Power Markets

Houston/ERCOT, We Have a Problem

Power Markets for Bitcoin Miners, 6/26/23

David Bellman

Key Takeaway #1

The price formation on 6/20/23 in ERCOT is suspect, particularly when compared to an event such as Uri.

Key Takeaway #2

The new ERCOT Contingency Reserve Service (ECRS) likely generated more problems than it solved by creating scarcity while paying units not to be dispatching at key energy time periods.

Key Takeaway #3

As a miner, there were some great opportunities to produce additional revenue from power trading. By turning off for only 7 hours of the day, a 100 MW miner could have obtained over $2 million.

Key Takeaway #4

A simple approach to power vs. a more tactical approach is a significant gap.

InERCOT on 6/20/23, themajority of the Texas power grid had pricesnear the price cap of $5K/MWh for several hours. Many prognosticators andmarket “experts” attributed these prices to unprecedented heat and low wind,even comparing the extreme situation to winter storm Uri (June 2021). However,the devil is in the details…

Price formation should be calculable andconsistent, or else market participants cannot appropriately plan. The price onTuesday the 20th was not rational and likely should have been lower. If we lookat the prices during storm Uri and this Tuesday’s heat wave, the make-up pricesare the Locational Marginal Price (LMP), On-Line Reliability Deployment Adder,and Reserve Price Adder which comes from Operating Reserve Demand Curve (ORDC). The last two are 0 during “normal”time periods.

Storm Uri the adders represented a largeportion of the price formation, as reserves were low, plus a redeployment ofassets to manage the grid was needed (24% of the entire day pricing vs. 2% for6/20/23).

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In ERCOT on 6/20/23, the majority of the Texas power grid had prices near the price cap of $5K/MWh for several hours. Many prognosticators and market “experts” attributed these prices to unprecedented heat and low wind, even comparing the extreme situation to winter storm Uri (June 2021). However, the devil is in the details…

Price formation should be calculable and consistent, or else market participants cannot appropriately plan. The price on Tuesday the 20th was not rational and likely should have been lower. If we look at the prices during storm Uri and this Tuesday’s heat wave, the make-up prices are the Locational Marginal Price (LMP), On-Line Reliability Deployment Adder, and Reserve Price Adder which comes from Operating Reserve Demand Curve (ORDC). The last two are 0 during “normal” time periods.

Storm Uri the adders represented a large portion of the price formation, as reserves were low, plus a redeployment of assets to manage the grid was needed (24% of the entire day pricing vs. 2% for 6/20/23).

‍

Houston/ERCOT, We Have a Problem

The reserve margins for both days showed similar levels during a few hours – yet the adders were so far apart. So, what gives? There was a new product created called the ERCOT Contingency Reserve Service (ECRS), a new daily procured Ancillary Service. In this heat event, 2.5 GW subscribed/selected to participate in this new product – that day they were paid $2500/MW. This is a guaranteed payment regardless of how the day turned out, so it was very tempting to participate in this product vs. the energy market.

ECRS impacted the market, as ERCOT would not use ECRS units to manage the energy market – the low reserve margins observed starting at 3pm. Essentially ERCOT pulled 2.5 GW away, tightening the supply stack. The ORDC must have acknowledged there were reserves, and therefore the adders were not significant. The price was being set by a power plant bid. There are no marginal economics that would show a unit would “need” $4500/MWh to dispatch. Therefore, potentially someone knew the reserve market was plentiful and would not trigger an ORDC event, but they also knew the energy market would be extremely tight and the odds of being the marginal unit were very high; therefore, bidding near the cap would be beneficial. If the owner of the marginal unit happened to also be a large participant in the ECRS, this is a similar strategy to Enron’s Death Star in the California energy crisis. In this case, instead of scheduling congestion, they schedule reserves AND got paid for it.

Putting aside the funny business and malfunctioning aspect of ERCOT price formation, as a miner how do you navigate this? If you had hedged, you could have shut down for just 7 hours of the day and run economically for the rest of the day. Your forward financial hedge of $47/MWh would have netted over $2 million dollars for a 100 MW load. This one day would have paid for half the month’s energy use. In addition, the month’s heat is not yet over.

