Staff also used resource adequacy sales, forward purchases, transaction limits, collateral requirements, and ongoing credit review to manage financial and operational risks.
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 for January through June 2026. It describes major changes in supply forecasts, forward purchases, market prices, resource adequacy (RA) sales, and forward mark-to-market (MTM) values. The report focuses on how the City reduces risk, what risk remains, and how staff monitors the portfolio. The City’s Energy Risk Management function, which monitors and mitigates energy market risks, is 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 – Hedging
Electric Fixed-Price Forward Purchase Mark-to-Market Values Gas Supplies
Counterparty Credit Risk
Exceptions to Energy Risk Management Policies, Guidelines, or Procedures
ANALYSIS
Electricity Supplies
The City utilizes a diversified portfolio of electric supply resources, including hydroelectric generation, renewable contracts, fixed-price purchases, and market transactions. This diversified procurement strategy supports reliable service and limits exposure to a single resource or market condition. During the second half of FY 2026, the City primarily used solar (40% of load) and hydroelectricity from the Western (federal hydropower) facility (37%) to balance the load, as shown in Table 1 and Figure 1 below. During January to June 2026, the projected portfolio remained above minimum coverage levels, but several spring and summer months showed excess supply that needed to be sold.
Figure 1: Load Resource Balance and Palo Alto Load for January 2026 - June 2026 (in MWh) Hydroelectricity
The City of Palo Alto is a member of NCPA (Northern California Power Authority), which owns, operates, and maintains the Calaveras Hydroelectric project located in Calaveras County. NCPA also schedules the output of the Western project, which is a collection of hydroelectric facilities throughout northern California, on behalf of the City. These projects provide the City with longterm, carbon-free electricity that supports 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.1 Further, utilizing hydroelectricity offers flexibility in balancing load and supply fluctuations and reduces the City’s reliance on higher-cost market purchases. During the second half of FY 2026, increased hydroelectric supplies in February and June, led primarily by Western generation increases of 81,000 MWh and 64,500 MWh, with additional Calaveras increases of 1 2022 Sustainability and Climate Action Plan; June 5, 2023; \Clerk's Office\Staff Reports\City Council\2023\Staff Report 2303-1158 Table 1: Load Resource Balance for January 2026 - June 2026 (in mWh) Source Jan Feb Mar Apr May Jun Total % of Total
Spot Market (31,983) (21,228) 1,922 (23,647) (23,443) 1,185 (118,910) -0.13 Forward Market 36,200 33,120 11,738 669 (7,846) (10,400) 103,327 0.11 Solar 18,704 21,364 35,287 37,189 38,129 42,862 377,676 0.40 Wind 404 504 1,454 1,745 3,159 4,359 24,061 0.03
Calaveras 14,293 7,086 17,370 15,493 6,855 3,105 94,280 0.10 Western 36,508 22,634 4,369 32,030 49,833 26,642 348,924 0.37 Landfill 3,205 5,804 3,699 6,460 7,091 7,092 74,582 0.08 Geothermal 3,582 3,161 3,303 3,600 3,197 3,600 41,210 0.04 Total 80,913 72,445 79,142 73,539 76,975 78,445 945,151 1.00 1,000 MWh and 12,000 MWh, coincided with cost savings of $3.98 million and $2.84 million, respectively, reflecting a reduced need for replacement energy purchases. Conversely, from March through May, Western supply declined by 18,500 MWh, 26,900 MWh, and 20,300 MWh.
Overall, for the January through June period overall, the impacts of the generation increases in February and June, particularly from Western, more than offset the cost increases for the March through May period for a net savings of $7m relative to the budget for these months.
Staff will continue monitoring hydrologic conditions, generation forecasts, project-operational constraints, expected load, and forward market prices to identify emerging supply gaps and support timely procurement, hedging, or reserve actions.
