Power Markets

Hedging in ERCOT: A Case Study

Power Markets for Bitcoin Miners, 02/06/23

David Bellman

Key Takeaway #1

Hedging is not trading; it is more akin to insurance.

Key Takeaway #2

In many situations with insurance, one does not exercise the value of the insurance; Jan 2023 in ERCOT is a case where weather saved the day, and it was best not to have hedged.

Key Takeaway #3

The overall cost of the hedge for Jan 2023 was not cost prohibitive, given that it would have allowed mining and potentially significant trading opportunities to maximize the value of the hedge in power scarcity moments.

Key Takeaway #4

Mining economics are improving; the best time to contemplate hedging is when you are not so stressed.

Continuing our discussion of hedging, we observed that ERCOT’s January 2023 ATC prices ended up much lower than those at which the contract traded for the previous year. Assuming you have a 100 MW load that is directly tied to ERCOT-N Real Time prices, we can use hindsight and offer an alternate scenario of what could have occurred. We assume the operation would not be profitable (and would thus shut down) at greater than $80/MWh.

Hedging from April 2022 to October 2022 would have not been advisable given curve above $80/MWh. In fact, the forward curve was signaling a huge risk to the operation, indicating the need to figure out a way to operate at levels greater than $80/MWh. The Northern Hemisphere observed one of the warmest winters ever, leading to a collapse of natural gas fundamentals. This led to the eventual pricing of RT sub $24/MWh.

A hedging opportunity likely occurred in the beginning of last year. If a hedge for Jan 2023 was placed equally across Jan 2022, the effective cost of power would be $52/MWh, clearly below the economic threshold of $80/MWh. Potentially, one could argue for hedging only a certain percentage to get some of the value of the downside, but the ultimate risk is a catastrophic outcome of not running at all if prices surged over $80/MWh. A unique attribute about power and mining is that it’s a function of time: the pricing of power can be as low as 15 min, so there are operational mechanisms to avoid high prices. The number of hours above $80/MWh can be mitigated with a flexible operations. In January 2023, there were only 20 out 744 hours above $80/MWh – obviously due to mild weather. Not operating in those hours would reduce the monthly power cost from $23.2/MWh to $19.6/MWh. In terms of the hedge, there were 34 hours above $52/MWh. In this case, the hedge ended up only protecting 34 hours of operations. In the table on the following slide, we see the cost of power in the various cases. Case A runs without regard to the hourly spike, Case B avoids spikes over $80/MWh, and Case C is the hedge case at $52/MWh, but there is some nuance to that case. There is some value for 34 hours, but the remaining hours were under $52/MWh and therefore there was a financial payment needed for the hedge.

It is important to have some historical perspective on why the forward curve was elevated and likely slightly more than what would be expected. Storm Uri impacted ERCOT in the previous year, which added some fear. Then we had the global/European energy issue as result of the conflict in Ukraine and the dependence on Russia energy. If we look back at how Jan contracts traded, this was a historical high – even the HR was over 50% higher than the past. Essentially, this means the reaction of the power price to gas was much higher – likely the Uri effect. The knowledge of these events perhaps would have led to a lower-than-usual volume of hedging. This brings up Case D, in which only half the volume was hedged at $52/MWh; in effect, you obtain 10 more hours of operation.

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Continuing our discussion of hedging, we observed that ERCOT’s January 2023 ATC prices ended up much lower than those at which the contract traded for the previous year. Assuming you have a 100 MW load that is directly tied to ERCOT-N Real Time prices, we can use hindsight and offer an alternate scenario of what could have occurred. We assume the operation would not be profitable (and would thus shut down) at greater than $80/MWh.

Hedging from April 2022 to October 2022 would have not been advisable given curve above $80/MWh. In fact, the forward curve was signaling a huge risk to the operation, indicating the need to figure out a way to operate at levels greater than $80/MWh. The Northern Hemisphere observed one of the warmest winters ever, leading to a collapse of natural gas fundamentals. This led to the eventual pricing of RT sub $24/MWh.

A hedging opportunity likely occurred in the beginning of last year. If a hedge for Jan 2023 was placed equally across Jan 2022, the effective cost of power would be $52/MWh, clearly below the economic threshold of $80/MWh. Potentially, one could argue for hedging only a certain percentage to get some of the value of the downside, but the ultimate risk is a catastrophic outcome of not running at all if prices surged over $80/MWh. A unique attribute about power and mining is that it’s a function of time: the pricing of power can be as low as 15 min, so there are operational mechanisms to avoid high prices. The number of hours above $80/MWh can be mitigated with a flexible operations. In January 2023, there were only 20 out 744 hours above $80/MWh – obviously due to mild weather. Not operating in those hours would reduce the monthly power cost from $23.2/MWh to $19.6/MWh. In terms of the hedge, there were 34 hours above $52/MWh. In this case, the hedge ended up only protecting 34 hours of operations. In the table on the following slide, we see the cost of power in the various cases. Case A runs without regard to the hourly spike, Case B avoids spikes over $80/MWh, and Case C is the hedge case at $52/MWh, but there is some nuance to that case. There is some value for 34 hours, but the remaining hours were under $52/MWh and therefore there was a financial payment needed for the hedge.

