City staff told the Climate Action and Sustainability Committee on Sept. 5 that Bay Area air-quality rules will effectively require electric or low‑NOx water heaters for most residential replacements manufactured on or after Jan. 1, 2027, and that the city should plan assistance to help residents comply.

Jonathan Obenschein, assistant director for climate action, said the Bay Area air district’s Rules 9‑4 and 9‑6 lower NOx limits for new replacement water heaters, which in practice will mean most compliant replacements will be heat-pump water heaters or electric options. Obenschein said installations vary widely in complexity: while many replacements are straightforward, a substantial share require home upgrades (electrical conduit, condensate drainage, space modifications) that increase costs and may deter homeowners from converting.

What staff will study: Obenschein asked the committee whether staff should analyze and pursue a range of assistance tools, including incentives, financing, contractor training and streamlined permitting. Staff presented four preliminary financing/incentive scenarios with broad annual cost ranges: a low-cost financing-only scenario and more expensive packages with low‑income and middle‑income incentives. Staff said these preliminary models assumed financing could be offered on a 20‑year term and that a targeted $4,500 incentive for low‑income customers would fully offset the incremental cost in the model.

Public feedback and concerns
- Sierra Club’s Dashiell Leeds told the committee the chapter supports implementation of the air-district rules and urged Palo Alto to help residents comply through financial and programmatic support.
- Multiple public commenters cautioned that broad vendor/contractor incentives can be captured by contractors through higher pricing. David Cole and another commenter described experiences where contractor pricing rose when rebates were available and urged program designs that avoid paying incentives directly to contractors.
- Luke Morton, an energy consultant, and others described technical tradeoffs for electric resistance water heaters and electric tankless units: resistance or tankless options can be installed in compact spaces but may trigger large electric-service upgrades and high amperage needs; staff said these technical paths merit further study to determine whether they are viable policy options in Palo Alto.

Staff recommendation and next steps
- Staff recommended continuing regional coordination with community choice aggregators and other Bay Area agencies, developing proposals for incentives and financing options, and returning to Council with more detailed options in early 2026. Staff said they will also explore electric-resistance water-heater pathways and how streamlining or other measures could facilitate compliance.

Ending: Committee members generally supported further analysis and regional coordination; staff will incorporate committee feedback into proposals that return to Council for detailed consideration early next year.