Power Markets

Bitcoin Energy Tax

Power Markets for Bitcoin Miners, 3/15/23

David Bellman
Key Takeaway #1

The Biden administration is proposing a tax on BTC mining. The 30% tax would be applied to the cost of energy at the facility.

Key Takeaway #2

This tax can be minimized through various actions including self generation to restructuring of billing.

Key Takeaway #3

Power purchasing for mining was already complicated and this adds another wrinkle, emphasizing the need for a comprehensive view on power and mining. Mining economic

Key Takeaway #4

Heat rates are high, indicating profitability for existing generators plus a signal for future generator investments.

The Biden administration has proposed a Digital Asset Mining Energy Excise Tax that would apply to BTC miners.  While we view implementation as a long shot, it is prudent to examine the implications of this proposal:

“Any firm using computing resources, whether owned by the firm or leased from others, to mine digital assets would be subject to an excise tax equal to 30 percent of the costs of electricity used in digital asset mining.” (See page 78.)

Besides the philosophical issues of controlling the use of electricity/energy, there are several discussion points that came to mind for us: What will they consider to be the cost of electricity? For example, would it be what is on the miner’s electric bill (including capacity, energy, and other fixed costs)? If the tax is applied only to the electricity portion of the bill, one can imagine power contracts could be restructured to minimize that portion, raising admin fees and other items not subject to the excise tax.

Self-generation becomes appealing when considering a potential tax of 30%. If a self-generation capability is built, the cost of electricity can be much below market pricing to potentially zero, considering the cost can be shifted as a fixed cost vs variable. Typically, power costs are considered as variable and based on consumption. If the cost is shifted to capital investments, how would the IRS interpret a charge of consumption if the variable component is low and the fixed cost higher?

This is essentially what is happening for miners using flare gas. They are having a large capital cost expense (gas generator), which they pay for, and negotiate a low-to-negative fuel cost. The effective variable cost of power is now very low. In this setup, the flare gas miner would have a negligible impact on this proposed rule.

The bill specifically focused on the miners regardless if they are being hosted: “Firms that lease computational capacity would be required to report the value of the electricity used by the lessor firm attributable to the leased capacity, which would serve as the tax base.” Again, if focused on the variable cost, the host agreement can be shifted to charge less on “electricity” and charge more for administrative fees to minimize the power cost and minimize tax impact.

Facilities connected to wholesale power markets will likely not be able to minimize the charge other than to continue to focus on markets that are low in power cost. It is interesting to consider how to treat a negative power price. If a facility only ran during negative power prices, would that result in a tax credit?

What about facilities that have multiple functions from compute to mining? Energy must then be split between the two in order to tax just the energy for mining – unless digital assets extend to general compute in the future.

There is already much to consider when purchasing power. This potential tax adds another wrinkle to the equation. At BitOoda, we specialize in the interplay between the power and digital assets markets and can help you with a cohesive strategy to maximize the entire value chain.

‍

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Table of contents

Example H2

Research By

David Bellmanac

Power & Carbon Research

dbellman@bitooda.io

‍

The Biden administration has proposed a Digital Asset Mining Energy Excise Tax that would apply to BTC miners.  While we view implementation as a long shot, it is prudent to examine the implications of this proposal:

“Any firm using computing resources, whether owned by the firm or leased from others, to mine digital assets would be subject to an excise tax equal to 30 percent of the costs of electricity used in digital asset mining.” (See page 78.)

Besides the philosophical issues of controlling the use of electricity/energy, there are several discussion points that came to mind for us: What will they consider to be the cost of electricity? For example, would it be what is on the miner’s electric bill (including capacity, energy, and other fixed costs)? If the tax is applied only to the electricity portion of the bill, one can imagine power contracts could be restructured to minimize that portion, raising admin fees and other items not subject to the excise tax.

Self-generation becomes appealing when considering a potential tax of 30%. If a self-generation capability is built, the cost of electricity can be much below market pricing to potentially zero, considering the cost can be shifted as a fixed cost vs variable. Typically, power costs are considered as variable and based on consumption. If the cost is shifted to capital investments, how would the IRS interpret a charge of consumption if the variable component is low and the fixed cost higher?

This is essentially what is happening for miners using flare gas. They are having a large capital cost expense (gas generator), which they pay for, and negotiate a low-to-negative fuel cost. The effective variable cost of power is now very low. In this setup, the flare gas miner would have a negligible impact on this proposed rule.

The bill specifically focused on the miners regardless if they are being hosted: “Firms that lease computational capacity would be required to report the value of the electricity used by the lessor firm attributable to the leased capacity, which would serve as the tax base.” Again, if focused on the variable cost, the host agreement can be shifted to charge less on “electricity” and charge more for administrative fees to minimize the power cost and minimize tax impact.

Facilities connected to wholesale power markets will likely not be able to minimize the charge other than to continue to focus on markets that are low in power cost. It is interesting to consider how to treat a negative power price. If a facility only ran during negative power prices, would that result in a tax credit?

What about facilities that have multiple functions from compute to mining? Energy must then be split between the two in order to tax just the energy for mining – unless digital assets extend to general compute in the future.

There is already much to consider when purchasing power. This potential tax adds another wrinkle to the equation. At BitOoda, we specialize in the interplay between the power and digital assets markets and can help you with a cohesive strategy to maximize the entire value chain.

