CITYOF �
SANJOSE
CAPITAL OF SILICON VALLEY
TO: Transportation and Environment
Committee
SUBJECT: San Jose Power Status
Report
T&E AGENDA: 12/2/24
ITEM: (d) 4
Memorandum
FROM: Kip Harkness
Deputy City Manager
DATE: November 8, 2024
Approved��,-,{�Date:
COUNCIL DISTRICT: # Citywide
RECOMMENDATION
Accept a status report on San Jose Power's exploratory phase of providing Municipal Electric Utility Service and cross-refernce this item for full Council consideration at the December 17, 2024, City Council meeting.
SUMMARYAND OUTCOME
On October 3, 2023 City Council unanimously directed the City Manager to explore the feasibility of establishing San Jose Power as a municipal electric utility in limited areas of the City. Since then, staff have focused on following Council direction, advancing the exploratory phase and assessing the feasibility of a municipal electric utility. The City has identified two potentially viable locations for launching San Jose Power, one in North San Jose and one in Downtown San Jose. The City filed interconnection requests for 250 megawatts (MW) of power at each location, for a total of 500 MW.
Financing San Jose Power's initial infrastructure build out falls primarily into three categories: electrical distribution, transmission interconnection, and staffing/consultant costs. City staff have been in discussions with potential partners about the possibility of a developer/customer-financed approach, with an initial partner taking on the upfront costs for building out the needed infrastructure and effectively reducing any financial risk to the City's General Fund.
In parallel, staff continues to collaborate with the International Brotherhood of Electrical Workers (IBEW) and PG&E as we advance the exploratory phase of this work. Staff will return to Council in 2025 and present the outcome of the financing strategy, the preliminary results from the business case development, any recommended action on establishing San Jose Power, and the outcome of engagement with IBEW and PG&E.
TRANSPORTATION & ENVIRONMENT COMMITTEE
November 8, 2024
Subject: San Jose Power Status Report
BACKGROUND
On October 3, 2023, the City Council unanimously voted to amend the municipal code (Titles 2, 4, 26, and 28) to create a municipal electric utility in order to establish the legal framework for the City's authority to generate, purchase, and distribute electricity. In the same action, the Council directed staff to explore the possibility of establishing San Jose Power to provide electric service in selected areas of the City. The Council directed staff to consider four key questions as a guide to the exploratory phase as follows:
If the City were to provide municipal utility for electric service in limited areas of the city, could that be done in a way that would:
1. Reduce electricity energy costs?
2. Allow the development of more innovative and energy efficient buildings such as that envisioned in the planned Downtown West development?
3. Increase the electrical resilience of the City of San Jose and our critical infrastructure for both climate change and emergency response?
4. Enable us to attract and retain the skilled and trained talent required to perform this work effectively and reliably?
To answer these questions, staff is evaluating the infrastructure needs and developing and evaluating a business case, staffing plan, and financing strategy for a potential municipal electric utility.
Two new high-voltage transmission lines approved by the California Independent System Operator (CAISO) present an opportunity to establish a utility with lower transmission costs. CAISO is the non-profit that oversees the 27,000 miles of transmission lines in California and manages the flow of electricity across these highvoltage, long-distance power lines. One of CAISO's roles is to conduct transmission planning to maximize electrical power efficiency and reliability. During the 2021-2022 Transmission Planning Process, CAISO identified a significant need for additional transmission capacity to the Santa Clara Valley region and awarded an initial 1,000 megawatts (MW) of new electrical transmission capacity to LS Power to construct and operate by 2028 )
1 . Recently, CAISO staff identified the urgent need for even more electricity in the San Jose area and updated its transmission plan to propose doubling LS Power's project to 2,000 MW of transmission capacity2 . The CAISO Board approved
1 On March 27, 2023 CAISO released the results of their selection process and announced LS Power as the winning bidder for two new high-voltage transmission lines coming into San Jose (https://stakeholdercenter.caiso.com/lnitiativeDocuments/Metcalf-San-Jose-8-HVDC-Project-Project-SponsorSelection-Report.pdf; https://stakeholdercenter.caiso.com/lnitiativeDocuments/Newark-NRS-HVDC-Project-ProjectSponsor-Selection-Report.pdf) 2 On September 19, 2024, CAISO published an update to their 2024-2025 Transmission Plan and is proposing to double the amount of power LS Power is building from 1 000MW to 2000MW in the San Jose area. (https://stakeholdercenter.caiso.com/lnitiativeDocuments/Presentation-2024-2025-Transmission-Planning-ProcessSep-23-2024.pdf).
TRANSPORTATION & ENVIRONMENT COMMITTEE
November 8, 2024
Subject: San Jose Power Status Report
this mid-cycle change on November 12, 2024, increasing the capacity of the two LS Power constructed lines to a total of 2,000 MW.
