Power Markets

Value of Hedging and Energy Management

Power Markets for Bitcoin Miners, 01/22/24

David Bellman

Key Takeaway #1

ERCOT-N last week showed enormous hedging and energy management value, producing a potential of $7.55M on 100 MW.

Key Takeaway #2

The futures market traded over $1000/mWh for the week, and yet ended up only $71.72/MWh – still higher than a hedge executed in December 23.

Key Takeaway #3

The reason to actively hedge power is that your operations can be impacted by power price spikes.

Key Takeaway #4

Power hedging needs to balanced with operational flexibility and an active energy management in order to avoid mishaps. Mining economics improved as hash dropped more than BTC price. • Natural gas price dropped as the weather did not end up being as severe as it might have been, and the forecast is warming. • Power is not following gas prices yet

As we have previously mentioned in our reports, if you are a miner in ERCOT, hedging with an energy management focus is significantly beneficial. We were harping in December that it was an advantageous time to hedge, as the forward curve had dropped below the power-breakeven of $7090/MWh. In the chart on the next slide, we show each Friday closing for the On-Peak January 24 Future Contract.

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As we have previously mentioned in our reports, if you are a miner in ERCOT, hedging with an energy management focus is significantly beneficial. We were harping in December that it was an advantageous time to hedge, as the forward curve had dropped below the power-breakeven of $7090/MWh. In the chart on the next slide, we show each Friday closing for the On-Peak January 24 Future Contract.

Let’s not assume we can catch the bottom; assume we were able to buy 100 MW ERCOT-N January 2024 at $56/MWh to protect against abnormal events, from extreme cold to grid outages. This contract without margin would cost 100 MW *352 On-Peak Hours Jan * $56/MWh = $1.9M.

Between the 9th and 10th, the Next Week Contract (15th-19th) traded over $1000/MWh – we believe this was extreme. With the $56/MWh Jan 2024 contract, we could have closed out a week’s worth at $1000/MWh. This would then produce a positive return on your futures book of ($1000-$56)/MWh *80 On-Peak Hours for Week * 100 MW = $7.55M. This is more than enough to cover the hedge and physical operations outages to price curtailment. The risk of selling before next week transpires would be if the price of the contract went to the max peak (as seen in Uri) of $5000/MWh. If this occurred, then the potential gain would be over $39M. There is a common phrase in the trading world – “Pigs get slaughtered.” Eventually, the week ended only $71.72/MWh. The hedge for the week would still have produced a positive return, but only $126K. An active energy management team would have steered you to sell the next week around $1000, and at worst carry a few MW into the next week vs. the full 100MW

The reason for a miner to hedge power is that their contracts are tied to the wholesale market. Your operations are not profitable above $90/MWh, and it is best to shut off. When you shut off you, are not generating revenue. This loss of revenue can be significant. In the most pessimistic case, we can assume that a complete power outage in ERCOT for those five days by a 100MW facility running efficiently would result in a loss of 25 BTC. At a $45000 market, this loss totals $1.13M. Subtracting the power cost (assuming $35/MWh) is a total net loss of 845K. Even this extreme case does not compare to what would have been possible with hedging plus an active energy management

The next question would be whether there is a case when the hedge loses the company money. There are many ways to lose if you are not careful. If you buy a contract at its peak and the market clears lower, you need to cover this difference. However, it is not a complete loss because on the operational side your mining facility is benefiting from low prices. This is why it is important for miners to work with an energy management team that understands mining and the power industry, and can help you pick an appropriate level and volume to hedge. Active management on both the futures and physical operations will yield significant revenue. BitOoda can help you with your financial and operational strategy to maximize profit.

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 10 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. January 22, 2024 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 through http on or ://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. Copyright 2024 BitOoda Holdings, Inc. All rights reserved. No part of this material may be reprinted, redistributed, or sold without prior written consent of BitOoda

As we have previously mentioned in our reports, if you are a miner in ERCOT, hedging with an energy management focus is significantly beneficial. We were harping in December that it was an advantageous time to hedge, as the forward curve had dropped below the power-breakeven of $7090/MWh. In the chart on the next slide, we show each Friday closing for the On-Peak January 24 Future Contract.

Let’s not assume we can catch the bottom; assume we were able to buy 100 MW ERCOT-N January 2024 at $56/MWh to protect against abnormal events, from extreme cold to grid outages. This contract without margin would cost 100 MW *352 On-Peak Hours Jan * $56/MWh = $1.9M.

Between the 9th and 10th, the Next Week Contract (15th-19th) traded over $1000/MWh – we believe this was extreme. With the $56/MWh Jan 2024 contract, we could have closed out a week’s worth at $1000/MWh. This would then produce a positive return on your futures book of ($1000-$56)/MWh *80 On-Peak Hours for Week * 100 MW = $7.55M. This is more than enough to cover the hedge and physical operations outages to price curtailment. The risk of selling before next week transpires would be if the price of the contract went to the max peak (as seen in Uri) of $5000/MWh. If this occurred, then the potential gain would be over $39M. There is a common phrase in the trading world – “Pigs get slaughtered.” Eventually, the week ended only $71.72/MWh. The hedge for the week would still have produced a positive return, but only $126K. An active energy management team would have steered you to sell the next week around $1000, and at worst carry a few MW into the next week vs. the full 100MW

The reason for a miner to hedge power is that their contracts are tied to the wholesale market. Your operations are not profitable above $90/MWh, and it is best to shut off. When you shut off you, are not generating revenue. This loss of revenue can be significant. In the most pessimistic case, we can assume that a complete power outage in ERCOT for those five days by a 100MW facility running efficiently would result in a loss of 25 BTC. At a $45000 market, this loss totals $1.13M. Subtracting the power cost (assuming $35/MWh) is a total net loss of 845K. Even this extreme case does not compare to what would have been possible with hedging plus an active energy management

The next question would be whether there is a case when the hedge loses the company money. There are many ways to lose if you are not careful. If you buy a contract at its peak and the market clears lower, you need to cover this difference. However, it is not a complete loss because on the operational side your mining facility is benefiting from low prices. This is why it is important for miners to work with an energy management team that understands mining and the power industry, and can help you pick an appropriate level and volume to hedge. Active management on both the futures and physical operations will yield significant revenue. BitOoda can help you with your financial and operational strategy to maximize profit.

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 10 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. January 22, 2024 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 through http on or ://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. Copyright 2024 BitOoda Holdings, Inc. All rights reserved. No part of this material may be reprinted, redistributed, or sold without prior written consent of BitOoda

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Value of Hedging and Energy Management

Power Markets for Bitcoin Miners, 01/22/24

Key Takeaway #1

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Key Takeaway #3

Key Takeaway #4

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