Power Markets

ERCOT Summer Assessment Biased to the Bulls

Power Markets for Bitcoin Miners, 5/9/23

David Bellman

Key Takeaway #1

ERCOT released its SARA report for this summer.

Key Takeaway #2

The outlook was more bullish than reality, as ERCOT changed its evaluation method from a statistical approach to using the actual weather from 2011 as a base assumption. However, the weather in 2022 was extreme, resulting in higher loads than the previous methodology.

Key Takeaway #3

The report also discounted the Large Flexible Load (LFL) too much, using only 1.2 GW when there are over 2 GW of mining load plus a desire from other industries to capitalize, as many miners did during storm Uri.

Key Takeaway #4

Mining economics slightly worsened as natural gas prices weakened across the curve. As been the case for several weeks, the power market is lagging.

ERCOT last week released the Seasonal Assessment of Resource Adequacy (SARA) report for Summer 2023. There are some changes in this report that ERCOT did not explain but which we think are significant in terms of ERCOT’s primary market focus. Since its inception, the focus has been on an energy-only market. However, the outcomes of the recent events, particularly storm Uri, have led them to question this model. There are many pushing the Performance Credit Mechanism (PCM), a potential overhaul of the Texas electricity market pushing private investment in new power plants. This is ERCOT’s version of capacity payments, since they are not guaranteed.

“The performance credit mechanism would obligate electricity companies that provide power to homes and businesses to buy ‘performance credits’ from generators that earn them by being available during times of greatest strain on the power grid. The credits would be awarded to generators after the close of compliance periods, based on evaluations of their availability.”

This structure incentivizes companies to force strain onto the grid, which seems illogical to us.

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ERCOT last week released the Seasonal Assessment of Resource Adequacy (SARA) report for Summer 2023. There are some changes in this report that ERCOT did not explain but which we think are significant in terms of ERCOT’s primary market focus. Since its inception, the focus has been on an energy-only market. However, the outcomes of the recent events, particularly storm Uri, have led them to question this model. There are many pushing the Performance Credit Mechanism (PCM), a potential overhaul of the Texas electricity market pushing private investment in new power plants. This is ERCOT’s version of capacity payments, since they are not guaranteed.

“The performance credit mechanism would obligate electricity companies that provide power to homes and businesses to buy ‘performance credits’ from generators that earn them by being available during times of greatest strain on the power grid. The credits would be awarded to generators after the close of compliance periods, based on evaluations of their availability.”

This structure incentivizes companies to force strain onto the grid, which seems illogical to us.

The SARA report is supposed to be an analytical thought piece examining real-life scenarios of how the summer could turn out, taking into account multiple variables. Obviously, the biggest variable is weather. Unlike previous SARA reports, a statistical approach for weather was ignored in the most recent report.

**Figure:** SARA report Load Adjustments Comparison 2022 vs. 2023
**Source:** ERCOT

ERCOT changed the base case from 15yr p90 to 2011 actuals. However, 2011 was an extreme weather anomaly that has not happened again. This essentially increased the load from the previous method by over 4%. It does not make sense to us to plan for such an extreme case, particularly when it would be inefficient to base resource decisions on infrastructure buildouts to increase reliability on abnormal patterns. Certain businesses, such as data centers and critical infrastructure providers, can afford the cost of buildouts to guarantee reliability, but average users cannot – and should not.

The cost for the system to avoid users experiencing a short rolling blackout once every 30 years could equal more than the cost of installing a backup generator at your house. If storm Uri caused temporary rolling blackouts, most users would have been understanding – it was snowing in Houston, which just does not happen very often. By changing the SARA report and pushing PCM as the solution, ERCOT is not creating a better grid operability but more generation capacity, getting more dollars from rate payers. Creating an effective rolling blackout requires communication among various parts in the grid. This can be done, but these measures that are being promoted do not do that.

The other interesting item we noted in this report is Large Flexible Load (LFL), which is essentially bitcoin miners. As noted, many of the miners helped the system and got paid significant amounts for their ability to help. Other industries could have also received those benefits. The SARA report takes a look-back approach to the volume of LFL. It is only natural that boards and management teams have pushed their companies to do a better job of being able to participate in these types of compensation processes. Not only will miners likely participate more, but certain large industrials are likely to have added investments (from batteries to operational improvements) so they can participate as well. The LFL capability they note is only 1.1 GW. However, there are over 2 GW of miners on the system, with participation likely over 90%. The impact of LFL is likely multiple times more than they have stated. There is clearly a financial incentive for miners and other industrials to be ready.