These new transmission lines could allow the City to connect directly to the transmission grid, enhancing reliability and reducing San Jose Power's start-up infrastructure costs. The City of San Jose filed two interconnection requests with LS Power, one for North San Jose and one for Downtown San Jose. These requests will allow staff to understand the transmission infrastructure costs and begin reserving access to the transmission infrastructure and additional available capacity as appropriate.
ANALYSIS
Since October 2023, staff have focused on following Council direction, advancing the exploratory phase, and assessing the feasibility of a municipal electric utility. The City has identified two locations to interconnect with the CAISO grid in North San Jose and Downtown San Jose. These two locations are where the new high-voltage (HV) transmission line coming through San Jose ends and will provide an opportunity to connect and construct a new distribution grid in limited areas of North San Jose and Downtown San Jose. CAISO has contracted with LS Power to design, build, and operate these HV transmission lines. Coupling the launch of San Jose Power with the construction of LS Power's transmission line projects potentially offers an opportunity to reduce the duration of construction and cost of capital infrastructure.
The City filed two interconnection requests (one in North San Jose and one in Downtown) with LS Power for 250 MW each (500 MW total). With each interconnection offering 250 MW of transmission capacity, San Jose Power would reserve a portion for the initial developer/customer and could also reserve a portion of this capacity for critical infrastructure and economic development. This approach would allow the developer/customer to build projects using their 200 MW or reserved capacity and allow San Jose Power to also begin to service critical infrastructure and economic development uses.
North San Jose Service Area Opportunities
The first potential service area focuses on a limited portion of North San Jose on and adjacent to the San Jose-Santa Clara Regional Wastewater Facility (see Figure 1 ). The North San Jose transmission line, with 250 MW of power reserved for San Jose Power, presents an opportunity to potentially power private development and critical infrastructure on Regional Wastewater Facility land and catalyze economic development on land owned and leased out by the Regional Wastewater Facility.
Critical infrastructure in this area that San Jose Power might serve includes the Regional Wastewater Facility itself as well as the current and expanding recycled water
TRANSPORTATION & ENVIRONMENT COMMITTEE
November 8, 2024
Subject: San Jose Power Status Report
. system and build out of new direct potable reuse purified water facilities providing a diverse water supply to meet growing regional needs.
Figure 1: LS Power Proposed Transmission Line Route from Newark through North San Jose and continuing on to Santa Clara's NRS Substation
(https:l/ia. cpuc. ca. qovlenvironmentlinfolesalpsblindex. html) The reserved transmission capacity could also be available for commercial and industrial developments focused on economic development lands. The San Jose/Santa Clara Regional Wastewater Facility Plant Master Plan identifies 159 acres of economic development lands for new industrial, manufacturing, office, research and development, and retail uses. Many of these uses have high demands for electricity. Powering these developments through San Jose Power could offer a cost advantage, with potentially lower electricity prices, making the area more attractive to businesses and potentially incentivizing a more rapid development and build out of the area. The successful development of these economic development lands would provide ongoing lease revenue to the Regional Wastewater Facility reducing costs for ratepayers and would also provide an ongoing source of revenues (e.g., property taxes and utility taxes) to the City's General Fund.
Downtown San Jose Service Area Opportunities
The second potential service area in Downtown San Jose (see Figure 2), with an additional 250 MW of capacity allocated for San Jose Power, offers strategic opportunities to serve critical infrastructure, including San Jose Mineta International Airport and potentially Diridon Station. As key transportation hubs, both facilities would stand to gain from the potential increased reliability and cost savings associated with
TRANSPORTATION & ENVIRONMENT COMMITTEE
November 8, 2024
Subject: San Jose Power Status Report
San Jose Power. For instance, transitioning the Airport's electricity service to San Jose Power could enhance its operational resilience while lowering costs, an advantage particularly valuable as the City expands electric vehicle (EV) charging infrastructure and other energy-intensive services on the Airport campus.
A primary challenge in Downtown San Jose, however, lies in spatial constraints. The dense urban setting limits available land for new infrastructure, posing challenges for establishing necessary interconnection components.
Figure 2: LS Power Proposed Transmission Line Route from Grove Substation in Coyote Valley to Skyline Terminal in Downtown San Jose.
(https:llia. cpuc. ca. govlenvironmentlinfolesalpscvlindex. html)
TRANSPORTATION & ENVIRONMENT COMMITTEE
November 8, 2024
Subject: San Jose Power Status Report
Financing Approach and Business Case Development
Financing San Jose Power's initial infrastructure build out falls primarily into three categories: electrical distribution, transmission interconnection, and staffing/consultant costs. For the distribution infrastructure, San Jose Power will likely follow a typical model where a developer/customer funds and builds the distribution infrastructure and then turns it over to the utility. This approach gives the developer/customer greater input and control over infrastructure build out and timeline. For the transmission interconnection costs, staff is evaluating a financing model where the developer/customer would cover all of San Jose Power's upfront transmission interconnection costs. The developer/customer would cover the cost of building facilities that could scale in the future to also serve the nearby future load.
