Power Markets

Demand Charges Are More than Skin Deep

Power Markets for Bitcoin Miners, 8/28/23

David Bellman

Key Takeaway #1

There are two major charges typically observed on a power contract – energy and demand.

Key Takeaway #2

Demand charges are based on contribution to peak load that caused the most cost on both generation and transmission.

Key Takeaway #3

ERCOT 4CP is an allocation method for transmission cost, which the TDSP recovers through its power contracts with customers. It represents a charge for the overall transmission cost of the grid.

Key Takeaway #4

Loads that can help reduce the TDSP’s contribution to 4CP should benefit – this is done in contract negotiations.

As we have previously noted, power markets are hard to generalize, as power contracts can vary substantially. We also previously discussed the concept of energy and demand charge. The energy charge is easy to understand as it is similar to filling up your car with gas – you pay for what you consume. The demand charge is subjective, more complex, and not carried out consistently throughout the industry. The cost that the utility is trying to recover is real. Because load is not uniform, and supply/demand must match in the power world, the peak demand of power in a year can be very expensive. A whole power plant may be needed to cover the peak loads, and then for the rest of the year that plant does nothing. Plus, the transmission and distribution of that incremental MW are also real. The entire cost of that plant needs to be recovered, which would be difficult if the recovery mechanism consisted only of energy prices.

As an example, if the plant was needed for 1% of the hours, this would represent 87.6 hours in a year. A combustion turbine of 100 MW could cost $800/kW = $80 Million dollars. Assuming a simple 5 yr breakeven for that facility, you would need power prices to be around $2000/MWh, not including variable (e.g., fuel) or fixed (e.g., labor) costs. In addition, this marginal unit must also have transmission built to deliver the incremental power. This year, even with the best conditions for high prices due to weather and regulatory changes, the amount of hours greater than $2000/MWh has only been 22 with an average price of $3220/MWh. Even if we double this the total revenue is under $15 million dollars for 1 year. It would take over 5 years to just do a simple breakeven.

To make up for this gap, many markets offer capacity payments for generators or other programs (such as ancillary service payments, large energy payments, transmission/distribution charges, or even capacity payments). Regardless of the payment type, someone must pay for it – and that someone will eventually be the consumer of power. This is why power bills are more complex than just energy.

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As we have previously noted, power markets are hard to generalize, as power contracts can vary substantially. We also previously discussed the concept of energy and demand charge. The energy charge is easy to understand as it is similar to filling up your car with gas – you pay for what you consume. The demand charge is subjective, more complex, and not carried out consistently throughout the industry. The cost that the utility is trying to recover is real. Because load is not uniform, and supply/demand must match in the power world, the peak demand of power in a year can be very expensive. A whole power plant may be needed to cover the peak loads, and then for the rest of the year that plant does nothing. Plus, the transmission and distribution of that incremental MW are also real. The entire cost of that plant needs to be recovered, which would be difficult if the recovery mechanism consisted only of energy prices.

As an example, if the plant was needed for 1% of the hours, this would represent 87.6 hours in a year. A combustion turbine of 100 MW could cost $800/kW = $80 Million dollars. Assuming a simple 5 yr breakeven for that facility, you would need power prices to be around $2000/MWh, not including variable (e.g., fuel) or fixed (e.g., labor) costs. In addition, this marginal unit must also have transmission built to deliver the incremental power. This year, even with the best conditions for high prices due to weather and regulatory changes, the amount of hours greater than $2000/MWh has only been 22 with an average price of $3220/MWh. Even if we double this the total revenue is under $15 million dollars for 1 year. It would take over 5 years to just do a simple breakeven.

To make up for this gap, many markets offer capacity payments for generators or other programs (such as ancillary service payments, large energy payments, transmission/distribution charges, or even capacity payments). Regardless of the payment type, someone must pay for it – and that someone will eventually be the consumer of power. This is why power bills are more complex than just energy.

There has been much discussion recently about ERCOT’s Four Coincident Peak (4CP) program. The 4CP is an ERCOT tariff charge to transmission and distribution service providers (TDSPs) — including American Electric Power (AEP), Oncor, Centerpoint, and Texas-New Mexico Power (TNMP) — based on their share of the total ERCOT peak load. This is not a direct charge to the consumer; the TDSP writes contracts to its customers to recover this fee, which is focused on the transmission cost of the system, not necessarily the generation increment.

