Power Markets

A Time to Hedge

Power Markets for Bitcoin Miners, 02/27/23

David Bellman

Key Takeaway #1

Understanding the power market risk can be approached several ways. Given the multivariable conditions, sometimes a simple of approach of historical heat range can be sufficient to understand risk.

Key Takeaway #2

Once the range of potential outcomes is understood, then a decision matrix can be built to create a hedging program without emotions.

Key Takeaway #3

There are signs that large power users should start hedging their power, particularly in the winter.

Key Takeaway #4

BitOoda is well positioned to help you analyze your power contracts, and design and execute a hedging program for you.

The future potential of the power markets can be evaluated in a number of ways, each with their own pluses and minuses. The most common way is to run a dispatch model to account for the changing generation landscape, where the user inputs the changing generation stack into the model. Key variables driving this model are load (weather dependent), fuel price (somewhat weather dependent), environmental regulation, and the schedule of new building and retirements in the generation stack. There is a significant amount of guess work needed to fully understand the potential risks in the model. Each variable has its own interdependency with the others – stacking the various scenarios can lead to over 50 simulations.

A simpler approach for those who have a power contract in a specific area is to first run an analysis of your contract. The analysis would involve the intricacy of the contra on whether it is energy or capacity driven. Forecasting the capacity price is a harder strategy vs. energy price. If the contract is more energy related, running correlations/regressions to identify the best market hub can lead to a financial forecast using the forward curve. In order to create the range bound of that forward curve, actual historical heat rates can be used. Heat rate implies the amount of fuel energy (typically mmbtu) required per power unit (typically MWh). This can be done on a financial basis by taking the actual power price divided by the natural gas price to get an implied heat rate.

The implied heat rate takes into account all of the variables discussed above for a dispatch model, assuming you have enough historical data. You can understand how a particular month fared with high loads and outages to low loads and a lot of renewable energy. The only concern about this lookback is the potential to create an even more extreme scenario than the actual history. However, with enough history, the extreme cases will highlight enough deviation for you to feel comfortable in hedging. If we were trading, a deeper analysis would be needed, since hedging and trading are distinctly different. Hedging is akin to insurance and facilitating business continuity in extreme circumstances.

‍

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The future potential of the power markets can be evaluated in a number of ways, each with their own pluses and minuses. The most common way is to run a dispatch model to account for the changing generation landscape, where the user inputs the changing generation stack into the model. Key variables driving this model are load (weather dependent), fuel price (somewhat weather dependent), environmental regulation, and the schedule of new building and retirements in the generation stack. There is a significant amount of guess work needed to fully understand the potential risks in the model. Each variable has its own interdependency with the others – stacking the various scenarios can lead to over 50 simulations.

A simpler approach for those who have a power contract in a specific area is to first run an analysis of your contract. The analysis would involve the intricacy of the contra on whether it is energy or capacity driven. Forecasting the capacity price is a harder strategy vs. energy price. If the contract is more energy related, running correlations/regressions to identify the best market hub can lead to a financial forecast using the forward curve. In order to create the range bound of that forward curve, actual historical heat rates can be used. Heat rate implies the amount of fuel energy (typically mmbtu) required per power unit (typically MWh). This can be done on a financial basis by taking the actual power price divided by the natural gas price to get an implied heat rate.

The implied heat rate takes into account all of the variables discussed above for a dispatch model, assuming you have enough historical data. You can understand how a particular month fared with high loads and outages to low loads and a lot of renewable energy. The only concern about this lookback is the potential to create an even more extreme scenario than the actual history. However, with enough history, the extreme cases will highlight enough deviation for you to feel comfortable in hedging. If we were trading, a deeper analysis would be needed, since hedging and trading are distinctly different. Hedging is akin to insurance and facilitating business continuity in extreme circumstances.

As an example, consider the forward curve of PJM-W using the historical actual monthly heat rates to create a Max and Min for each month (below).

We noticed some months are closer to the low case than the high case by a large margin. Those cases show the best approach is to buy those power prices and “lock” in the power hedge. The base case is likely to drift down, assuming unforeseen weather and generation or transmission developments do not occur. Both those factors can easily cause the base case to rally upward. The extent to which it drops likely is represented in the low case. In this view, the prudent decision is to start locking in the majority of the power for the winter, and less in the shoulder and summer months.

BitOoda is here to assist in these types of analyses and the development and execution of hedging strategies. We have the experience and expertise to develop a no-regrets hedging strategy, which will allow you to maintain business continuity through the most extreme cases while minimizing the “premium” paid to insure this. Please contact us for further assistance and information. This is the best time to start a hedging program.

