MEMORANDUM UTILITIES ADVISORY COMMISSION UTILTIES DEPARTMENT. DATE: December 4, 2013

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1 TO: FROM: MEMORANDUM UTILITIES ADVISORY COMMISSION UTILTIES DEPARTMENT 4 DATE: December 4, 2013 SUBJECT: Evaluation of the Cost Effectiveness of Residential Gas-to-Electric Fuel Switching Options for Appliances and Gasoline-Fueled Vehicles to Natural Gas- Fueled or Electric Vehicles This attached report on the cost effectiveness of switching from gas to electric appliances and from gasoline-fueled vehicles to natural gas-fueled, or electric, vehicles is provided for the Utilities Advisory Commission s information and discussion. No action is requested at this time. EXECUTIVE SUMMARY Since the City s electric supply is 100% carbon neutral, reduction in the City s greenhouse gas (GHG) emissions must come from reductions in the community s use of natural gas and transportation fuels. Another way to reduce GHG emissions is to replace gas appliances (hot water heaters, space heaters, clothes dryers, and stoves/ovens) with electric appliances or to replace gasoline-powered vehicles with electric vehicles. The attached report summarizes staff s analysis of the cost effectiveness of these fuel-switching options for residents. The analysis concludes that it is not cost effective for residents to switch from natural gas appliances to electric appliances. However, changes in carbon market prices, installation of solar photovoltaic (PV) systems, or a different electric rate structure may result in cost-effective residential fuel switching scenarios. The most cost-effective way to reduce the carbon impact of burning natural gas in residential homes is by purchasing carbon offsets. The PaloAltoGreen Gas Program is currently under development to provide that mechanism for residents to reduce the carbon footprint associated with their natural gas usage. Buying an electric vehicle (EV) or natural gas vehicle (NGV) is a cost-effective alternative to buying a compact-sized gasoline vehicle after including state rebates and federal tax credits. In addition, plug-in hybrid electric vehicles (PHEVs) are cost effective when compared to the costs of owning and operating a mid-sized gasoline car. BACKGROUND In 2012, the average single-family household in the City had a carbon footprint of 32.4 metric tons (MT). With the implementation of the carbon neutral electric plan, a single-family household in the City of Palo Alto Utilities (CPAU) territory currently has an average carbon footprint of 29.9 MT per year. Fuel switching focuses on eliminating the 11.8 MT of GHG Page 1 of 6

2 emissions associated with natural gas consumption (3.0 MT/year) and vehicle transport (8.8 MT/year). A complete summary of all GHG emissions associated with single-family households is provided in Attachment A. DISCUSSION The attached report contains a thorough evaluation of the first cost and annual operating costs for residential natural gas appliances and similar electric appliances. The report also compares the first cost and annual operating costs for small and mid-size gasoline-powered automobiles compared to that of comparably sized EVs, NGVs, and PHEVs. The analysis of appliances for this study was limited to residential gas-fueled appliances. While almost all residents have the basic appliances evaluated, the appliances used by commercial customers are unique and varied, complicating the analysis. Staff evaluated the cost-effectiveness of fuel switching from both a societal and customer perspective. This distinction is commonly used in the energy industry to evaluate energy efficiency costs and benefits. From a societal (Palo Alto community) perspective, fuel switching to electric appliances and electric/natural gas vehicles is cost effective if the lifetime fuel and maintenance cost of the electric appliance (or non-gasoline vehicle) is lower than that of the natural gas appliance (or gasoline vehicle). This assumes the projected commodity and distribution cost of the underlying fuel source, and monetizes the environmental costs of GHG emissions based on the projected market price of carbon. The key differences in the cost-effectiveness calculation for the customer perspective (as opposed to the societal perspective) are the inclusion of utility incentives for alternative fuel appliances and vehicles, and the use of projected tiered electric and gas retail rates. Both societal and customer perspectives assume the same upfront technology cost which includes equipment cost, tax, installation cost (if applicable), less any federal and state incentives. Residential Appliances From the societal perspective, for residential appliances, the study concluded: The least cost option for water heaters is a standard efficiency gas water heater over the 13-year life of the appliance. High efficiency electric water heaters cost over twice as much over that period. For space heating, standard or high efficiency gas space heaters cost about the same over the 20-year life of the appliance, but a high efficiency air source electric heat pump costs almost twice as much over the appliance lifetime. An electric induction stove/oven is over twice as expensive as a gas stove/oven over the 20-year life of the appliance. An electric clothes dryer is over almost three times as expensive as a gas dryer over the 15-year life of the appliance. Page 2 of 6