Fixed-Price Forward -Hedging
Fixed-price forward purchases provide price certainty for expected customer load, known as hedging. The City hedges to mitigate market risk and insulate itself from price volatility. The FY 2026 fixed-price hedge level (as a percentage of customer load) increased from 105% in January and February to 110% in May and June. Table 3 shows the expected cost for the whole supply portfolio for over a 6-month period as of each report date, and how those compare to our budget projections for that period. The FY26 portfolio hedge remained within the 110% recommended limit, increasing from approximately 105% early in 2026 to 108% in March, 109% in April, and 110% in May and June. This high fixed-price coverage mitigated exposure to wholesale-market price increases, reduced reliance on potentially expensive spot-market purchases, and increased supply-cost budget certainty for the City. However, by reaching the 110% maximum, the City had little remaining capacity to execute additional fixed-price purchases or spot market purchases without updated load forecasts, offsetting sales, or an authorized exception.
During the second half of FY2026, the City secured fixed-priced electricity purchase contracts Table 2 : Hydroelectricity Supply Changes and Cost Impact (January - June 2026) Month Western Supply
Change (MWh)
Calaveras Supply
Change (MWh)
Cost Impact (Savings)/
Cost ($millions)
January 1,750 (9,000)
February 81,000 1,000 (4.0)
March (18,500) 4,000 1.0
April (26,900) 19,600 1.0
May (20,300) 490 2.0
June 64,500 12,000 (3.0)
totaling 95,850 MWh for delivery over the next 20 months at an average price of $57.59 per MWh, as shown in Figure 2. The City contracted these purchases with four of its approved counterparties: DRW Energy Trading LLC (DRW), Shell Energy North America, NextEra Energy Resources, and NRG Business Marketing LLC (NRG). Shell Energy North America and NextEra Energy Resources are rated in adherence to PAMC Section 2.30.340.3 DRW and NRG were granted an exception to PAMC Section 2.30.340 in February 2026 as outlined in Resolution 10279.4
Electric Forward Purchase Mark-to-Market Values
Based on Mark-to-Market values (which estimate the current market value of forward electricity contracts compared with current market prices), the portfolio’s value in the second half of FY 2026 was approximately $5.54 million, resulting in a net mark-to-market exposure of negative $47,673, as shown in Table 4 and Figure 3. This small net favorable result means that, overall, market prices were slightly lower than the prices in the City’s contracts. Individual results varied by delivery month: the January 2028 NextEra purchase had the largest unfavorable change at $81,476, while the November 2027 and February 2028 NextEra 3 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 4https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=87056&dbid=0&repo=PaloAlto&searchid=648f882 6-e69e-4375-9d18-a46222b31a82
purchases had favorable changes of $66,017 and $51,077, respectively. The City also sold 12,000 MWh of Electricity to NextEra for delivery in June and August 2027.
All reported transactions were within the City’s approved counterparty transaction limits as of June 30, 2026. The portfolio includes transactions with DRW, SENA, NextEra, and NRG, which helps spread risk across several suppliers. Although NextEra represents several transactions, the City remained within established credit and concentration controls. Overall, these forward purchases are intended to reduce the City’s exposure to changing electricity prices and provide greater certainty for future energy costs. While mark-to-market values will change as market conditions change, the City’s total exposure remains limited relative to the total value of its energy commitments.
