Credit: Daniel Dreifuss (file)

The Santa Barbara City Council updated the terms to a two-part contract between the city and Tesla Inc. for a renewable energy system at the Cater Water Treatment Plant, which will allocate 10 percent of a combined million-dollar tax credit to the city and the other 90 percent to Tesla to cover increased project costs.

The city entered into the purchase agreement with the automotive, artificial intelligence, and clean energy giant in January 2021, with Tesla agreeing to install two “battery energy storage systems” to provide backup power to the treatment plant’s two pump stations, which carry the largest electrical loads in the entire facility, according to the city staff’s report. 

In the original agreements, the project’s $3.2 million combined cost was subsidized by a California Public Utilities Commission “Self-Generation Incentive Program,” which offers rebates for installing energy storage technology at facilities throughout the state. With the incentive, the city was able to pay Tesla the full project cost to receive backup power for both the power stations at the plant — the South Coast Conduit Pump Station and the Cater Cross Tie Pump Station — including the ability to ”load shift,” or use the battery power during peak hours, which could save the city an estimated $790,000 over the 20-year life of the batteries.

The project recently received its building permits and is ready to begin construction, the report said; however, “in the time since the city executed the original purchase agreement, several factors have changed, impacting project costs.”

For one, the pandemic and “drastic supply shortages” caused the project costs to increase by more than $1.2 million. Secondly, the recently passed Inflation Reduction Act now allows local governments to receive a federal tax credit for up to 30 percent of a renewable energy project’s cost, meaning the city was now eligible for an additional million-dollar Investment Tax Credit from the government toward initiatives like the battery storage system at Cater Water Treatment Plant.

With the increased costs and the ability to fully subsidize the project with the combined state and federal tax incentives, the city renegotiated the contracts and agreed to assign 90 percent of the $1,004,785 investment tax credit to Tesla, while the city will keep the remaining 10 percent.

And while the city’s 10 percent may seem like a drop in the bucket compared to the $3.3 million Tesla stands to receive from the combined state and federal credits, it is still a net benefit for the city, which is receiving the renewable battery storage with no cost to the general budget in addition to an extra $100,502 that the city was not eligible to receive before the Inflation Reduction Act.

The city will hold off on assigning that extra revenue in the annual budget until the federal tax credit is officially approved and until the battery storage system is fully completed and operational, which city staff said is “unlikely in fiscal year 2023.”

The item was included in this week’s consent agenda and received no discussion before the council approved the changes unanimously.

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