3 From a customer perspective, Switching to electric appliances would move the average residential customer from the second tier of the electric rate structure into the third tier. For water heating, solar water heaters are not cost-effective for customers, but switching to a heat pump water heater can be cost effective if the customer s total electricity usage stays within the second tier after adding the electric water heating usage. If the customer can secure a PV system at a $4.50/Watt installation price, it would also be cost effective to fuel switch to a heat pump water heater. Fuel switching from gas to electric for space heating is currently not cost effective even if the customer can secure a low-priced PV system. Switching from a gas stove/oven and gas clothes dryer to electric models is also not cost effective. Alternative Vehicles The study evaluated natural gas, electric and plug-in hybrid electric vehicles as alternatives to gasoline vehicles on a cost-effectiveness basis, drawing no conclusions about vehicle value or recommending a specific model. The conclusions from the societal perspective included: Over an 11-year lifetime, the Nissan Leaf is more cost-effective than a Honda Civic. The cost of a natural gas-powered Honda Civic is comparable to that of a gasoline-powered Honda Civic. For a medium-sized vehicle, the lifetime costs of a Plug-in Toyota Prius or a Ford C-max Energi are comparable to the lifetime costs of a Toyota Camry. The Nissan Leaf has the highest avoided GHG emissions over the vehicle s lifetime, followed by the Chevy Volt. From a customer perspective, the conclusions were the following: While the alternative fuel vehicles have higher upfront costs than their comparable baseline gasoline models, their operating costs are lower even under the assumption that all EV charging is done at the Tier 3 electric rate. All alternative fuel vehicles evaluated are cost effective compared to the comparable gasoline-powered vehicle model, except for the Chevy Volt. If a customer installed a low-cost solar PV system, the EVs and PHEVs would be even more cost effective. Impact of Changes in Assumptions on Cost-Effectiveness Staff examined the sensitivity of the cost effectiveness of the appliance fuel switching to changes to natural gas commodity price, carbon price, and equipment cost. The conclusions drawn included: If a customer can remain on the Tier 2 electric rate (and not move up to the Tier 3 rate) with the additional electric load from a heat pump water heater, then it is worthwhile for the customer to switch from a gas water heater to a heat pump water heater. Page 3 of 6

4 If the increased electric usage would be charged at the Tier 3 electric rate, a heat pump water heater could become cost effective to the customer only if both the price of carbon and gas commodity price are twice the current projections. For a major remodeling project or new construction project, an electric heat pump water heater is cost effective only if both carbon prices and gas commodity prices are doubled. Marginal Cost of GHG Emission Reduction The figure below illustrates the cost of carbon emission reduction (in $/MT CO 2 e) for the fuel switching options for both residential appliance and gasoline vehicles, as compared to purchasing carbon offsets certified by the Climate Action Reserve. The study concluded that only vehicle switching from a gasoline-powered Honda Civic to the electric Nissan Leaf is cheaper than purchasing offsets. For the vehicle options in the figure below, the cost of carbon emissions reduction was based on the difference in carbon emissions compared to a gasoline-powered vehicle. The Honda Civic NGV, Nissan Leaf, and Prius Plug-in were compared to a gasoline-powered Honda Civic. The Ford C-max Energi and Chevy Volt were compared to a Toyota Camry. Page 4 of 6