City staff have been in discussions with potential partners about the possibility of this developer financed approach with an initial developer/customer taking on the costs for building out the needed infrastructure and funding the ongoing operations and maintenance of the utility through electrical rates.
This customer focused approach reduces the risk of San Jose Power constructing infrastructure that becomes stranded if the development doesn't proceed. This model pushes this risk to the developer/customer who has better control over when to build distribution infrastructure to support the development. The developer/customer would also cover the City's staff costs, plus consultants, during the initial build out (and in future phases). The developer/customer would also be responsible for any power generation costs incurred in future phases.
In October, the City brought on NewGen Strategies and Solutions, LLC to develop a business case, financial model, and forecast of providing electric transmission and distribution delivery services to customers in the abovementioned potential service areas. The financial model will include all costs associated with owning and operating an electric delivery utility, amortize and project capital costs, benchmark delivery service to local IOU provider, and other analysis as needed to evaluate competitiveness and understand the viability, desirability, and risks of standing up San Jose Power.
Staff is in discussions with potential developers/customers in both North San Jose and Downtown. A potential next step could be a Mutual Cooperation Agreement with a preferred developer/customer to take staff's feasibility assessment through the next level of due diligence. Under a Mutual Cooperation Agreement, the potential developer would be granted an exclusive opportunity to develop an agreement to launch San Jose Power to serve their development(s). The developer/customer would reimburse the cost of the feasibility assessment work undertaken under the Mutual Cooperation Agreement. This work would likely include evaluating the specific infrastructure needs, and further developing and evaluating a business case, staffing plan, and financing strategy necessary to serve the developments and a path for the City to successfully launch a municipal electric utility.
TRANSPORTATION & ENVIRONMENT COMMITTEE
November 8, 2024
Subject: San Jose Power Status Report
Stakeholder Engagement- /BEW & PG&E
At the October 2023 meeting, Council requested that staff continue collaborating with IBEW and PG&E as we advance the exploratory phase of this work.
Since then, the City has met periodically with IBEW to discuss a range of topics. The Energy Department continues to engage with labor stakeholders including IBEW 332 on long term Power Purchase Agreement project selection criteria. Separately, the City plans to meet with IBEW on potential building electrification workforce development programs. The City Manager's Office has met with IBEW twice to understand their perspective on the City's exploration of a municipal utility, especially concerning staffing.
The City plans to continue meeting with IBEW to gather their feedback as we refine the San Jose Power opportunity analysis.
PG&E, in coordination with the City Manager's Office, has proposed the development of a Memorandum of Understanding (MOU) for cooperation on the economic development of Downtown and North San Jose through the timely construction of the electrical infrastructure required to support development in those areas and meet the City's decarbonization goals. The MOU is currently being drafted and would commit to providing competitive terms, including certainty and speed for interconnections.
The City continues to engage with PG&E on a regular basis, including standing monthly meetings, and will solicit their feedback on the City's exploration of San Jose Power.
The MOU could impact the desirability of moving forward with San Jose Power so the final draft MOU will be presented along with the results of the San Jose Power exploration when staff returns to Council, anticipated in March 2025.
EVALUATION AND FOLLOW-UP
Staff are actively exploring potential options and strategies to secure the financing needed for San Jose Power in North San Jose and Downtown San Jose. The success of this effort will depend on identifying a reliable customer/developer who can cover the upfront infrastructure costs in exchange for long-term access to lower cost electricity.
Staff will return to Council in 2025 and present the outcome of the financing strategy, the preliminary results from the business case development, and any recommended action on establishing San Jose Power as appropriate.
COORDINATION
This memo has been coordinated with the Energy Department, the City Manager's Office of Economic Development and Cultural Affairs, the City Attorney's Office, and the City Manager's Budget Office.
TRANSPORTATION & ENVIRONMENT COMMITTEE
November 8, 2024
Subject: San Jose Power Status Report
PUBLIC OUTREACH
This memorandum will be posted on the City's Council Agenda website for the December 17, 2024 City Council meeting.
COMMISSION RECOMMENDATION AND INPUT
No commission recommendation or input is associated with this action.
CEQA
Not a Project, File No. PP17-009, Staff Reports, Assessments, Annual Reports, and Informational Memos that involve no approvals of any City action shall not result in either a direct physical change in the environment, or a reasonably foreseeable indirect physical change in the environment.
PUBLIC SUBSIDY REPORTING
This item does not include a public subsidy as defined in section 53083 or 53083.1 of the California Government Code or the City's Open Government Resolution.
Isl
Kip Harkness
Deputy City Manager
For questions, please contact Erica Garaffo, Assistant to the City Manager, Lead Resilience Strategist, City Manager's Office at [email protected].