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Palo Alto’s Utilities Advisory Commission will be reviewing the financial plans of its electric, gas, water, and wastewater utilities this Wednesday at 6pm, as well as discussing proposed rate changes. I am always interested in energy prices — if we want to transition from gas to electric, the rates need to encourage that. Is gas getting more expensive? Is electricity getting cheaper? So I dug into the financial plans for the gas and electric utilities to see what I could find out. I did not understand everything, but here are a few takeaways.
Energy Rates are Going Up
There is no end in sight to rate increases for Palo Alto’s electric and gas utilities. I will talk about some of the reasons for that in the following sections. But this is why energy efficiency makes so much sense. Cost-effective measures like insulation, LED lighting, and window shades will save you money on bills and, if you electrify, on purchases of lower capacity heating appliances.
Consumption is Going Down
This may surprise you, but both gas and electric use are going down. This is one reason why rates go up — there are fixed costs that need to be spread across less usage. (1)
The chart below shows how gas use has decreased over the years, largely due to more efficient heating appliances and stricter building codes. Droughts also result in lower gas use because people use less hot water. Commercial customers, who use 60% of the gas in Palo Alto, have been using less gas in recent years as they shifted to remote work. The utility forecasts that gas use will continue to go down at a rate of about 0.5% per year. Electrification and warmer winters could accelerate the decline in consumption.
Electric use has also trended down. Most of Palo Alto’s electricity use, around 80%, is from commercial customers. In fact, about 3% of the customers (900 of them) account for about three quarters of the electric load. So while energy efficiency and building codes again play a role here, the fact that some larger commercial customers have relocated or shifted to more light-commercial usage (e.g., office space vs industrial) has had a measurable impact.
The utility predicts that electricity consumption will continue to decline, and that assumption is used for financial planning. I asked Assistant Director of Resource Management Jonathan Abendschein about that, given there are so many city, state, and federal policies encouraging us to electrify. He replied that “For financial planning purposes the utility assumes continuing consumption declines, but it looks at higher consumption scenarios that include accelerated electrification (and a potential new data center) for other purposes such as supply planning and grid capacity planning. The rate at which the community will adopt electrification is uncertain, and we do use a more conservative forecast for financial planning since we need to be cautious with the utility’s financial position.”
The Pandemic Cost Us
Both the electric and gas utilities kept rates artificially low during the pandemic, so we used up reserves that we now need to replenish. Higher rates are being proposed in part to refill our reserves to prescribed levels.
Climate Change is Costing Us
Almost 40% of our electricity comes from hydropower, which is no longer as reliable as it used to be. The utility has started discounting the hydroelectric supply by 20% to account for that. Replacing that supply during times of drought is expensive, so some of the rate increases are funding a reserve that will help to keep rates stable during dry years. Transmission, which we buy through the California Independent System Operator, has gotten much more expensive in part due to wildfire prevention efforts. And updating our distribution grid to support electrification is pricey. On the gas side, cap-and-trade costs are going up, by design, as are the prices of the carbon offsets that the gas utility purchases. I think the faster we consolidate on electric energy, the lower our costs will be.
But Costs are Going Up More Generally
Inflation and construction costs are pushing our rates up. The cost of replacing gas mains, which must be done to maintain safety, has gone up significantly. Salaries are going up across the board. Even our power supply costs are going up, as solar energy becomes worth less (2) and more expensive evening energy is needed. If we decide to add another transmission line into the city to improve reliability, that is also a significant expense.
Some costs, like the price of gas, we don’t have much control over. The utility may continue to buy insurance to limit the kind of price variability that hit us in 2023, but changes in gas commodity rates can be noticeable for customers. Evolving cap-and-trade rules can also affect these costs.
Another source of uncertainty is the set of state regulations that can affect the type and cost of the electricity that we purchase. The speed at which we electrify, which is influenced by federal and state policies, will also have a significant effect on usage and rates.
Residential Electrification is Getting Cheaper Relative to Gas
A bit of positive news: the proposed new rates for residents should encourage electrification. Larger electric bills will actually get cheaper, while gas bills will go up in all cases. The reason for the bill savings for large electric users is an adjustment to Tier 1 and Tier 2 rates. The Tier 1 allocation is getting bigger (461 kWh instead of 330 kWh) because residential use has increased considerably since the tier boundary was established. The 461 kWh better reflects average summer residential consumption. The ratio between the Tier 2 rate and the Tier 1 rate has decreased due to changes in the utility’s costs. (Winter peak use has less of a premium.) So a bill for 1200 kWh would go down 6% from $272.42 to $257.34.
In contrast, residential gas rates are going up across the board by 6-9%. A typical monthly gas bill will go up by $5-$10, though a large one (e.g., 150 therms) can go up by more than $30.
These rate changes reflect the cost to serve customers, as required by law. The city may in the next year bring some ideas for incentives to voters that could further encourage electrification.
We Should Understand Plans for our Flush Reserves
Rates for both utilities are going up in part to fill or refill various reserves. There are a lot of reserves holding considerable amounts of money. Electric reserves are projected to grow from $85 million in 2023 to $138 million in 2029. We should pay attention to the plans for the $38 million in Special Projects, the $15 million in Public Benefits, the $9 million in Cap and Trade. Similarly, gas reserves are projected to grow from $18 million in 2023 to $88 million in 2029. What are the plans for the $31 million in the Cap and Trade fund? And how is all this money invested? (3)
Abendschein says that some of the Special Projects money is going to the smart meter rollout, and some may be used for a second transmission line, though City Council would need to approve that expense. He adds that “The Public Benefits and Cap and Trade reserves are expected to be used for building and vehicle electrification and energy efficiency, but because we don’t have all of our electrification programs up and running yet the Financial Plan shows these reserves accumulating funds. In reality these reserves are unlikely to accumulate as much as is shown.”
This is only some of the material that is covered in the financial plans. I am happy to share more information based on the questions you ask, or even better you can attend the Utilities Advisory Commission’s meeting on Wednesday. See also the footnotes (4) for some additional information.
Notes and References
1. Assistant Director of Resource Management Jonathan Abendschein points out that energy efficiency still saves everybody money. “Even if rates go up a bit, bills are still lower than they would have been without efficiency.”
2. Because solar (midday) energy is becoming worth less over time, the city’s reimbursement rate for excess solar, based on “avoided cost,” is also dropping. If you have solar energy, it makes better financial sense to use it rather than sell it back to the grid.
3. Here are some more details about the reserves for the electric utility.
And here for the gas utility.
4. Below is a chart comparing revenues and expenses for the electric utility. It shows rate changes at the top (grey for previous years, red for proposed future years.)
And here is same chart for the gas utility, with gas price variations removed from the rate changes.
This table shows costs for the electric utility at a fairly coarse level.
Power supply costs are broken down here.
And here are costs for the gas utility.
Current Climate Data
Global impacts (January 2024), US impacts (January 2024), CO2 metric, Climate dashboard
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