5 RECOMMENDATIONS AND NEXT STEPS This evaluation clarified several issues and identified opportunities for the City to consider in the future. The following recommendations are under consideration for implementation in the coming months and years as new programs are proposed and developed. 1. Promote the PaloAltoGreen Gas Program Given that no residential appliance fuel switching measure is currently cost effective, staff recommends that residents offset the GHG emissions associated with the natural gas end use in their homes by subscribing to the PaloAltoGreen Gas Program. 2. Participate in the Low Carbon Fuel Standard Program The City should participate in the LCFS market to capture the carbon credits generated from charging electric vehicles and refueling natural gas vehicles within the City. Funds derived from the sale of these credits could be used for system improvements to encourage EV ownership. 3. Secure a Bulk Buy Residential PV Contract A bulk buy residential solar PV program could enable Palo Alto residents to pool their buying power to secure significant discounts and a range of financing options for PV installation. Current CPAU installation data indicates that the average Palo Alto residential customer paid $6.00/Watt in 2013 to install solar PV, which is well above what residents in neighboring cities are currently paying. A bulk buy program that can lower the installed solar PV cost to less than $4.50/Watt would increase the attractiveness of electric appliances and EVs and PHEVs from a customer perspective. 4. Evaluate Cost Effectiveness of Leasing an EV/PHEV City Fleet The City currently has 60 Compressed Natural Gas (CNG) vehicles with an average fleet age of 9.7 years. Given that the City cannot claim the state and federal tax incentives associated with alternative fuel vehicles, staff recommends that the City evaluate the cost effectiveness of leasing EV and PHEV fleet vehicles. 5. Evaluate Rate Tiers for Electric-only Buildings Future electric rate evaluations should include a re-evaluation of the City s three-tier electric rate structure to explore ways to promote the use of electric building management systems and appliances within a cost-recovery-based rate structure. 6. Consider fuel-switching programs/incentives for residential new construction projects Installing 100% electric appliances in a new home or major remodel has the potential to be more cost effective than the retrofit scenarios evaluated in this study. With the California state goal of net zero energy for newly constructed residential buildings by 2020, the City may consider developing fuel-switching incentives for residential new construction projects. RESOURCE IMPACT Due to the low number of residential early adopters, natural gas to electric appliance fuel switching is anticipated to have a negligible resource impact. Vehicle fuel switching is expected Page 5 of 6

6 to have a minimal resource impact and staff has yet to see any adverse impact of EV charging on the distribution system. ATTACHMENT A. Evaluation of Residential Fuel Switching Options PREPARED BY: REVIEWED BY: DEPARTMENT HEAD: Page 6 of 6

7 Evaluation of Residential Gas-to-Electric Fuel Switching Options for Appliances and Vehicles TABLE OF CONTENTS INTRODUCTION... 1 EXECUTIVE SUMMARY... 1 BACKGROUND... 2 A. Residential Single Family Carbon Profile... 2 B. Fuel Switching Opportunities in Single Family Homes... 3 DISCUSSION... 4 A. Cost-Effectiveness: Societal versus Customer Perspective... 4 B. Assumptions for the Cost Effectiveness Evaluation of Fuel Switching... 4 C. Cost Effectiveness Evaluation of Fuel Switching Societal Perspective Residential Appliances Alternative Vehicles Marginal Abatement Cost of CO2e Reduction D. Cost-Effectiveness of Fuel Switching - Customer Perspective Residential Appliances Vehicles E. Impact of Changes in Assumptions on Cost-Effectiveness RECOMMENDATIONS AND NEXT STEPS A. Promote the PaloAltoGreen Gas Program B. Participate in the Low Carbon Fuel Standard Program C. Secure a Bulk Buy Residential PV Contract D. Evaluate Cost Effectiveness of Leasing an EV/PHEV City Fleet E. Evaluate Rate Tiers for Electric-only Buildings F. Consider fuel-switching programs/incentives for residential new construction projects 16 i.

8 INTRODUCTION Since the City s electric supply is 100% carbon neutral, reduction in the City s greenhouse gas (GHG) emissions must come from reductions in the community s use of natural gas and transportation fuels. Another way to reduce GHG emissions is to replace gas appliances (hot water heaters, space heaters, clothes dryers, and stoves/ovens) with electric appliances or to replace gasoline-powered vehicles with electric vehicles. This report summarizes staff s analysis of the cost effectiveness of these fuel-switching options. EXECUTIVE SUMMARY Palo Alto residents consume 45% of the City s natural gas needs and drive 30-40% of the community s vehicle miles traveled annually. Even with carbon neutral electric supplies, the average Palo Alto single family is estimated to have a carbon footprint of 29.9 metric tonnes (MT), of which 39% is associated with natural gas usage at home and vehicle transport. Switching fuel use from natural gas or transportation fuels to electricity has a great potential to reduce the City s GHG emissions. Staff evaluated two fuel-switching program options: A Fuel Switching Program to encourage residential customers to replace their natural gas appliances with electric appliances, and An Electric Vehicle (EV) Incentive Program to encourage customers to replace conventionally powered vehicles with EVs. This report specifically examines the economics of appliance and vehicle fuel switching from natural gas and gasoline to electricity for single-family residential customers. The analysis concludes that under current projections, it is not cost effective for residents to switch from natural gas appliances to electric appliances. However, changes in carbon market prices, installation of solar photovoltaic (PV) systems, or a different electric rate structure may result in cost-effective residential fuel switching scenarios. After first completing all costeffective efficiency measures, staff finds that the most cost-effective way to reduce the carbon impact of burning natural gas in residential homes is by purchasing carbon offsets. A PaloAltoGreen Gas Program, backed by carbon offsets, is currently under development to provide that mechanism for residents to reduce the carbon footprint associated with their natural gas usage. For vehicles, buying an EV or natural gas vehicle (NGV) is a cost-effective alternative to buying a compact-sized gasoline vehicle after including state rebates and federal tax credits. In addition, plug-in hybrid electric vehicles (PHEVs) are cost effective when compared to the costs of owning and operating a mid-sized gasoline car. 1