BitOoda can serve as your expert power advisor and can work with you to design effective hedging strategies – we have the skills to know your business and the power markets to optimize your results.

***Figure:*** *Hourly Reserve Margin*
***Source:*** *ERCOT*

Miner WoW View

Mining economics were rather flat week on week.
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

Henry Hub was flat week on week.

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 no change week on week.

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 moved up on pricing issues.

CAISO WoW

For the CAISO region, we use SP-15 hub as the benchmark. SP-15 is located in Southern California.
CAISO saw only minor changes.

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.

NYISO WoW: NY-A

This slide adds NY-A for the NYISO region.
NY-A prices went up again this week.

‍

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.

‍

In ERCOT on 6/20/23, the majority of the Texas power grid had prices near the price cap of $5K/MWh for several hours. Many prognosticators and market “experts” attributed these prices to unprecedented heat and low wind, even comparing the extreme situation to winter storm Uri (June 2021). However, the devil is in the details…

Price formation should be calculable and consistent, or else market participants cannot appropriately plan. The price on Tuesday the 20th was not rational and likely should have been lower. If we look at the prices during storm Uri and this Tuesday’s heat wave, the make-up prices are the Locational Marginal Price (LMP), On-Line Reliability Deployment Adder, and Reserve Price Adder which comes from Operating Reserve Demand Curve (ORDC). The last two are 0 during “normal” time periods.

Storm Uri the adders represented a large portion of the price formation, as reserves were low, plus a redeployment of assets to manage the grid was needed (24% of the entire day pricing vs. 2% for 6/20/23).

‍

Houston/ERCOT, We Have a Problem

The reserve margins for both days showed similar levels during a few hours – yet the adders were so far apart. So, what gives? There was a new product created called the ERCOT Contingency Reserve Service (ECRS), a new daily procured Ancillary Service. In this heat event, 2.5 GW subscribed/selected to participate in this new product – that day they were paid $2500/MW. This is a guaranteed payment regardless of how the day turned out, so it was very tempting to participate in this product vs. the energy market.

ECRS impacted the market, as ERCOT would not use ECRS units to manage the energy market – the low reserve margins observed starting at 3pm. Essentially ERCOT pulled 2.5 GW away, tightening the supply stack. The ORDC must have acknowledged there were reserves, and therefore the adders were not significant. The price was being set by a power plant bid. There are no marginal economics that would show a unit would “need” $4500/MWh to dispatch. Therefore, potentially someone knew the reserve market was plentiful and would not trigger an ORDC event, but they also knew the energy market would be extremely tight and the odds of being the marginal unit were very high; therefore, bidding near the cap would be beneficial. If the owner of the marginal unit happened to also be a large participant in the ECRS, this is a similar strategy to Enron’s Death Star in the California energy crisis. In this case, instead of scheduling congestion, they schedule reserves AND got paid for it.

Putting aside the funny business and malfunctioning aspect of ERCOT price formation, as a miner how do you navigate this? If you had hedged, you could have shut down for just 7 hours of the day and run economically for the rest of the day. Your forward financial hedge of $47/MWh would have netted over $2 million dollars for a 100 MW load. This one day would have paid for half the month’s energy use. In addition, the month’s heat is not yet over.

BitOoda can serve as your expert power advisor and can work with you to design effective hedging strategies – we have the skills to know your business and the power markets to optimize your results.

Miner WoW View

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

Henry Hub WoW

Henry Hub was flat week on week.

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 no change week on week.

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 moved up on pricing issues.

CAISO WoW

For the CAISO region, we use SP-15 hub as the benchmark. SP-15 is located in Southern California.
CAISO saw only minor changes.

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.

NYISO WoW: NY-A

This slide adds NY-A for the NYISO region.
NY-A prices went up again this week.

‍

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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Free

Houston/ERCOT, We Have a Problem

Power Markets for Bitcoin Miners, 6/26/23

Key Takeaway #1

Key Takeaway #2

Key Takeaway #3

Key Takeaway #4

Premium Content

Table of contents

Research By

Houston/ERCOT, We Have a Problem

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

Houston/ERCOT, We Have a Problem

Miner WoW View

Henry Hub WoW

PJM WoW

ERCOT WoW

CAISO WoW

NYISO WoW: NY-G

NYISO WoW: NY-A

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