Palo Alto's utility customers will see a jolt in January, with residential bills set to rise by about 20% thanks to a combination of growing energy costs and diminished production from the city's hydroelectric facilities in the Central Valley and northern California.

And while city officials still boast about having lower rates than PG&E, the rate adjustments that the City Council approved on Monday night will somewhat narrow the gap. With the average residential electric bill set to jump from $86.57 to $103.72, the rate will be about 39% below PG&E, compared to 49% before the change, according to data from the Utilities Department.

The reasons for the jump are both local and global. Natural gas prices have spiked around the globe in recent months for factors that include Russia's invasion of Ukraine and inflation, according to utility officials. These global trends, coupled with California's low temperatures, have led to historically high prices for natural gas, Jonathan Abendschein, assistant utilities director for resource management, said Monday.

"This year's December gas prices were twice as high as last year's winter prices," he told the council. "For January, we're seeing some future projections that were showing over four times as high as last year's winter prices."

At the same time, the reservoirs that help power Palo Alto are now operating at diminished capacity after years of drought. On a good year, two hydroelectric facilities that serve the city — one in Calaveras County and another funded by the federal government in the Central Valley — typically provide close to half of the city's electricity needs.

But over the recent dry spell, the percentage has dropped precipitously, forcing the city to go to the commodity market to close the gap from other sources, including increasingly expensive natural gas. Reservoirs are now at between 30% and 50% below their average levels. As a result, the city is projected to generate 230 gigawatt hours from hydro, down from 481 gigawatt hours on an average year. Given the lower production, the city increasingly relies on the commodity market to buy energy, which includes gas-powered generation.

To address the twin trends — higher energy prices on the commodity market and lower hydro capacity — the City Council approved on Monday an amendment to the city's "electric hydro rate adjuster," a mechanism that allows the utility to temporarily raise rates to account for droughts and then lower them when the need passes.

Abendschein said that without increasing the rate, the city would need to tap into its utility reserve, diminishing it well below currently set targets. The city would then need to either rebuild these reserves through future rate increases or make "deep cuts" to capital investment at a time when the city is trying to upgrade its infrastructure to handle increasing electrification and meet its sustainability goals, he said.

"The challenge for us with our hydroelectric resource is it's historically been a source of our rate advantage," he said. "It's been a very low-cost resource but it's very volatile like this."

He said utility officials will reevaluate the city's mix of energy sources over the coming year, as they put together an integrated resource plan.

The council's 6-1 vote raises the rate adjuster from the current level of $0.013 to $0.048 per kilowatt hour. And by a separate 6-1 vote, the council raised the cap on the city's natural gas purchases, allowing the utility to pay up to $4 per therm, up from the current level of $2 per therm. Utilities Director Dean Batchelor said the adjustment will allow the utility to respond to fluctuations in the gas market.

"We're just asking for authorization so if it does go above $2, we're able to purchase at whatever the cost is at that point," Batchelor said.

Council member Greg Tanaka dissented in both votes, arguing that the proposed utility rates are too high.

"This is not going to come at a pleasant surprise for people," he said. "I think we need to do better."

His colleagues, however, agreed with staff's assessment that the changes, while painful, are necessary. Council member Alison Cormack supported empowering staff to respond to what she called a "fast-moving environment." Mayor Pat Burt acknowledged that the adjustment will have "very significant impact on our utility ratepayers" but supported the change, given the recent decrease in hydroelectric power.

Council member Tom DuBois said that if the city does not approve the modification in the rate adjuster, it will have to pay a higher price later.

"If we don't move forward with this, we'll basically be financing these costs through higher rates on electric utilities over a long period of time," DuBois said.