9 BACKGROUND A. Residential Single Family Carbon Profile In 2012, the average single-family household, which houses an average of 2.59 people, 1 had a carbon footprint of 32.4 MT. 2 With the implementation of the carbon neutral electric plan, a single-family household in the City of Palo Alto Utilities (CPAU) territory currently has an average carbon footprint of 29.9 MT. Fuel switching focuses on eliminating the 11.8 MT of GHG emissions associated with natural gas consumption and vehicle transport as shown in Figure 1 below. Figure 1: 2012 Single Family Household Greenhouse Gas Emissions (MT) Eliminated by Carbon Neutral Electric Resource Focus of Fuel Switching Annual emissions based on 2.59 people per single family Palo Alto household and The Nature Conservancy Calculator. Natural gas household appliances emit 3.0 MT of GHG emissions each year, comprising 10% of the current household GHG footprint. Water heating and space heating respectively account for 49% and 37% of the annual natural gas consumption in an average California household. Cooking, clothes drying and pool/spa heating make up the rest of natural gas usage in the residential sector. 1 Steve Emslie, City of Palo Alto Community Profile. July (accessed 4 Sept. 2013). 2 The Nature Conservancy, Single Family Carbon Footprint, (accessed 6 Sept 2013). 2

10 The average single-family household is estimated to drive 19,700 miles/year with vehicle transportation emitting 8.8 MT of GHG emissions annually. This represents 29% of the household GHG emissions. Vehicle emissions therefore are one of the largest opportunities for carbon reduction. B. Fuel Switching Opportunities in Single Family Homes The median single-family household currently uses around 511 kwh per month; this monthly electricity consumption would increase by 78% if this household were to switch all four major gas appliances to electric. If all 14,500 single-family residential homes in CPAU territory fuel switched or bought voluntary offsets through a PaloAltoGreen Gas Program for 100% of their natural gas appliances, GHG emissions would decrease by 44,000 MT annually. With 2.2 vehicles per household in Palo Alto, single-family residences are estimated to own 32,000 vehicles. 3 For the study, vehicles were assumed to have an average lifespan of 11 years and travel 10,000 miles annually. Every gasoline vehicle replaced with a 100% EV is expected to increase the annual electric load by approximately 2,900 kwh and reduce GHG emissions by 3.96 MT/year when compared to the average sedan on the road in the United States. 4 By fuel switching or purchasing offsets for 100% of vehicle and natural gas consumption, the average single family home has the opportunity to reduce its current carbon footprint by 39%. Staff estimates that approximately 500 EVs are currently registered in Palo Alto. Assuming 20% of single-family households were to replace one of their cars with an EV by 2020, there would be 2,900 EVs registered in Palo Alto and the annual electric energy consumption would increase by 8,400 MWh, or 0.8% of the Citywide electric usage in Staff s current focus is to keep track of the number of EVs owned by residents and to monitor the impact of these EV charging on the neighborhood distribution transformers. As the numbers of EVs increase over time and when 2-3 EVs cluster on a single distribution transformer, the overloaded transformers will be replaced. Staff is also monitoring workplace EV charging. CPAU s distribution feeder lines have sufficient capacity to take on EV related additional loads well into the next decade. CPAU is participating with other California electric utilities on a study to forecast EV penetration by 2020 and 2030, and the potential impact on the distribution grid. This study by the California Electric Transportation Coalition is expected to be completed by the end of the year and staff will keep the Commission informed of the study results. Staff also expects to have the time-of-use (TOU) EV charging pilot study results available by the end of next year. 3 CLR Search, Palo Alto Number of Vehicles per Household, Demographics/CA/Number-of-Vehicles-per-Household (accessed 9 Sept. 2013). 4 WRI Transportation Emission Factors and Department of Transportation, 3