A free-market design will have hiccups, but if designed appropriately, financial incentives will mute those hiccups. The alternative system is to overpay on insurance and never collect. The Uri situation should be reframed to not being 100% reliable, but to have an effective plan to minimize inconveniences to a manageable outcome (for example, rolling blackouts of 4-8 hours per 24 hours, occurring once every 30 years).

Miner WoW View

Mining economics declined slightly.
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

Henry Hub slightly weakened.

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 saw only 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.
ERCOT saw only minor change WoW.

CAISO WoW

For the CAISO region, we use SP-15 hub as the benchmark. SP-15 is located in Southern California.
CAISO dropped in the prompt summer and winter.

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 WoW.

NYISO WoW: NY-A

This slide adds NY-A for the NYISO region.
NY-A prices went up, leading to higher heat rates.

‍

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.

‍

ERCOT last week released the Seasonal Assessment of Resource Adequacy (SARA) report for Summer 2023. There are some changes in this report that ERCOT did not explain but which we think are significant in terms of ERCOT’s primary market focus. Since its inception, the focus has been on an energy-only market. However, the outcomes of the recent events, particularly storm Uri, have led them to question this model. There are many pushing the Performance Credit Mechanism (PCM), a potential overhaul of the Texas electricity market pushing private investment in new power plants. This is ERCOT’s version of capacity payments, since they are not guaranteed.

“The performance credit mechanism would obligate electricity companies that provide power to homes and businesses to buy ‘performance credits’ from generators that earn them by being available during times of greatest strain on the power grid. The credits would be awarded to generators after the close of compliance periods, based on evaluations of their availability.”

This structure incentivizes companies to force strain onto the grid, which seems illogical to us.

The SARA report is supposed to be an analytical thought piece examining real-life scenarios of how the summer could turn out, taking into account multiple variables. Obviously, the biggest variable is weather. Unlike previous SARA reports, a statistical approach for weather was ignored in the most recent report.

ERCOT changed the base case from 15yr p90 to 2011 actuals. However, 2011 was an extreme weather anomaly that has not happened again. This essentially increased the load from the previous method by over 4%. It does not make sense to us to plan for such an extreme case, particularly when it would be inefficient to base resource decisions on infrastructure buildouts to increase reliability on abnormal patterns. Certain businesses, such as data centers and critical infrastructure providers, can afford the cost of buildouts to guarantee reliability, but average users cannot – and should not.

The cost for the system to avoid users experiencing a short rolling blackout once every 30 years could equal more than the cost of installing a backup generator at your house. If storm Uri caused temporary rolling blackouts, most users would have been understanding – it was snowing in Houston, which just does not happen very often. By changing the SARA report and pushing PCM as the solution, ERCOT is not creating a better grid operability but more generation capacity, getting more dollars from rate payers. Creating an effective rolling blackout requires communication among various parts in the grid. This can be done, but these measures that are being promoted do not do that.

The other interesting item we noted in this report is Large Flexible Load (LFL), which is essentially bitcoin miners. As noted, many of the miners helped the system and got paid significant amounts for their ability to help. Other industries could have also received those benefits. The SARA report takes a look-back approach to the volume of LFL. It is only natural that boards and management teams have pushed their companies to do a better job of being able to participate in these types of compensation processes. Not only will miners likely participate more, but certain large industrials are likely to have added investments (from batteries to operational improvements) so they can participate as well. The LFL capability they note is only 1.1 GW. However, there are over 2 GW of miners on the system, with participation likely over 90%. The impact of LFL is likely multiple times more than they have stated. There is clearly a financial incentive for miners and other industrials to be ready.

A free-market design will have hiccups, but if designed appropriately, financial incentives will mute those hiccups. The alternative system is to overpay on insurance and never collect. The Uri situation should be reframed to not being 100% reliable, but to have an effective plan to minimize inconveniences to a manageable outcome (for example, rolling blackouts of 4-8 hours per 24 hours, occurring once every 30 years).

Miner WoW View

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

Henry Hub WoW

Henry Hub slightly weakened.

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 saw only 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.
ERCOT saw only minor change WoW.

CAISO WoW

For the CAISO region, we use SP-15 hub as the benchmark. SP-15 is located in Southern California.
CAISO dropped in the prompt summer and winter.

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 WoW.

NYISO WoW: NY-A

This slide adds NY-A for the NYISO region.
NY-A prices went up, leading to higher heat rates.

‍

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.

‍

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ERCOT Summer Assessment Biased to the Bulls

Power Markets for Bitcoin Miners, 5/9/23

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

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