The TDSPs COULD pass through the same costs that ERCOT is applying to them, or they could modify it as they see fit. ERCOT’s method is to look for a synthetic hour for the summer months (Jun-Sept) by finding the top four 15-min peaks for each of the summer months.

This is why customers need to have open discussions with the utilities in order to be able to reduce the 4CP charges. It is essentially a competition between the TDSPs – the total cost is fixed. It is a matter of how the charges get distributed. IF customers can help the TDSP reduce its contribution to the 4CP, they should give the customer credit for that.

As we have stated previously, the devil is in the details with power. However you navigate these complexities it is important to partner with someone who understands the entire situation, not just a piece of the puzzle. BitOoda is the only company built to cover all aspects of the mining process and every element of its nexus with the power/energy world.

Note: Ooda Commodities LLC is an Introducing Broker registered with the National Futures Association.

‍

Miner WoW View

Mining economics dropped week on week.
The S19JPro breakeven price is between $60-$70/MWh. This should cause some rigs to turn off.

**Figure:** Weekly Average Cash Contribution After Power Expense
**Note:** Assumes a PUE of 1.12
**Source:** BitOoda, Bloomberg, Coinmetrics

Henry Hub WoW

Henry Hub is looking forward as the heat dies down – strip is weakening.

PJM WoW

For the PJM region, we use PJM-W hub as the benchmark. PJM-W is the most traded power hub in the US.
Minor changes WoW.

ERCOT WoW

For the ERCOT region, we use ERCOT-North hub as the benchmark. ERCOT-North is the most traded power hub for ERCOT.
Minor changes WoW.

CAISO WoW

For the CAISO region, we use SP-15 hub as the benchmark. SP-15 is located in Southern California.
CAISO is slightly down in the near term.

NYISO WoW: NY-G

This slide uses the NY-G hub as the benchmark for the NYISO region. NY-G is the most traded power hub in NYISO.
NY-G saw only minor changes other than this winter, which is up.

NYISO WoW: NY-A

This slide adds NY-A for the NYISO region.
NY-A prices saw minor changes WoW.

Disclosures

Purpose

This research is only for the clients of BitOoda. This research is not intended to constitute an offer, solicitation, or invitation for any securities and may not be distributed into jurisdictions where it is unlawful to do so. For additional disclosures and information, please contact a BitOoda representative at info@bitooda.io.

Analyst Certification

David Bellman, the research analyst denoted by an “AC” on the cover of this report, hereby certifies that all of the views expressed in this report accurately reflect his personal views, which have not been influenced by considerations of the firm’s business or client relationships.

Conflicts of Interest

This research contains the views, opinions, and recommendations of BitOoda. This report is intended for research and educational purposes only. We are not compensated in any way based upon any specific view or recommendation.

General Disclosures

Any information (“Information”) provided by BitOoda Holdings, Inc., BitOoda Digital, LLC, BitOoda Technologies, LLC or Ooda Commodities, LLC and its affiliated or related companies (collectively, “BitOoda”), either in this publication or document, in any other communication, or on or through http://www.bitooda.io/, including any information regarding proposed transactions or trading strategies, is for informational purposes only and is provided without charge. BitOoda is not and does not act as a fiduciary or adviser, or in any similar capacity, in providing the Information, and the Information may not be relied upon as investment, financial, legal, tax, regulatory, or any other type of advice. The Information is being distributed as part of BitOoda’s sales and marketing efforts as an introducing broker and is incidental to its business as such. BitOoda seeks to earn execution fees when its clients execute transactions using its brokerage services. BitOoda makes no representations or warranties (express or implied) regarding, nor shall it have any responsibility or liability for the accuracy, adequacy, timeliness or completeness of, the Information, and no representation is made or is to be implied that the Information will remain unchanged. BitOoda undertakes no duty to amend, correct, update, or otherwise supplement the Information.

The Information has not been prepared or tailored to address, and may not be suitable or appropriate for the particular financial needs, circumstances or requirements of any person, and it should not be the basis for making any investment or transaction decision. The Information is not a recommendation to engage in any transaction. The digital asset industry is subject to a range of inherent risks, including but not limited to: price volatility, limited liquidity, limited and incomplete information regarding certain instruments, products, or digital assets, and a still emerging and evolving regulatory environment. The past performance of any instruments, products or digital assets addressed in the Information is not a guide to future performance, nor is it a reliable indicator of future results or performance.