11 DISCUSSION A. Cost-Effectiveness: Societal versus Customer Perspective Staff evaluated the cost-effectiveness of fuel switching from both a societal and customer perspective. From a societal (Palo Alto community) perspective, fuel switching to electric appliances and electric/natural gas vehicles is cost effective if the lifetime fuel and maintenance cost of the electric appliance (or non-gasoline vehicle) is lower than that of the natural gas appliance (or gasoline vehicle). This assumes the projected commodity and distribution cost of the underlying fuel source, and monetizes the environmental costs of GHG emissions based on the projected market price of carbon. The key differences in the cost-effectiveness calculation for the customer perspective (as opposed to the societal perspective) are the inclusion of utility incentives for alternative fuel appliances and vehicles, and the use of projected electric and gas retail rates, which have a tiered structure to encourage energy efficiency. Both societal and customer perspectives assume the same upfront technology cost which includes equipment cost, tax, installation cost (if applicable), less any federal and state incentives. B. Assumptions for the Cost Effectiveness Evaluation of Fuel Switching To evaluate the societal cost effectiveness of each fuel switching option, staff computed the Net Present Value (NPV) of the upfront equipment cost plus the annual fuel and maintenance costs over the lifetime of the equipment. If the NPV of a fuel switching alternative is higher than that of the base case equipment, then the fuel switching alternative is deemed not cost effective. For the NPV calculation, the following assumptions were used: 1) Discount factor of 4%. 2) For electric supply, there is no associated carbon cost since Palo Alto s electric supply is carbon free. 3) For gas supply, the associated carbon cost is based on the projected price floor of the California Air Resource Board carbon market. 4) For vehicle gasoline, the associated carbon benefit of alternative vehicles is based on the current market price of the Low Carbon Fuel Standard (LCFS) credit. 5) Electric supply cost is based on Palo Alto s renewable electric supply cost. 6) Natural gas supply cost is based on the current market forward price curve. 7) Gasoline supply cost is based on the EIA s current price forecast. 8) Equipment and installation costs for residential appliances are based on local Home Depot quotes as of the summer of ) Vehicle purchase price are based on 2013 Kelley Blue Book estimates. C. Cost Effectiveness Evaluation of Fuel Switching Societal Perspective The following section presents the results of the cost effectiveness analysis for appliance and passenger vehicle options as listed in Table 1 and Table 2, and a summary of the cost of carbon abatement for the fuel switching options. 4

12 Table 1. Natural Gas appliances and fuel switching alternatives End Use Gas Appliance Electric Replacement Appliance Water Heating Standard Gas (EF=0.62) Heat Pump Electric (EF=2.35) Space Heating Standard Gas (AFUE 78) Air Source Heat Pump Electric (COP = 3.8) Cooking Standard Gas Electric Induction Stove/ Electric Oven Drying Clothes Standard Gas Standard Electric Notes: 1. Energy Factor (EF) is a measure of water heater overall efficiency, is the ratio of useful energy output from the water heater to the total amount of energy delivered to the water heater. 2. Coefficient of Performance (COP) is the ratio of heating or cooling provided to electrical energy consumed. Table 2. Gasoline Vehicles and fuel switching alternatives Gasoline Baseline Vehicle Natural Gas Vehicle Electric Vehicle Plug-in Hybrid Electric Vehicle Honda Civic Honda Civic Natural Gas Nissan Leaf Prius Plug-in Toyota Camry - - Chevy Volt Ford C-MAX 1. Residential Appliances Fuel switching for residential appliances is not cost effective under any replacement scenario, as shown below for water heaters and space heaters. The main reason is that the savings from the avoided natural gas usage do not offset the additional electricity costs. For each therm of avoided natural gas use, the savings represent only 46% of the natural gas supply costs. The remaining 56% of costs comprise fixed administrative and infrastructure costs. Additionally, replacing a gas appliance with an electric appliance often requires upgrading the electrical panel, which can add an additional $800-2,000 to the installation cost depending on the appliance. Such installation costs are included in the analyses. 5