**Figure:** PJM-W ATC Forward View for 1/30/23
**Source:** BitOoda

Miner WoW View

Mining economics slightly improving.
The S19JPro breakeven price is between $80-$90/MWh.

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

Henry Hub WoW

It was another week with not much change.
The Freeport LNG facility seems to be on track to start by the end of March.

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.
We saw only minor changes in the curve this week but signs of power weakening.

ERCOT WoW

For the ERCOT region, we use ERCOT-North hub as the benchmark. ERCOT-North is the most traded power hub for ERCOT.
Near terms cash prices have been sub $20 with lots of wind and moderate weather.

CAISO WoW

For the CAISO region, we use SP-15 hub as the benchmark. SP-15 is located in Southern California.
CAISO minor changes relative to the past few weeks.

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.
We saw only minor changes this week.

NYISO WoW: NY-A

This slide adds NY-A for the NYISO region.
NY-A continues to move on its own terms up throughout the curve.

‍

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.

Ooda Commodities, LLC is a member of NFA and is 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.

‍

The future potential of the power markets can be evaluated in a number of ways, each with their own pluses and minuses. The most common way is to run a dispatch model to account for the changing generation landscape, where the user inputs the changing generation stack into the model. Key variables driving this model are load (weather dependent), fuel price (somewhat weather dependent), environmental regulation, and the schedule of new building and retirements in the generation stack. There is a significant amount of guess work needed to fully understand the potential risks in the model. Each variable has its own interdependency with the others – stacking the various scenarios can lead to over 50 simulations.

A simpler approach for those who have a power contract in a specific area is to first run an analysis of your contract. The analysis would involve the intricacy of the contra on whether it is energy or capacity driven. Forecasting the capacity price is a harder strategy vs. energy price. If the contract is more energy related, running correlations/regressions to identify the best market hub can lead to a financial forecast using the forward curve. In order to create the range bound of that forward curve, actual historical heat rates can be used. Heat rate implies the amount of fuel energy (typically mmbtu) required per power unit (typically MWh). This can be done on a financial basis by taking the actual power price divided by the natural gas price to get an implied heat rate.

The implied heat rate takes into account all of the variables discussed above for a dispatch model, assuming you have enough historical data. You can understand how a particular month fared with high loads and outages to low loads and a lot of renewable energy. The only concern about this lookback is the potential to create an even more extreme scenario than the actual history. However, with enough history, the extreme cases will highlight enough deviation for you to feel comfortable in hedging. If we were trading, a deeper analysis would be needed, since hedging and trading are distinctly different. Hedging is akin to insurance and facilitating business continuity in extreme circumstances.

As an example, consider the forward curve of PJM-W using the historical actual monthly heat rates to create a Max and Min for each month (below).

We noticed some months are closer to the low case than the high case by a large margin. Those cases show the best approach is to buy those power prices and “lock” in the power hedge. The base case is likely to drift down, assuming unforeseen weather and generation or transmission developments do not occur. Both those factors can easily cause the base case to rally upward. The extent to which it drops likely is represented in the low case. In this view, the prudent decision is to start locking in the majority of the power for the winter, and less in the shoulder and summer months.

BitOoda is here to assist in these types of analyses and the development and execution of hedging strategies. We have the experience and expertise to develop a no-regrets hedging strategy, which will allow you to maintain business continuity through the most extreme cases while minimizing the “premium” paid to insure this. Please contact us for further assistance and information. This is the best time to start a hedging program.

Miner WoW View

Mining economics slightly improving.
The S19JPro breakeven price is between $80-$90/MWh.

Henry Hub WoW

It was another week with not much change.
The Freeport LNG facility seems to be on track to start by the end of March.

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.
We saw only minor changes in the curve this week but signs of power weakening.

ERCOT WoW

For the ERCOT region, we use ERCOT-North hub as the benchmark. ERCOT-North is the most traded power hub for ERCOT.
Near terms cash prices have been sub $20 with lots of wind and moderate weather.

CAISO WoW

For the CAISO region, we use SP-15 hub as the benchmark. SP-15 is located in Southern California.
CAISO minor changes relative to the past few weeks.

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.
We saw only minor changes this week.

NYISO WoW: NY-A

This slide adds NY-A for the NYISO region.
NY-A continues to move on its own terms up throughout the curve.

‍

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.

Ooda Commodities, LLC is a member of NFA and is 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

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A Time to Hedge

Power Markets for Bitcoin Miners, 02/27/23

Key Takeaway #1

Key Takeaway #2

Key Takeaway #3

Key Takeaway #4

Premium Content

Table of contents

Research By

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

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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