With natural gas prices having nearly doubled since March 2022, reaching their highest levels in the last 13 years, mining operations across the United States have been directly affected
Natural gas is the largest source of energy used to generate electricity in the United States. Rising natural gas prices, in turn, result in higher costs to generate electricity. While at first glance this may seem trivial, higher electric costs directly affect the mining industry. We’ve had firsthand experience with this scenario and its effect on the industry, and would like to share some of our insights with you.
Following the peak of the COVID-19 pandemic, New York saw regular natural gas price fluctuations during the winter months that affected local, industrial-scale Bitcoin mining operations. At the time, the average rate per kilowatt was $0.05/kWh. However, during peak usage, the rate would fluctuate between $0.07 and $0.08/kWh, and even up to $0.10/kWh at times. As Wattum weathered fluctuating prices, our focus turned to researching natural gas price trends from the past 20 years in order to better understand and determine the likelihood of such spikes persisting in the future, and what risks these changes could pose to US mining operations.
Soon thereafter, a NY-based hosting facility that Wattum hosted some of its units at was forced to go offline due to unpaid electric bills. After months of miscommunication, it was finally concluded that their customer price agreements had been incorrectly structured due to their lack of consideration for the price spikes experienced during peak months over a span of 3 years, thus causing them to accumulate over $3 million in debt to the power grid operator, and ultimately forcing them into bankruptcy. This made it clear that variable utility pricing is an additional risk factor in Bitcoin mining, along with mining difficulty increase and the price of BTC.
This urged Wattum to situate all future operations outside of New York, and sparked a concentration on the South where power purchase agreement (PPA) projections showed that the price would remain under $0.049/kWh for the foreseeable future. As Wattum’s first Georgia, USA property was leased, the PPA went from $0.045 to $0.09/kWh seemingly overnight, which came as a surprise considering the area that the facility resided in primarily uses nuclear, solar and other forms of renewable energy. The power grid operator then confirmed that utility pricing is based solely on Henry Hub Natural Gas Futures and Options prices. Essentially, gas prices had reached a 10-year high in April 2022, thus causing the price increase which would likely remain so for at least another year, as per gas settlements.
Wattum then began to look at which other states were affected by these gas prices. Looking at PJM and reviewing state by state, it became evident that all fifty states are affected. An easy demonstration of this can be seen by taking the price per megawatt from PJM and dividing it by 1000 to get today’s price per kilowatt. The resulting number does not include delivery charges and applicable taxes. Realization then set in that Bitcoin mining has never seen gas prices this high, as it has remained at under $0.05/kWh for nearly 10 years. Natural gas prices now officially play another role as a risk variable in Bitcoin mining profitability.
As a Bitcoin miner, unless you locked your PPA kilowatt price prior to the spike in April, the lowest you will likely obtain now, in most places, is still over $0.06/kWh and even as high as $0.10/kWh, meaning it’s best to wait to lock prices. Even with today’s prices, the break even price for BTC is still $0.20, so it is still profitable to mine. And if Henry Hub is any indication, it's likely that prices will drop back down below $0.05 in 2023.
This is the new reality of hosting prices for the remainder of 2022, which is likely to persist into the beginning of 2023 as well. While current prices are less than ideal, they will inevitably drop back down. On the other hand, today’s market creates a favorable environment for purchasing an ASIC, and here’s why: one of the main purchase factors of mining equipment is its ROI, and while ROI is currently at its lowest, this also makes it the best time to buy. In Understanding the Pricing Methodology of the Bitcoin Mining Industry, Wattum takes an in depth look at factors that determine the best time to invest in Bitcoin mining equipment.