13 Figure 2 shows that the least cost option for water heaters is a standard efficiency gas water heater. Even high efficiency gas water heaters are more expensive over the 13-year life of the appliance. Electric options are even more expensive and solar hot water heating is the most expensive option. Figure 2. Cost of Water Heater Replacement Options Figure 3 shows that standard or high efficiency gas space heaters cost about the same over the 20-year life of the appliance. However, a high efficiency air source electric heat pump for space heating is almost twice as costly over the appliance lifetime. Figure 3. Cost of Space Heater Replacement Options 6

14 Figure 4 shows that an electric induction stove/oven is over twice as expensive as a gas stove/oven over the 20-year life of the appliance. Figure 4. Cost of Stove/Oven Replacement Options Figure 5 shows that an electric dryer is over almost three times as expensive as a gas dryer over the 15-year life of the appliance. Figure 5. Cost of Clothes Dryer Replacement Options 7

15 2. Alternative Vehicles Natural gas, electric and plug-in hybrid electric vehicles (PHEVs) were evaluated as alternatives to gasoline vehicles. PHEVs were assumed to operate on a combination of electricity and gasoline depending on the battery size of the vehicle. 5 Figure 6 below compares the NPV for seven vehicle purchase options assuming an 11-year ownership and 10,000 miles per year. Among these vehicle purchase options, the Nissan Leaf EV has the lowest NPV even lower than the two gasoline-powered base case vehicles. Natural gas and gasoline Honda Civics have very similar NPVs under current assumptions. Electric, hybrid electric and natural gas vehicles have higher upfront vehicle costs but lower operational and maintenance costs. The cost effectiveness of the NGV, EV and PHEV increases as annual mileage driven increases. Both the Prius Plug-in and Ford C-max Energi PHEVs become cost effective compared to the Toyota Camry if the vehicles are assumed to drive at least 12,000 miles annually. Figure 6. Cost of Vehicle Purchase Options (assume 11-year ownership, 10,000 miles per year, and federal/state incentives of $4,000 to $10,000) 5 PHEVS: Volt: 80% Miles Driven on Electric; Prius Plug-in 40% Miles Driven on Electric; Ford: 65% Miles Driven on Electric. 8

16 Aside from comparing the NPV for vehicle purchase options, staff also estimated the avoided GHG emissions over the vehicle s lifetime. Figure 7 compares the avoided GHG emissions for each vehicle option relative to the Honda Civic gasoline model. The Nissan Leaf has the highest avoided GHG emissions, followed by the Chevy Volt. The avoided emissions for the PHEV options vary due to their battery size and driving range in EV mode. 6 Figure 7. Lifetime MT CO 2e Avoided per Vehicle (assume each vehicle is driven 10,000 miles/year over 11 years) 6 EVs: 100% electric; PHEVS: Volt: 80% Miles Driven on Electric; Prius Plug-in 40% Miles Driven on Electric; Ford: 65% Miles Driven on Electric. 9

17 Currently, the California Low Carbon Fuel Standard (LCFS) requires a 10% reduction in the carbon intensity (in grams of carbon dioxide equivalent per Million Joules, or gco 2 e/mj) of transportation fuels by 2020, measured on a lifecycle basis. CPAU can claim the carbon credits from the refueling of NGVs, EVs and PHEVs within Palo Alto; these LCFS credits are currently trading at around $60 per metric ton. Figure 8 compares the NPV of the vehicle purchase options with the LCFS credit included. The higher the avoided GHG emissions, the more LCFS credit is assumed for each vehicle option. The lifetime LCFS credit for the Nissan Leaf is about 60% higher than that for the Prius Plug-in. Providing the LCFS credit back to EV owners is one option for how to use the LCFS credits, but that may be administratively difficult. Other uses for the LCFS credits including making distribution system improvements to manage the increased loads that result from increased EV penetrations in town. Figure 8. Cost of Vehicle Purchase Options including LCFS credit 10