It is important to have some historical perspective on why the forward curve was elevated and likely slightly more than what would be expected. Storm Uri impacted ERCOT in the previous year, which added some fear. Then we had the global/European energy issue as result of the conflict in Ukraine and the dependence on Russia energy. If we look back at how Jan contracts traded, this was a historical high – even the HR was over 50% higher than the past. Essentially, this means the reaction of the power price to gas was much higher – likely the Uri effect. The knowledge of these events perhaps would have led to a lower-than-usual volume of hedging. This brings up Case D, in which only half the volume was hedged at $52/MWh; in effect, you obtain 10 more hours of operation.

To make it more nuanced, being active in ERCOT also allows intra-month trading/optimization. In many situations, due to the spiking nature of ERCOT, the intra-month contract (week, dailies, bal-day) can be priced much higher than noted, and much value can be extracted if one rolled out of the hedge contract. The $52/MWh hedge essentially gives you 100MW at $52/MWh for the whole day. There are times that the on-peak bal-day contract trades over $2000+/MWh – a selling/closing hedge for 100MW on a peak contract could have netted (16 hrs * 100 MW * (2000-52)) = $3.1 million, which is enough to pay the power costs for the month.

**Figure:** ERCOT-N ATC Jan 2023
**Sources:** ERCOT & CME

Miner WoW View

Mining economics are 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

Gas prices continued to drop.
With the weather warm and gas production growing, price may have to move lower to rebalance.

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 is barely dropping, but HR is still relatively high.

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 prices dropped in the near term, but HR is still high.

CAISO WoW

For the CAISO region, we use SP-15 hub as the benchmark. SP-15 is located in Southern California.
Power dropped, but HR is still 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.
Power dropped a bit, but HR is still high.

NYISO WoW: NY-A

This slide adds NY-A for the NYISO region.
NY-A actually moved up, as did HR.

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.

‍

Continuing our discussion of hedging, we observed that ERCOT’s January 2023 ATC prices ended up much lower than those at which the contract traded for the previous year. Assuming you have a 100 MW load that is directly tied to ERCOT-N Real Time prices, we can use hindsight and offer an alternate scenario of what could have occurred. We assume the operation would not be profitable (and would thus shut down) at greater than $80/MWh.

Hedging from April 2022 to October 2022 would have not been advisable given curve above $80/MWh. In fact, the forward curve was signaling a huge risk to the operation, indicating the need to figure out a way to operate at levels greater than $80/MWh. The Northern Hemisphere observed one of the warmest winters ever, leading to a collapse of natural gas fundamentals. This led to the eventual pricing of RT sub $24/MWh.

A hedging opportunity likely occurred in the beginning of last year. If a hedge for Jan 2023 was placed equally across Jan 2022, the effective cost of power would be $52/MWh, clearly below the economic threshold of $80/MWh. Potentially, one could argue for hedging only a certain percentage to get some of the value of the downside, but the ultimate risk is a catastrophic outcome of not running at all if prices surged over $80/MWh. A unique attribute about power and mining is that it’s a function of time: the pricing of power can be as low as 15 min, so there are operational mechanisms to avoid high prices. The number of hours above $80/MWh can be mitigated with a flexible operations. In January 2023, there were only 20 out 744 hours above $80/MWh – obviously due to mild weather. Not operating in those hours would reduce the monthly power cost from $23.2/MWh to $19.6/MWh. In terms of the hedge, there were 34 hours above $52/MWh. In this case, the hedge ended up only protecting 34 hours of operations. In the table on the following slide, we see the cost of power in the various cases. Case A runs without regard to the hourly spike, Case B avoids spikes over $80/MWh, and Case C is the hedge case at $52/MWh, but there is some nuance to that case. There is some value for 34 hours, but the remaining hours were under $52/MWh and therefore there was a financial payment needed for the hedge.

It is important to have some historical perspective on why the forward curve was elevated and likely slightly more than what would be expected. Storm Uri impacted ERCOT in the previous year, which added some fear. Then we had the global/European energy issue as result of the conflict in Ukraine and the dependence on Russia energy. If we look back at how Jan contracts traded, this was a historical high – even the HR was over 50% higher than the past. Essentially, this means the reaction of the power price to gas was much higher – likely the Uri effect. The knowledge of these events perhaps would have led to a lower-than-usual volume of hedging. This brings up Case D, in which only half the volume was hedged at $52/MWh; in effect, you obtain 10 more hours of operation.

To make it more nuanced, being active in ERCOT also allows intra-month trading/optimization. In many situations, due to the spiking nature of ERCOT, the intra-month contract (week, dailies, bal-day) can be priced much higher than noted, and much value can be extracted if one rolled out of the hedge contract. The $52/MWh hedge essentially gives you 100MW at $52/MWh for the whole day. There are times that the on-peak bal-day contract trades over $2000+/MWh – a selling/closing hedge for 100MW on a peak contract could have netted (16 hrs * 100 MW * (2000-52)) = $3.1 million, which is enough to pay the power costs for the month.

Miner WoW View

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

Henry Hub WoW

Gas prices continued to drop.
With the weather warm and gas production growing, price may have to move lower to rebalance.

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 is barely dropping, but HR is still relatively high.

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 prices dropped in the near term, but HR is still high.

CAISO WoW

For the CAISO region, we use SP-15 hub as the benchmark. SP-15 is located in Southern California.
Power dropped, but HR is still 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.
Power dropped a bit, but HR is still high.

NYISO WoW: NY-A

This slide adds NY-A for the NYISO region.
NY-A actually moved up, as did HR.

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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Hedging in ERCOT: A Case Study

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Miner WoW View

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NYISO WoW: NY-G

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Table of contents

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PJM WoW

ERCOT WoW

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NYISO WoW: NY-A

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