Power Markets

Financial Hedging Power Introduction

Power Markets for Bitcoin Miners, 4/10/23

David Bellman

Key Takeaway #1

Financial power markets are built around the physical spot market for the region.

Key Takeaway #2

Financial contracts will be settled to the physical reality of the marketplace.

Key Takeaway #3

Hedging power prices can be done effectively, with caution against considering the hedge book as an instrument of PNL.

Key Takeaway #4

Trading power can be done effectively but requires stringent risk management, as the commodity has a history of blowups.

Financially hedging power on exchanges is essentially managing a financial book focused on the change of value from the hedge point. Power contracts on exchanges are not homogenous, other than the around the clock (ATC) pricing. Each power market has its own description of On and Off peaks. Many assume that power only spikes in On-peak. In general, that could be true depending on the markets; however, the definition of off-peak typically includes weekends and holidays. Weather anomalies do occur on weekends and holidays, making the situation more precarious at times, as staffing at plants could cause a slower-than-expected response during those days, leading to power spikes. Also, considering winter risk, the coldest time periods are typically in off-peak hours. On-peak products are much more liquid than off-peak products on the exchange.

Setting aside the time period structure, power contracts can be purchased as calendar (every month) and then by month, by week, by day, and even balance of the day. An ATC calendar contract is the easiest to explain: it’s essentially every hour. For example, if you purchase a 50MW ATC Calendar 2024, this is essentially 50MW priced for 8784 hours (leap year in 2024), for a total of 439200 MWh. Therefore, the nominal value of the contract at $60/MWh = $26,352,000. Owning the $60/MWh contract would not require the obligation of the full amount since financially the only risk is the delta position from the hedge point. The financial instrument is settled to the real results of the market. If the market ended each hour each day at $60/MWh and you purchased the contract at $60/MWh, the financial settlement is 0. There will be many days when you will accumulate value, but there will also be many days when you lose value. Being well-capitalized and allocating the appropriate capital to the hedge book will allow business continuity. If the price ended up $1/MWh higher at $61/MWh, the resulting settlement by the end of the year is a positive $439,200 in your financial book. However, your physical power book with the utility (assuming 1:1 correlation) would be an extra expense over the budgeted $439,200. However, when combined, the net result is 0 – a perfect hedge.

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Financially hedging power on exchanges is essentially managing a financial book focused on the change of value from the hedge point. Power contracts on exchanges are not homogenous, other than the around the clock (ATC) pricing. Each power market has its own description of On and Off peaks. Many assume that power only spikes in On-peak. In general, that could be true depending on the markets; however, the definition of off-peak typically includes weekends and holidays. Weather anomalies do occur on weekends and holidays, making the situation more precarious at times, as staffing at plants could cause a slower-than-expected response during those days, leading to power spikes. Also, considering winter risk, the coldest time periods are typically in off-peak hours. On-peak products are much more liquid than off-peak products on the exchange.

Setting aside the time period structure, power contracts can be purchased as calendar (every month) and then by month, by week, by day, and even balance of the day. An ATC calendar contract is the easiest to explain: it’s essentially every hour. For example, if you purchase a 50MW ATC Calendar 2024, this is essentially 50MW priced for 8784 hours (leap year in 2024), for a total of 439200 MWh. Therefore, the nominal value of the contract at $60/MWh = $26,352,000. Owning the $60/MWh contract would not require the obligation of the full amount since financially the only risk is the delta position from the hedge point. The financial instrument is settled to the real results of the market. If the market ended each hour each day at $60/MWh and you purchased the contract at $60/MWh, the financial settlement is 0. There will be many days when you will accumulate value, but there will also be many days when you lose value. Being well-capitalized and allocating the appropriate capital to the hedge book will allow business continuity. If the price ended up $1/MWh higher at $61/MWh, the resulting settlement by the end of the year is a positive $439,200 in your financial book. However, your physical power book with the utility (assuming 1:1 correlation) would be an extra expense over the budgeted $439,200. However, when combined, the net result is 0 – a perfect hedge.

The calendar contract is in essence 12 monthly contracts. These monthly contracts can be traded individually. As the month approaches, the weeks within the month can be traded. Then, as the week approaches, the days start being broken out typically current day / next day and the bal-week. Within the month, there is a balance-of-month contract, which represents the remaining days in the month so one can lock in or remove the remaining position. Once again, these are subject to market contracts from On and Off peak to the universal ATC contract.