18 3. Marginal Abatement Cost of CO2e Reduction Figure 9 illustrates the cost of carbon emission reduction (in $/MT CO 2 e) for the fuel switching options for both residential appliance and gasoline vehicles, as compared to purchasing carbon offsets certified by the Climate Action Reserve (CAR). 7 Under current assumptions, only vehicle switching from a gasoline-powered Honda Civic to the electric Nissan Leaf is cheaper than purchasing offsets. Figure 9. Marginal Abatement Cost Comparison Given that appliance fuel switching is not currently cost effective, staff recommends against offering incentives to encourage residential appliance switching at this time. Instead staff recommends developing and promoting the PaloAltoGreen Gas Program, which is proposed to be backed by carbon offsets. For vehicle fuel switching, the Nissan Leaf emerges as the most cost effective option, with the Honda Civic NG, the Prius Plug-in, and the Ford C-max Energi PHEV also being cost effective depending on the miles drive per year and the inclusion of LCFS credit. Staff recommends that the City capture the LCFS carbon credits and use the funds to support vehicle fuel switching. D. Cost-Effectiveness of Fuel Switching - Customer Perspective Staff undertook a similar cost effectiveness analysis for fuel switching options from a customer perspective. The analysis assumes the current gas and electric tiered rate structures for 7 A carbon offset is an instrument created when greenhouse gas emissions are voluntarily reduced at a specified location/project and are then independently verified to meet industry standards. Some of the most well-known offset certification programs include the Climate Action Reserve (CAR), the California Air Resources Board (CARB), American Carbon Registry (ACR) and Verified Carbon Standard (VCS). Carbon reduction protocols under these programs include urban and rural forest, livestock, landfill, coalmine methane, ozone depleting substances and rice cultivation. The certification programs identify specific projects in locations that generate the purchased offset. 11

19 residential customers and that the incremental electric usage from fuel switching appliances is billed at the Tier 3 electric rate. Base case appliances and vehicle options are the same as used in the previous analyses and are listed in Tables 1 and Residential Appliances The median single-family household currently consumes 511 kwh per month. As shown in Figure 10 below, by switching its water heater, space heating, clothes drying and stove from gas to electric appliances, the median customer would move into the third tier of the electric rate and would increase his or her monthly electric consumption by 78%, and more than double his or her monthly electric bill (from $56 to $122). Figure 10. Single Family Home Median Monthly Electricity Consumption Figure 11 compares the NPVs of standard gas water, heat pump water heater and solar water heating at different electric rates from a customer perspective. Due to the high upfront cost, a solar hot water system is not cost effective. Switching to a heat pump water heater can be cost effective if the customer s total electricity usage stays within Tier 2 of the residential electric rate after adding the electric water heating usage. Furthermore, if the customer can secure a PV system at a levelized cost of $0.14/kWh or less, which is equivalent to a $4.50/Watt installation price, it would also be cost effective to fuel switch to a heat pump water heater. Current City residential solar data reflects an average solar PV installation price of $6.00/Watt. 8 If CPAU were to secure a bulk buy contract for Palo Alto residents, similar to what has been done in San Francisco and San Jose, residents may be able to achieve a $4.50/Watt installation price. 8 According to the Solar Energy Industries Association, from Q to Q1 2013, national average residential system prices fell by 15.8% percent, from $5.86/W to $4.93/W and it is not uncommon for final installed prices to be in the $4.00/W range. (accessed 11 Sept. 2013). 12

20 Figure 11. Cost of Water Heater Replacement Options From a Customer Perspective Figure 12 shows that fuel switching from gas space heating to electric space heating is currently not cost effective even if the customer can secure a PV system with a bulk buy discount. The upfront cost of a heat pump electric space heating unit is shown to be more than double than that of a high-efficiency gas furnace. From a customer perspective, switching from a gas stove/oven and gas clothes dryer to electric models are also not cost effective. Figure 12. Cost of Space Heater Replacement Options From a Customer Perspective 2. Vehicles Figures 13 and 14 compare the NPV of vehicle purchase options from a customer perspective with and without the LCFS credit. While the alternative fuel vehicles have higher upfront costs than their comparable baseline gasoline model, their operating costs are lower even under the assumption that all EV charging is done at the Tier 3 electric rate. 13

21 As shown in Figure 13, even without the LCFS credit, the alternative fuel vehicles are cost effective compared to the baseline vehicle model, except for the Chevy Volt. Figure 13. Cost of Vehicle Purchase Options From a Customer Perspective (assume Tier 3 electric rate, current gasoline price, and federal/state incentives of $4,000 to $10,000 and no LCFS credit) As shown in Figure 14, the LCFS credit further increases the cost effectiveness of the alternative fuel vehicle options based on the lifetime GHG emission reductions. The Honda Civic NGV reduces GHG emissions by only 2.56 MT over the vehicle s lifetime while the Nissan Leaf reduces emissions by MT over the vehicle s lifetime, when compared to a new Honda Civic. Again, the Chevy Volt is the least cost-effective vehicle among the comparison group. If a customer installed solar PV and lowered his or her electric rate to about $0.14/kWh, the EVs and PHEVs would be even more cost effective. 14