All derivatives brokerage is conducted by Ooda Commodities, LLC a member of NFA and subject to NFA’s regulatory oversight and examinations. However, you should be aware that NFA does not have regulatory oversight authority over underlying or spot virtual currency products or transactions or virtual currency exchanges, custodians or markets.

BitOoda Technologies, LLC is a member of FINRA.

“BitOoda”, “BitOoda Difficulty”, “BitOoda Hash”, “BitOoda Compute”, and the BitOoda logo are trademarks of BitOoda Holdings, Inc.

‍

As we have previously noted, power markets are hard to generalize, as power contracts can vary substantially. We also previously discussed the concept of energy and demand charge. The energy charge is easy to understand as it is similar to filling up your car with gas – you pay for what you consume. The demand charge is subjective, more complex, and not carried out consistently throughout the industry. The cost that the utility is trying to recover is real. Because load is not uniform, and supply/demand must match in the power world, the peak demand of power in a year can be very expensive. A whole power plant may be needed to cover the peak loads, and then for the rest of the year that plant does nothing. Plus, the transmission and distribution of that incremental MW are also real. The entire cost of that plant needs to be recovered, which would be difficult if the recovery mechanism consisted only of energy prices.

As an example, if the plant was needed for 1% of the hours, this would represent 87.6 hours in a year. A combustion turbine of 100 MW could cost $800/kW = $80 Million dollars. Assuming a simple 5 yr breakeven for that facility, you would need power prices to be around $2000/MWh, not including variable (e.g., fuel) or fixed (e.g., labor) costs. In addition, this marginal unit must also have transmission built to deliver the incremental power. This year, even with the best conditions for high prices due to weather and regulatory changes, the amount of hours greater than $2000/MWh has only been 22 with an average price of $3220/MWh. Even if we double this the total revenue is under $15 million dollars for 1 year. It would take over 5 years to just do a simple breakeven.

To make up for this gap, many markets offer capacity payments for generators or other programs (such as ancillary service payments, large energy payments, transmission/distribution charges, or even capacity payments). Regardless of the payment type, someone must pay for it – and that someone will eventually be the consumer of power. This is why power bills are more complex than just energy.

There has been much discussion recently about ERCOT’s Four Coincident Peak (4CP) program. The 4CP is an ERCOT tariff charge to transmission and distribution service providers (TDSPs) — including American Electric Power (AEP), Oncor, Centerpoint, and Texas-New Mexico Power (TNMP) — based on their share of the total ERCOT peak load. This is not a direct charge to the consumer; the TDSP writes contracts to its customers to recover this fee, which is focused on the transmission cost of the system, not necessarily the generation increment.

The TDSPs COULD pass through the same costs that ERCOT is applying to them, or they could modify it as they see fit. ERCOT’s method is to look for a synthetic hour for the summer months (Jun-Sept) by finding the top four 15-min peaks for each of the summer months.

This is why customers need to have open discussions with the utilities in order to be able to reduce the 4CP charges. It is essentially a competition between the TDSPs – the total cost is fixed. It is a matter of how the charges get distributed. IF customers can help the TDSP reduce its contribution to the 4CP, they should give the customer credit for that.

As we have stated previously, the devil is in the details with power. However you navigate these complexities it is important to partner with someone who understands the entire situation, not just a piece of the puzzle. BitOoda is the only company built to cover all aspects of the mining process and every element of its nexus with the power/energy world.

Note: Ooda Commodities LLC is an Introducing Broker registered with the National Futures Association.

‍

Miner WoW View

Mining economics dropped week on week.
The S19JPro breakeven price is between $60-$70/MWh. This should cause some rigs to turn off.

Henry Hub WoW

Henry Hub is looking forward as the heat dies down – strip is weakening.

PJM WoW

For the PJM region, we use PJM-W hub as the benchmark. PJM-W is the most traded power hub in the US.
Minor changes WoW.

ERCOT WoW

For the ERCOT region, we use ERCOT-North hub as the benchmark. ERCOT-North is the most traded power hub for ERCOT.
Minor changes WoW.

