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Despite a wet winter that recharged Palo Alto’s hydroelectric supplies, the city’s electric customers could be in for a shock in July, when rates are expected to go up by 12 percent or more.

The new estimate from the city’s Utilities Department shows electricity rates rising for the second time in two years on July 1 after seven straight years of stability. And residents may be in for another rate bump next year, when another rate hike could kick in.

The series of rate increases may strike some as surprising, given the recent rains and the plummeting costs of renewable energy, which is taking on an ever growing role in the city’s electric portfolio. But with capital costs rising, cash reserves drying up, electric sales dipping and costs outpacing revenues, city officials say the adjustment is necessary.

The forecast, which the City Council Finance Committee reviewed on Tuesday night, shows electricity rates going up by 12 to 14 percent this year and then by another 9 percent in July 2018.

A major culprit is the recent drought – a severe disruption for a city that gets nearly half of its electricity from hydroelectric sources. With hydroelectric power unavailable, City of Palo Alto Utilities had to go to the market for energy purchases, which has raised costs, Rates Manager Eric Keniston told the committee Tuesday.

“Hydro is by far the cheapest resource,” Keniston said. “Those rains are relatively recent and we did not see those savings in costs until well down the line.”

There are other drivers as well. Capital costs have gone up, with bids coming in more than 30 percent above estimates, staff said. Sales have gone down, with people conserving more and thus paying less. And the electric utility’s reserves are exhausted (partly because the city used these reserves to keep rates flat over prior years) and in need of replenishing, according to staff.

Another driver is the city’s recent switch to solar power. With solar rates hitting new lows last year, the city added two new long-term solar contracts to its renewable portfolio. Altogether, the city’s solar commitments now total more than 150 megawatts, enough to provide for about a third of the city’s electricity needs.

Catherine Elvert, the Utility Department’s communications manager, said these agreements require the city to make some upfront investments. These costs will taper off, she said.

“There are upfront capital costs to get those up to commercial operational status,” Elvert said. “Then the costs for electric commodities themselves are going to drop.”

The projections are still preliminary and the numbers may still change. But staff suggested Tuesday that the increase, if anything, may end up being even higher than the 12 percent in the current forecast.

“The goal is to bring rates to a case where you have revenues matching expenses,” Keniston said. “That’s what this proposal gets us to.”

It’s not all bad news for the Palo Alto ratepayer, however. Other utility rates are expected to remain relatively steady, with gas and wastewater rates showing no increase. Water rates, however, are expected to go up by 4 percent thanks to the rising costs of wholesale purchases from the San Francisco Public Utilities Commission, the city’s supplier.

Altogether, the rate changes are expected to add 4 percent — or about $11.92 — to Palo Alto’s median residential bill, which last year was $282.78. Next year’s projected rate bumps — 9 percent for electricity; 2 percent for gas; 7 percent for wastewater; 6 percent for water; and 3 percent for refuse — would add another $15.97 to the bill.

The council won’t officially set the new rates until June, when it approves the budget for Fiscal Year 2018. Councilman Greg Tanaka, who sits on the Finance Committee, expressed some concerns Tuesday about the rising bills. Tanaka said that while he was campaigning, he spoke to people who are financially strapped and “hanging in by the skin of their teeth.”

He observed that the proposed increase in the electricity rate is more than three times the rate of inflation. He also suggested that Utilities consider hedging its bets in the fluctuating energy market by getting into the futures market and purchasing derivatives.

“(Residents) are not going to like seeing 10 percent on top of 12 percent increase,” Tanaka said. “To me, it would be behoove of us to look at instruments that are available to moderate fluctuation.”

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