Power Markets

A Look Back to 2022’s Benchmark Prices

Power Markets for Bitcoin Miners, 7/24/23

David Bellman

Key Takeaway #1

A year ago, the gas price forward curve was much higher than it is today, even in the outer years.

Key Takeaway #2

Power markets generally move with gas prices, but they have their own unique dynamics.

Key Takeaway #3

PJM forward curves are indicating a need for more flexible load as the spread of on/off prices widens.

Key Takeaway #4

In ERCOT, we are seeing summer risk with a $40/MWh change for this August week on week, similar to the year on year.

It is always good to review history in order to have an appreciation of how markets move over time, and the energy market is certainly no different in this respect. On July 21 last year, the gas market benchmark price forward curve showed a far different picture than it did last Friday.

Last year, the market was anticipating the Henry gas price to be $5/mmbtu for this August; now the forward market is showing under $3/mmbtu. Even the long-dated product is showing a significant discount to last year.

Of course, last year there was a growing concern about the impact of the war in Ukraine. Perhaps the cure for last year’s high prices could be high prices now?

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It is always good to review history in order to have an appreciation of how markets move over time, and the energy market is certainly no different in this respect. On July 21 last year, the gas market benchmark price forward curve showed a far different picture than it did last Friday.

Last year, the market was anticipating the Henry gas price to be $5/mmbtu for this August; now the forward market is showing under $3/mmbtu. Even the long-dated product is showing a significant discount to last year.

Of course, last year there was a growing concern about the impact of the war in Ukraine. Perhaps the cure for last year’s high prices could be high prices now?

PJM-W, the most traded power market in the US, shows a much steeper valley in the shoulder months now. The driving change for PJM is a belief in wider on/off spreads as off peak prices came off more. Even the long-dated product showed this trend. This indicates a need for load flexibility. which should be beneficial for miners.

ERCOT-N, the most traded hub in ERCOT/TX, is not showing a big change down, but is actually higher in the near term with August 23 trading over $40/MWh higher than last year at this time. In scale, this means a 100MW load in ERCOT would now have to pay $3 million more on power vs. last year. This highlights how much risk there is in the market for ERCOT, not to mention the hot summer forecast.

In the longer term, ERCOT is going against gas prices, as ERCOT prices have not moved much compared to the gas drop. This would indicate baseload gas units in ERCOT are becoming more profitable. The ATC effective HR is 13 for cal 2024. The average baseload combined cycle is close to 7, indicating a gas unit is making double the value on its variable cost. A 500MW combined cycle would likely generate profits in excess of $26 million in 2024. The reason to understand this as a miner is that the incentive to self-generate vs. relying on the grid increases as the heat rate (HR) rises.

Mainstream market analysis also changed just as much as the forward curve did in the past year. The best way to navigate this volatility is through a managed dynamic hedging strategy that allows you to handle the swings but not lose out / overpay for “insurance.” As we have previously noted, the hedging strategy should incorporate some trading due to the unique nature of mining operations and their cycling capability. Tremendous value can be unlocked with Balance of the Day trading.

BitOoda has the expertise in both mining and power to help you reach this potential. We can work with you to develop a comprehensive hedging strategy and help you maximize the value of your operations through trading optionality and potentially on-site generation.

Miner WoW View

Mining economics improved week on week.
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 is seeing some near-term strength as much of the country experiences hot weather.

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 power saw minor changes outside this winter; winter prices are up.

ERCOT WoW

For the ERCOT region, we use ERCOT-North hub as the benchmark. ERCOT-North is the most traded power hub for ERCOT.
August futures jumped as real-time prices are clearing higher given the pricing formation issue we discussed in a previous report. Hot weather is expected to continue into August.

CAISO WoW

For the CAISO region, we use SP-15 hub as the benchmark. SP-15 is located in Southern California.
CAISO changed back from last week’s move (although there may be accuracy issues with the CME source data).

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 saw minor changes WoW.

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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.

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