Table 4: Electric Transactions, Exposure and Limits as of June 30, 2026 Counterparty
Delivery
Month
Purchase/
Sale
Transaction
Date
Energy
(MWh/mo)
Deal Cost /
(Revenue) $
Current Cost /
(Revenue) $
Mark-to-Market
(MTM) Exposure ($)
Within
Counterparty
Transaction Limit
DRW Oct-26 Purchase 5/12/2026 6,480 298,080 281,993 (16,087) Yes DRW Nov-26 Purchase 5/12/2026 5,760 264,960 274,526 9,566 Yes SENA Dec-26 Purchase 5/12/2026 12,480 708,240 699,777 (8,463) Yes NextEra Nov-27 Purchase 5/26/2026 11,235 702,862 636,845 (66,017) Yes NextEra Dec-27 Purchase 5/26/2026 11,480 718,189 727,611 9,422 Yes NextEra Jan-28 Purchase 5/26/2026 12,040 753,222 834,698 81,476 Yes NextEra Feb-28 Purchase 5/26/2026 10,360 648,122 629,139 (18,983) Yes NRG Mar-28 Purchase 5/26/2026 7,775 305,013 317,652 12,638 Yes NextEra Dec-27 Purchase 5/26/2026 6,000 390,600 387,765 (2,835) Yes NextEra Jan-28 Purchase 5/26/2026 6,000 390,600 393,286 2,686 Yes NextEra Feb-28 Purchase 5/26/2026 6,240 406,224 355,147 (51,077) Yes Total 95,850 5,586,112 5,538,438 (47,673)
Gas Supplies
The City purchases gas on the monthly and daily spot markets for the month ahead at a price based on the published monthly spot market index price for that month. The City’s gas operator buys and sells gas to match the City’s daily needs if the actual daily usage is different from the forecasted daily usage. The City makes these daily transactions 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 the gas utility's counterparty risk exposure.
In the second half of FY 2026, the City purchased 283,372 MMBtu of Gas from the approved counterparty, EDF, at a purchase price of $1.81/MMBtu, for delivery over six months. The City made the purchases shown in Table 5, through an approved transacting trader, in accordance with the Energy Risk Management Guidelines. In May 2026, the City sold 283,372 MMBtu of gas to EDF for $0.40 more than the purchase price, as shown in Table 6. This sale generated a $0.11M gain for the City.
Counterparty Credit Risk
The City monitors the credit quality of energy counterparties using major credit rating agencies such as Moody's, Fitch, and S&P. The Energy Risk Management guideline uses Baa3 investment Table 5: Gas Supply Purchases - Redwood Pipeline Capacity from EDF (May 2026) Delivery Month Quantity
(MMBtu/day) Days
Monthly Quantity
(MMBtu)
Purchase Price @
$1.81/MMBtu ($)
May 2026 658 31 20,398 36,920
June 2026 1,458 30 43,740 79,169
July 2026 2,258 31 69,998 126,696
August 2026 2,258 31 69,998 126,696
September 2026 1,858 30 55,740 100,889
October 2026 758 31 23,498 42,531
Total — 184 283,372 512,903
Table 6: Gas Supply Sales - Redwood Pipeline Capacity from EDF (May 2026) Delivery Month Quantity
(MMBtu/day) Days
Monthly Quantity
(MMBtu)
Sale Price @
$2.21/MMBtu ($)
May-26 658 31 20,398 45,080
Jun-26 1,458 30 43,740 96,665
Jul-26 2,258 31 69,998 154,696
Aug-26 2,258 31 69,998 154,696
Sep-26 1,858 30 55,740 123,185
Oct-26 758 31 23,498 51,931
Total — 184 283,372 626,252
grade, or equivalent, as the minimum recommended rating for all counterparties. The City also uses the 1-year Point-In-Time Probability of Default calculated by Moody’s Analytics to assess counterparties' financial stability and operational reliability. The Energy Risk Management Guidelines recommend a maximum Probability of Default threshold of 0.8%. Tables 7 and 8 indicate that the several of the City’s current Electric and Gas counterparties exceed the City's preferred threshold of 0.8%. However, as all Electric and Gas counterparties meet the investment grade threshold (or will be required to post cash collateral or a letter of credit in compliance with the waiver procedure), and as the City’s credit exposure to these counterparties is also low, this still represents a low-risk portfolio of counterparties.7 Staff continues to monitor these counterparties as needed and, at a minimum, evaluate changes in financial condition, market activity, and overall creditworthiness quarterly. Silicon Valley Clean Energy Authority has improved significantly since December 31, 2025, but staff continues to monitor them.