CAISO WoW

For the CAISO region, we use SP-15 hub as the benchmark. SP-15 is located in Southern California.
CAISO is slightly down in the near term.

NYISO WoW: NY-G

This slide uses the NY-G hub as the benchmark for the NYISO region. NY-G is the most traded power hub in NYISO.
NY-G saw only minor changes other than this winter, which is up.

NYISO WoW: NY-A

This slide adds NY-A for the NYISO region.
NY-A prices saw minor changes WoW.

Disclosures

Purpose

This research is only for the clients of BitOoda. This research is not intended to constitute an offer, solicitation, or invitation for any securities and may not be distributed into jurisdictions where it is unlawful to do so. For additional disclosures and information, please contact a BitOoda representative at info@bitooda.io.

Analyst Certification

David Bellman, the research analyst denoted by an “AC” on the cover of this report, hereby certifies that all of the views expressed in this report accurately reflect his personal views, which have not been influenced by considerations of the firm’s business or client relationships.

Conflicts of Interest

This research contains the views, opinions, and recommendations of BitOoda. This report is intended for research and educational purposes only. We are not compensated in any way based upon any specific view or recommendation.

General Disclosures

Any information (“Information”) provided by BitOoda Holdings, Inc., BitOoda Digital, LLC, BitOoda Technologies, LLC or Ooda Commodities, LLC and its affiliated or related companies (collectively, “BitOoda”), either in this publication or document, in any other communication, or on or through http://www.bitooda.io/, including any information regarding proposed transactions or trading strategies, is for informational purposes only and is provided without charge. BitOoda is not and does not act as a fiduciary or adviser, or in any similar capacity, in providing the Information, and the Information may not be relied upon as investment, financial, legal, tax, regulatory, or any other type of advice. The Information is being distributed as part of BitOoda’s sales and marketing efforts as an introducing broker and is incidental to its business as such. BitOoda seeks to earn execution fees when its clients execute transactions using its brokerage services. BitOoda makes no representations or warranties (express or implied) regarding, nor shall it have any responsibility or liability for the accuracy, adequacy, timeliness or completeness of, the Information, and no representation is made or is to be implied that the Information will remain unchanged. BitOoda undertakes no duty to amend, correct, update, or otherwise supplement the Information.

The Information has not been prepared or tailored to address, and may not be suitable or appropriate for the particular financial needs, circumstances or requirements of any person, and it should not be the basis for making any investment or transaction decision. The Information is not a recommendation to engage in any transaction. The digital asset industry is subject to a range of inherent risks, including but not limited to: price volatility, limited liquidity, limited and incomplete information regarding certain instruments, products, or digital assets, and a still emerging and evolving regulatory environment. The past performance of any instruments, products or digital assets addressed in the Information is not a guide to future performance, nor is it a reliable indicator of future results or performance.

All derivatives brokerage is conducted by Ooda Commodities, LLC a member of NFA and subject to NFA’s regulatory oversight and examinations. However, you should be aware that NFA does not have regulatory oversight authority over underlying or spot virtual currency products or transactions or virtual currency exchanges, custodians or markets.

BitOoda Technologies, LLC is a member of FINRA.

“BitOoda”, “BitOoda Difficulty”, “BitOoda Hash”, “BitOoda Compute”, and the BitOoda logo are trademarks of BitOoda Holdings, Inc.

‍

Related Research

Premium

Free

Demand Charges Are More than Skin Deep

Power Markets for Bitcoin Miners, 8/28/23

Key Takeaway #1

Key Takeaway #2

Key Takeaway #3

Key Takeaway #4

Premium Content

Table of contents

Research By

Note: Ooda Commodities LLC is an Introducing Broker registered with the National Futures Association.

Miner WoW View

Henry Hub WoW

PJM WoW

ERCOT WoW

CAISO WoW

NYISO WoW: NY-G

NYISO WoW: NY-A

Disclosures

Table of contents

Research By

Note: Ooda Commodities LLC is an Introducing Broker registered with the National Futures Association.

Miner WoW View

Henry Hub WoW

PJM WoW

ERCOT WoW

CAISO WoW

NYISO WoW: NY-G

NYISO WoW: NY-A

Disclosures

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