Power Markets

LCOE’s Use in Long-Term Planning

Power Markets for Bitcoin Miners, 11/06/23

David Bellman

Key Takeaway #1

Through levelized cost of electricity (LCOE) analysis, you can understand the required cost for new power assets and the key variables driving that cost.

Key Takeaway #2

Power assets are long-term assets, with some lasting for over 50 years. This makes it hard to connect with miners whose technology could be obsolete in 3 years.

Key Takeaway #3

Partnerships with utilities/IPPs make sense, but there are nuances in designing a power contract that benefits both parties.

Key Takeaway #4

BTC economics stayed the same, as BTC price climbed along with hash. • Gas prices are slightly up, but power saw minor changes

Levelized cost of electricity (LCOE) is a frequently-used metric for long-term planning, which is critical given that power generation assets are long-term assets and therefore require a long-term view. Unfortunately, bitcoin mining is often viewed as a short-term effort relative to power generation, in part because a mining technology can quickly become obsolete. The shortest timeline asset in power generation is the battery, which lasts 10 years with a degradation rate of 15% per year, and nuclear and coal plants last upwards of 50 years

One popular LCOE report is Lazard’s; all such studies are highly dependent on assumptions, but Lazard handles this by offering a wide range of LCOE. Ultimately, LCOE is a power price that recovers the cost of purchasing and running the plant for the life of the plant. NREL offers a calculator that allows you to plan by inputting your own assumptions.

The major inputs to LCOE are capital cost, fuel cost, duration, average cost of capital/discount rate, and how the plant will run – the capacity factor. In a fully regulated market, it is easy to assume the plant will run to its engineering capability; however, in a competitive market this is not as clear. If we look at the Lazard table (see next slide), there is a slight bias to renewables with the lowest conventional power at $39/MWh. In general, this is a reasonable assumption with gas prices at $3-4/mmbtu since gas combined cycles are largely driven by the assumption of gas price. However, if we place that cycle in gas export constrained areas from West Texas to even the Middle East, we could see prices in the 20’s

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Levelized cost of electricity (LCOE) is a frequently-used metric for long-term planning, which is critical given that power generation assets are long-term assets and therefore require a long-term view. Unfortunately, bitcoin mining is often viewed as a short-term effort relative to power generation, in part because a mining technology can quickly become obsolete. The shortest timeline asset in power generation is the battery, which lasts 10 years with a degradation rate of 15% per year, and nuclear and coal plants last upwards of 50 years

One popular LCOE report is Lazard’s; all such studies are highly dependent on assumptions, but Lazard handles this by offering a wide range of LCOE. Ultimately, LCOE is a power price that recovers the cost of purchasing and running the plant for the life of the plant. NREL offers a calculator that allows you to plan by inputting your own assumptions.

The major inputs to LCOE are capital cost, fuel cost, duration, average cost of capital/discount rate, and how the plant will run – the capacity factor. In a fully regulated market, it is easy to assume the plant will run to its engineering capability; however, in a competitive market this is not as clear. If we look at the Lazard table (see next slide), there is a slight bias to renewables with the lowest conventional power at $39/MWh. In general, this is a reasonable assumption with gas prices at $3-4/mmbtu since gas combined cycles are largely driven by the assumption of gas price. However, if we place that cycle in gas export constrained areas from West Texas to even the Middle East, we could see prices in the 20’s

At this price level, it certainly would be appealing for miners. The key is to be able to figure out other demand sources beyond BTC mining, as the investment to be able to offer this type of power price is at least a 400MW sized plant costing around $500m. The power price of 20’s quickly turns to $50/MWh if you are trying to pay that cost back in 5 years vs. 30 years.

This is why sub-$50 power contracts are hard to find in the US: you would have to find locations with excess generation, as any significant increase in load would require capital investments which are not easily found sub $50/MWh without a longterm need for load. If miners can only do a 5 year power purchase, it makes it hard for the power generator/utility to capitalize that much expense without a belief there will be load requirements beyond the BTC load after 5 years. Lower than $50/MWh can also be achieved with wind and solar generation, but this is likely to require a trade off of less operating time for the miners.

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 11 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 through http on or ://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. All derivatives brokerage is conducted by Ooda Commodities, LLC a member of NFA and 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. Copyright 2023 BitOoda Holdings, Inc. All rights reserved. No part of this material may be reprinted, redistributed, or sold without prior written consent of BitOoda.

Levelized cost of electricity (LCOE) is a frequently-used metric for long-term planning, which is critical given that power generation assets are long-term assets and therefore require a long-term view. Unfortunately, bitcoin mining is often viewed as a short-term effort relative to power generation, in part because a mining technology can quickly become obsolete. The shortest timeline asset in power generation is the battery, which lasts 10 years with a degradation rate of 15% per year, and nuclear and coal plants last upwards of 50 years

One popular LCOE report is Lazard’s; all such studies are highly dependent on assumptions, but Lazard handles this by offering a wide range of LCOE. Ultimately, LCOE is a power price that recovers the cost of purchasing and running the plant for the life of the plant. NREL offers a calculator that allows you to plan by inputting your own assumptions.

The major inputs to LCOE are capital cost, fuel cost, duration, average cost of capital/discount rate, and how the plant will run – the capacity factor. In a fully regulated market, it is easy to assume the plant will run to its engineering capability; however, in a competitive market this is not as clear. If we look at the Lazard table (see next slide), there is a slight bias to renewables with the lowest conventional power at $39/MWh. In general, this is a reasonable assumption with gas prices at $3-4/mmbtu since gas combined cycles are largely driven by the assumption of gas price. However, if we place that cycle in gas export constrained areas from West Texas to even the Middle East, we could see prices in the 20’s

At this price level, it certainly would be appealing for miners. The key is to be able to figure out other demand sources beyond BTC mining, as the investment to be able to offer this type of power price is at least a 400MW sized plant costing around $500m. The power price of 20’s quickly turns to $50/MWh if you are trying to pay that cost back in 5 years vs. 30 years.

This is why sub-$50 power contracts are hard to find in the US: you would have to find locations with excess generation, as any significant increase in load would require capital investments which are not easily found sub $50/MWh without a longterm need for load. If miners can only do a 5 year power purchase, it makes it hard for the power generator/utility to capitalize that much expense without a belief there will be load requirements beyond the BTC load after 5 years. Lower than $50/MWh can also be achieved with wind and solar generation, but this is likely to require a trade off of less operating time for the miners.

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 11 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 through http on or ://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. All derivatives brokerage is conducted by Ooda Commodities, LLC a member of NFA and 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. Copyright 2023 BitOoda Holdings, Inc. All rights reserved. No part of this material may be reprinted, redistributed, or sold without prior written consent of BitOoda.

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LCOE’s Use in Long-Term Planning

Power Markets for Bitcoin Miners, 11/06/23

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Key Takeaway #4

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