A common trap among hedging, companies start to see their hedges as PNL. There is a temptation to monetize hedges without consideration of the physical operations depending on the hedge. This essentially becomes trading, not hedging. Trading is a fine business strategy and offers significant rewards for active participants, but also carries risk. Power markets are the riskiest commodity product to trade, as the dependency on other commodities and fragmented markets makes it extremely volatile and unpredictable. With all this risk, there is a great opportunity for a market participant who can minimize spikes to actively trade and monetize this risk. This is not for the faint of heart, nor for a limited capitalized company. Power trading risk can be minimized with physical operations, but the financial side offers a path risk like no other. Hence, capitalization combined with trade size management is needed. Being right only works if you can stay in the trade long enough to be proven right.

At BitOoda, we have decades of experience in the power markets. We can advise on hedging strategies, risk management, and even power trading and market fundamentals. The compute/mining world is converging with the power markets, and only those who can merge the two will likely survive.

Miner WoW View

Mining economics were flat WoW.
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

We saw only minor change WoW.

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.
We saw an increase in this summer pricing.

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 saw only minor changes last week.

NYISO WoW: NY-A

This slide adds NY-A for the NYISO region.
NY-A is up and moving on its own again.

‍

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.

‍

Financially hedging power on exchanges is essentially managing a financial book focused on the change of value from the hedge point. Power contracts on exchanges are not homogenous, other than the around the clock (ATC) pricing. Each power market has its own description of On and Off peaks. Many assume that power only spikes in On-peak. In general, that could be true depending on the markets; however, the definition of off-peak typically includes weekends and holidays. Weather anomalies do occur on weekends and holidays, making the situation more precarious at times, as staffing at plants could cause a slower-than-expected response during those days, leading to power spikes. Also, considering winter risk, the coldest time periods are typically in off-peak hours. On-peak products are much more liquid than off-peak products on the exchange.

Setting aside the time period structure, power contracts can be purchased as calendar (every month) and then by month, by week, by day, and even balance of the day. An ATC calendar contract is the easiest to explain: it’s essentially every hour. For example, if you purchase a 50MW ATC Calendar 2024, this is essentially 50MW priced for 8784 hours (leap year in 2024), for a total of 439200 MWh. Therefore, the nominal value of the contract at $60/MWh = $26,352,000. Owning the $60/MWh contract would not require the obligation of the full amount since financially the only risk is the delta position from the hedge point. The financial instrument is settled to the real results of the market. If the market ended each hour each day at $60/MWh and you purchased the contract at $60/MWh, the financial settlement is 0. There will be many days when you will accumulate value, but there will also be many days when you lose value. Being well-capitalized and allocating the appropriate capital to the hedge book will allow business continuity. If the price ended up $1/MWh higher at $61/MWh, the resulting settlement by the end of the year is a positive $439,200 in your financial book. However, your physical power book with the utility (assuming 1:1 correlation) would be an extra expense over the budgeted $439,200. However, when combined, the net result is 0 – a perfect hedge.

The calendar contract is in essence 12 monthly contracts. These monthly contracts can be traded individually. As the month approaches, the weeks within the month can be traded. Then, as the week approaches, the days start being broken out typically current day / next day and the bal-week. Within the month, there is a balance-of-month contract, which represents the remaining days in the month so one can lock in or remove the remaining position. Once again, these are subject to market contracts from On and Off peak to the universal ATC contract.

A common trap among hedging, companies start to see their hedges as PNL. There is a temptation to monetize hedges without consideration of the physical operations depending on the hedge. This essentially becomes trading, not hedging. Trading is a fine business strategy and offers significant rewards for active participants, but also carries risk. Power markets are the riskiest commodity product to trade, as the dependency on other commodities and fragmented markets makes it extremely volatile and unpredictable. With all this risk, there is a great opportunity for a market participant who can minimize spikes to actively trade and monetize this risk. This is not for the faint of heart, nor for a limited capitalized company. Power trading risk can be minimized with physical operations, but the financial side offers a path risk like no other. Hence, capitalization combined with trade size management is needed. Being right only works if you can stay in the trade long enough to be proven right.

At BitOoda, we have decades of experience in the power markets. We can advise on hedging strategies, risk management, and even power trading and market fundamentals. The compute/mining world is converging with the power markets, and only those who can merge the two will likely survive.

Miner WoW View

Mining economics were flat WoW.
The S19JPro breakeven price is between $70-$80/MWh.

Henry Hub WoW

We saw only minor change WoW.

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.
We saw an increase in this summer pricing.

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 saw only minor changes last week.

NYISO WoW: NY-A

This slide adds NY-A for the NYISO region.
NY-A is up and moving on its own again.

‍

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

Premium

Free

Financial Hedging Power Introduction

Power Markets for Bitcoin Miners, 4/10/23

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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