Energy Markets Demand Smart Hedging Programs

Continuing the theme from our last report, this week we are highlighting the volatility risk in the energy space and the need to implement a smart hedging no-regrets plan. Within less than a year, gas prices soared to $9.85/mmbtu and also collapsed to $3.46/mmbtu. Assuming power prices were based on wholesale markets and/or fuel clause impacts, they likely went as high as $153/MWh to as low as $27/MWh – and this is just the fuel price impact. This does not include the dispatch load issues seen in extreme events, nor does it include the local distribution and transmission charges.

Smart Hedging Programs Can Mitigate Bitcoin Miners’ Risk

The key question for miners is what range of power prices would have made their operations shut down. Risk is more important than the reward in this analysis. Clearly, low power prices will enable more profit, but there is likely a ceiling that is no longer acceptable to operate. Protecting from this level, plus being able to capture some value from low power prices, is the key to developing a hedging program.

The extent of a shutdown also becomes a concern. Wholesale power markets generally settle in 15 minute increments with 5 minute price signals. Therefore, if you had to shut down the operation for 2 hours per day to lower your daily price by $250/MWh (hypothetical case), you would likely do that. As the spread narrows, the savings for turning off no longer offers the value of continual operation and producing your product. In an extreme example (12/23/22 in ERCOT as shown below), if your operation breakeven was $60/MWh, then it was best to only operate 8 out of 24 hours. Your mining operation is not being utilized in those 16 hours (i.e., there is no BTC production), but you essentially lower the power cost of the day by over $500/MWh. Operations and hedging strategy need to be connected.

An important consideration of a hedge is that it does cost money, similar to an insurance policy for property. There is a premium to hedge, and this likely takes the form of not capturing the rewards of lower wholesale market price. Not overpaying for the hedge is key, and the right no-regret level needs to be developed. For bitcoin mining operations, as compared to manufacturing a product and selling to the consumer, the impact of lower power price is less transparent for BTC. Lower power prices eventually drive equipment pricing and hash rates and hence difficulty, which all puts pressure on BTC prices. However, deploying new equipment takes time. In the long term (12 months+) you don’t want to lose the capability of capturing the lower prices in order to manage the longer-term impact of the changing mining landscape, but just as quickly as the power price went down just as quickly in can go up as shown in just last year prices.  The tenure of the hedge is an important element to manage. This is more a function of strategic planning than operations. Therefore, strategic planning and the hedging strategy also need to be connected.

At the same time, the hedge on the fuel is placed it would also makes sense to hedge some of the output.  BTC markets have the option to hedge on price but also on hash rates.  Selling and buying hash at an acceptable power hedge essentially creates a hedge on profitability – similarly seen in the power markets known as spark spread and in the refining industry known as the crack spread.

It is prudent and fiscally responsible to not be at the mercy of the markets. BitOoda has years of experience in hedging energy products and is likely one of the few firms also knowledgeable in hedging both sides of the margin spread (BTC/Hashrate/Power/Gas). Let us help your operations and strategic planning team develop a comprehensive no-regrets hedging program to manage your energy cost and profitability.

Miner WoW View

• Mining economics are not getting better yet – but next week we should see an improvement with the recent rebound in BTC prices.
• The S19JPro breakeven price is between $60-$70/MWh.

Henry Hub WoW

• Gas bounced off its low, but far from where it has been over the past weeks.
• Cold shots will likely not rebound the curve, as the winter is dwindling and the impact of the cold is being reduced.
• Freeport LNG delays continue to create even more bearish headwinds.

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.
• Power futures finally dropped.  HR is starting to make sense.

ERCOT WoW

• For the ERCOT region, we use ERCOT-North hub as the benchmark. ERCOT-North is the most traded power hub for ERCOT.
• This market saw a similar pattern as in PJM: gas was up and power was down, making HR more sensible.

CAISO WoW

• For the CAISO region, we use SP-15 hub as the benchmark. SP-15 is located in Southern California.
• Power markets moved slightly down, but not as much as other markets. HR is high.

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.
• This market saw a similar pattern as in PJM: gas was up and power was down, making HR more sensible.

NYISO WoW: NY-A

• This slide adds NY-A for the NYISO region.
• NYA is the counter market for the past months – power and HR actually moved up.

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