Miner WoW View

  • Mining economics slightly declined.
  • The S19JPro breakeven price is between $70-$80/MWh.
Figure: Weekly Average Cash Contribution After Power Expense
Note: Assumes a PUE of 1.12
Source: BitOoda, Bloomberg, Coinmetrics

Henry Hub WoW

  • The curve is slightly down, as the weather was not as cold as forecasted.
Source: BitOoda, CME Group

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.
  • PJM is not following gas – power prices have risen along with HR.
Source: BitOoda, CME Group

ERCOT WoW

  • For the ERCOT region, we use ERCOT-North hub as the benchmark. ERCOT-North is the most traded power hub for ERCOT.
  • Similar to PJM, ERCOT power prices moved up, increasing HR.
Source: BitOoda, CME Group

CAISO WoW

  • For the CAISO region, we use SP-15 hub as the benchmark. SP-15 is located in Southern California.
  • CAISO moved like the rest of the markets – higher power price and higher HR.
Source: BitOoda, CME Group

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.
  • NYISO moved like the rest of the markets – higher power price and higher HR.
Source: BitOoda, CME Group

NYISO WoW: NY-A

  • This slide adds NY-A for the NYISO region.
  • NY-A moved like the rest of the markets – higher power price and higher HR.
Source: BitOoda, CME Group

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.

Copyright 2022 BitOoda Holdings, Inc. All rights reserved. No part of this material may be reprinted, redistributed, or sold without prior written consent of BitOoda.

‍

Download This Report

Table of contents

Example H2

Research By

David Bellmanac

Power & Carbon Research

dbellman@bitooda.io

‍

The Biden administration has proposed a Digital Asset Mining Energy Excise Tax that would apply to BTC miners.  While we view implementation as a long shot, it is prudent to examine the implications of this proposal:

“Any firm using computing resources, whether owned by the firm or leased from others, to mine digital assets would be subject to an excise tax equal to 30 percent of the costs of electricity used in digital asset mining.” (See page 78.)

Besides the philosophical issues of controlling the use of electricity/energy, there are several discussion points that came to mind for us: What will they consider to be the cost of electricity? For example, would it be what is on the miner’s electric bill (including capacity, energy, and other fixed costs)? If the tax is applied only to the electricity portion of the bill, one can imagine power contracts could be restructured to minimize that portion, raising admin fees and other items not subject to the excise tax.

Self-generation becomes appealing when considering a potential tax of 30%. If a self-generation capability is built, the cost of electricity can be much below market pricing to potentially zero, considering the cost can be shifted as a fixed cost vs variable. Typically, power costs are considered as variable and based on consumption. If the cost is shifted to capital investments, how would the IRS interpret a charge of consumption if the variable component is low and the fixed cost higher?

This is essentially what is happening for miners using flare gas. They are having a large capital cost expense (gas generator), which they pay for, and negotiate a low-to-negative fuel cost. The effective variable cost of power is now very low. In this setup, the flare gas miner would have a negligible impact on this proposed rule.

The bill specifically focused on the miners regardless if they are being hosted: “Firms that lease computational capacity would be required to report the value of the electricity used by the lessor firm attributable to the leased capacity, which would serve as the tax base.” Again, if focused on the variable cost, the host agreement can be shifted to charge less on “electricity” and charge more for administrative fees to minimize the power cost and minimize tax impact.

Facilities connected to wholesale power markets will likely not be able to minimize the charge other than to continue to focus on markets that are low in power cost. It is interesting to consider how to treat a negative power price. If a facility only ran during negative power prices, would that result in a tax credit?

What about facilities that have multiple functions from compute to mining? Energy must then be split between the two in order to tax just the energy for mining – unless digital assets extend to general compute in the future.

There is already much to consider when purchasing power. This potential tax adds another wrinkle to the equation. At BitOoda, we specialize in the interplay between the power and digital assets markets and can help you with a cohesive strategy to maximize the entire value chain.

Miner WoW View

  • Mining economics slightly declined.
  • The S19JPro breakeven price is between $70-$80/MWh.
Figure: Weekly Average Cash Contribution After Power Expense
Note: Assumes a PUE of 1.12
Source: BitOoda, Bloomberg, Coinmetrics

Henry Hub WoW

  • The curve is slightly down, as the weather was not as cold as forecasted.
Source: BitOoda, CME Group

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.
  • PJM is not following gas – power prices have risen along with HR.
Source: BitOoda, CME Group

ERCOT WoW

  • For the ERCOT region, we use ERCOT-North hub as the benchmark. ERCOT-North is the most traded power hub for ERCOT.
  • Similar to PJM, ERCOT power prices moved up, increasing HR.
Source: BitOoda, CME Group

CAISO WoW

  • For the CAISO region, we use SP-15 hub as the benchmark. SP-15 is located in Southern California.
  • CAISO moved like the rest of the markets – higher power price and higher HR.
Source: BitOoda, CME Group

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.
  • NYISO moved like the rest of the markets – higher power price and higher HR.
Source: BitOoda, CME Group

NYISO WoW: NY-A

  • This slide adds NY-A for the NYISO region.
  • NY-A moved like the rest of the markets – higher power price and higher HR.
Source: BitOoda, CME Group

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.

Copyright 2022 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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