22 Figure 14. Cost of Vehicle Purchase Options From a Customer Perspective (assume Tier 3 electric rate, current gasoline price, federal/state incentives and LCFS credit) E. Impact of Changes in Assumptions on Cost-Effectiveness Staff examined the sensitivity of the cost effectiveness of the appliance fuel switching to changes to natural gas commodity price, carbon price, and equipment cost. As discussed previously, appliance fuel switching is not cost effective from either the societal or customer perspective. If a customer can remain on the Tier 2 electric rate with the additional electric load from a heat pump water heater, then it is likely worthwhile for the customer to switch from a gas water heater to a heat pump water heater. Assuming the increased electric usage would be charged at the Tier 3 electric rate, a heat pump water heater could become cost effective to the customer only if both the price of carbon and gas commodity price are twice the current projections. Even then, replacing a gas water heater with an electric heat pump water heater will remain not cost effective from a societal perspective. For a major remodeling project or new construction project, an electric heat pump water heater is cost effective only if both carbon prices and gas commodity prices are doubled. RECOMMENDATIONS AND NEXT STEPS This evaluation clarified several issues and identified opportunities for the City to consider in the future. The following recommendations are under consideration for implementation in the coming months and years as new programs are proposed and developed. A. Promote the PaloAltoGreen Gas Program Given that no residential appliance fuel switching measure is currently cost effective, staff recommends that residents offset the GHG emissions associated with the natural gas end use in their homes by subscribing to the PaloAltoGreen Gas Program. This program will buy and retire 15

23 registered approved offsets at an estimated offset price of $8-9/MT CO2e compared to $139- $737/ MT CO2e for the natural gas fuel switching measures shown in Figure 9. B. Participate in the Low Carbon Fuel Standard Program The City should participate in the LCFS market to capture the carbon credits generated from charging electric vehicles and refueling natural gas vehicles within the City. These credits can be used to make system improvements to encourage EV ownership. C. Secure a Bulk Buy Residential PV Contract A bulk buy residential solar PV program could enable Palo Alto residents to pool their buying power to secure significant discounts and a range of financing options for PV installation. Current CPAU installation data indicates that the average Palo Alto residential customer paid $6.00/Watt in 2013 to install solar PV, which is well above what residents in neighboring cities are currently paying. A bulk buy program that can lower the installed solar PV cost to less than $4.50/Watt would increase the attractiveness of electric appliances from a customer perspective. In addition, EVs and PHEVs would look even more attractive to customers if they were able to install solar PV for less than $4.50/Watt. D. Evaluate Cost Effectiveness of Leasing an EV/PHEV City Fleet The City currently has 60 Compressed Natural Gas (CNG) vehicles with an average fleet age of 9.7 years. The City will be looking to replace a number of vehicles in the next few years, focusing on cost effectiveness and carbon reduction. Given that the City cannot claim the state and federal tax incentives associated with alternative fuel vehicles, staff recommends that the City evaluate the cost effectiveness of leasing EV and PHEV fleet vehicles. That costeffectiveness evaluation must include the cost of additional charging stations. E. Evaluate Rate Tiers for Electric-only Buildings Future electric rate evaluations should include a re-evaluation of the City s three-tier electric rate structure. In such an evaluation, the City could consider developing a separate rate tier structure for electric-only buildings, to promote the use of electric building management systems and appliances within a cost-recovery-based rate structure. Sensitivity analysis indicates that, from the customer s perspective, the cost effectiveness of appliance fuel switching is most sensitive to electric rates and redesigning the tiered rate structure for electric-only buildings could support fuel switching in the future. F. Consider fuel-switching programs/incentives for residential new construction projects Installing 100% electric appliances in a new home or major remodel has the potential to be more cost effective than the retrofit scenarios evaluated in this study. With the California state goal of net zero energy for newly constructed residential buildings by 2020, the City may consider developing fuel-switching incentives for residential new construction projects. 16