Gas counterparties generally have lower operational and financial exposures because they can store gas, access liquid replacement markets, and more readily secure alternative supply arrangements in the event of a counterparty default.
7 This counterparty credit risk can be quantified by multiplying each counterparty’s 1-year Point-in-Time Probability of Default by the City’s total credit exposure to that counterparty (i.e., the total Mark-to-Market of all outstanding transactions with that counterparty). The counterparty that the City currently has the greatest credit exposure to is NextEra, with a net exposure (MTM) of -$45,000 (see Table 4). However, because NextEra’s PiT PD is only 0.03%, the magnitude of this credit risk is only $14.
Table 7 : Electric Portfolio Counterparty Credit Ratings and 1-Year PiT PD (June 30 2026) Counterparty Counterparty
Credit Rating
Ratings Issuer 1-year PiT PD
Avangrid Renewables LLC Ba1 Moodys 1.04
BP Energy Company Ba1 Moodys 1.04
Cargill Power Markets, LLC Ba1 Moodys 0.01
Constellation Energy Generation, LLC Aa2 Moodys 0.03
DRW Energy Trading Waiver granted Low
Dynasty Power Waiver granted Low
NextEra Energy Power Marketing, LLC Aa2 Moodys 0.03
NRG Energy Waiver granted Moodys Low
Pacificorp Energy Baa2 Moodys 0.15
Powerex Ba1 Moodys 1.04
Shell Energy North America Ba1 Moodys 0.90
Silicon Valley Clean Energy Authority Ba3 Moodys 2.10
Turlock Irrigation District AA- Fitch
Exceptions to Energy Risk Management Policies, Guidelines, or Procedures Staff requested approval of master electric trading agreements with NRG, DRW, and Dynasty.9 The agreements allowed the City to buy and sell electricity products with additional qualified suppliers. Staff also requested a waiver of the City’s investment-grade credit rating requirement for these counterparties. NRG had a below-investment-grade issuer rating, while DRW and Dynasty were privately held firms without public credit ratings.
The proposed agreements included standard limits to control financial and operational risk.
Each transaction was limited to a delivery term of no more than 36 months and could not extend beyond December 2027. Total transactions under each agreement could not exceed $25 million. All transactions were required to comply with the Palo Alto Municipal Code and the City’s Energy Risk Management Policies, Guidelines, and Procedures.
Utilities staff and ASD Risk Management reviewed each company’s financial condition. Moody’s Analytics assigned implied ratings of Aa3 for NRG and Dynasty and Ba1 for DRW based on available financial data. To reduce credit risk, each supplier was required to post cash collateral or a letter of credit of 10% of the transaction value from an A+-rated bank within five business days after a transaction was awarded.
ENVIRONMENTAL REVIEW
This report is for informational purposes only with no action required by the Council.
APPROVED BY:
Lauren Lai, Administrative Services Director
9 Staff Report 2508-5117: Adoption of a Resolution Approving Edison Electric Institute Master Power Purchase and Sale Agreements with NRG Business Marketing LLC, DRW Energy Trading LLC, and Dynasty Power Inc., (collectively the “Master Agreements”), Delegating Authority to the City Manager to Transact Under the Master Agreements for Electricity-Related Commodities and Services, and Updating the City’s Standard Form Edison Electric Institute Master Power Purchase and Sale Agreement; CEQA status: not a project under CEQA Guidelines sections 15378(a) https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=86830&dbid=0&repo=PaloAlto&searchid=a9edc5c1 -2fbc-4941-85be-23b4d0b1a9d5
Table 8 : Gas Portfolio Counterparty Credit Ratings and 1-Year PiT PD (June 30 2026) Counterparty
Counterparty
Credit Rating Ratings Issuer 1-year PiT PD
BP Energy Ba1 Moodys 1.04%
City of Redding AA S&P
ConocoPhillips Aa1 Moodys 0.03
EDF Ba1 Moodys 1.04
Powerex Ba1 Moodys 1.04
Shell Energy North America Ba1 Moody 0.9