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October 2022 

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Contact:

Andrew Webber

Founder & CEO

Digital Power Optimization, Inc.

(917) 494-4151

webber@digitalpoweroptimization.com

www.digitalpoweroptimization.com

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The Fundamentals and Energy Implications of Bitcoin Mining

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DPO topics

Introductions and why bitcoin mining matters to the energy industry

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What is cryptocurrency and mining?

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Future of regulated generation portfolios

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Appendix: Additional Info

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Introductions and why bitcoin mining matters to the energy industry

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DPO: An exclusive focus on power producers

• DPO was formed in February 2020.
• The company is built around helping the power and energy sector use bitcoin mining for its own benefit.
• DPO does all the work associated with co-located bitcoin mining operations at power assets.
• Pre-construction: Financial modeling, planning & advisory, financial structuring, strategy.
• Construction: Procurement, project management, oversight of engineering, contractors, construction.
• Operations: Load management, profitability maximization, maintenance, crypto wallets, hedging, liquidation.
• Alignment of interests is critical. DPO does not make money until our power partners make money.
• DPO’s growing team currently includes 8 professionals with past experience in renewable energy, utilities, private equity, project management and construction at firms such as Goldman Sachs, Alliant Energy, and Fortress Investment Group.
• DPO currently has bitcoin mining operations or contracts with 7 clients ranging from regional solar developers to multi-billion-dollar publicly-traded utilities.

As Seen In:

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Bitcoin mining is energy intensive

BTC mining share by country – 07/2021

Canada

Kazakhstan

USA

Russia

Rest of world

Country comparison for BTC electricity consumption, TWh

Energy intensive activities consumption comparison, TWh

Source: Cambridge Bitcoin Electricity Consumption Index.

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Bitcoin mining has grid benefits…

• In the past, most bitcoin mining has taken place in China.

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• Much of the power used in China was derived from coal, especially in the dry seasons.

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• Bitcoin mining is now migrating to lower-cost power in regions with heavy renewable penetration and ESG investors are pushing for verified green Bitcoin to put on their balance sheets.

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• The flexibility of bitcoin mining loads make them more viable in locations that are oversaturated with low-cost renewables or see high intraday volatility.

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Risk of Bitcoin Mining

Environmental

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Regulatory/

Legal

Risk

Description

Financial

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Project

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Reputational

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• Air, Land, Water, Noise

• Federal, State, General

• Revenue, Expenses, Tax

• Consumer, Investor, Public

• Safety, Investor, Electric

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How Bitcoin Mining Can Work with Other Technologies

• Bitcoin Mining, Battery Storage, and Green Hydrogen can be structured and utilized in various ways, depending on location and what energy headaches need to be solved (like curtailments).

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• Each of these new technologies can work in concert with one another and are all a better alternative than curtailing generation when intermittent generation is outpacing load.

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Behind-the-Meter Strategy

• Allows for BTMG to an affiliate or 3rd party offtaker

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• Allows for the avoidance of transmission and distribution charges

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• Production Tax Credits are available as long as it's sold to a 3rd party offtaker

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Private-Use-Network

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Qualifying Facilities

(Renewables)

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Policy

Description

• Allows for BTMG to an affiliate

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• Allows for the  avoidance of transmission and distribution charges

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• Must be >= 1 MW

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• BTMG can be unlimited, but the max capacity can not be more than 80 MW for renewables (Note: fossil fuels can be unlimited and sold to a 3^rd party)

• Behind-the-Meter-Generation (BTMG) strategy is critical for the future of Bitcoin Mining

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• BTMG Policy
• Private-Use-Network (ERCOT/Texas)
• Qualifying Facilities (Applies to all the US)

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What is cryptocurrency and mining?

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The crypto technology stack

Source: Kasireddy (2017)

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Decentralized cryptocurrency relies on mining to validate transactions

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Bitcoin relies on an energy-intensive process called Proof-of-Work

• Everyone offering computing power to the blockchain is tasked with solving the same mathematical problem to validate a transaction
• Whoever successfully first solves the problem is rewarded with a fixed amount of new coins and a small transaction fee
• The chance to solve the problem increases if a person increases its share of total system computing power

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Proof-of-Work (PoW)

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Proof-of-Stake (PoS)

and

Other

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Method

Description

Coins & (Market Cap)

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• Proof-of-Stake and stable coins are other types of crypto that use a different mechanism to process transactions and maintain network security

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• Security, different function, goals and do not depend on energy as a primary source; however the lack of energy as an underpinning makes them less secure.

• Bitcoin ($429bn)
• Dodgecoin ($9bn)

• Ethereum ($211bn)
• Solana ($20bn)
• Cardano ($17bn)

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Future of regulated generation portfolios

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• Bitcoin mining in regulated states can lower ratepayers bills and help stabilize the grid.

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• In the MISO market, for example, utilities are compensated for capacity in their generation portfolios based on Planning Reserve Margin Requirements:
• 1GW of natural gas generation = 1GW of capacity
• 2GW of solar generation = 1GW of capacity
• 6.7GW of wind generation = 1GW of capacity

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• In addition to renewables natural variability, they are also often concentrated in areas with good resource availability resulting in significant localized overgeneration and/or meaningful curtailments.

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• Bitcoin mining can be a profitable off-take in many of these situations to make these dynamics easier to navigate.

In a regulated utilities strategy:

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• All economic benefits are credited back to the customer to reduce energy bills.

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• Bitcoin is only mined after all retail, commercial, and industrial load is served.
• Customers are the reason why regulated utilities get to put incremental generation in their portfolio but after all customer load is served reliably, the remaining energy should be used to help lower customer bills and stabilize the grid through opportunities like Bitcoin mining.

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• Utilizing specific ESG-minded mining strategies can further reduce customers’ bills through the capture of “green” energy value in the crypto markets.

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• DPO’s strategy for regulated utilities is straightforward: do what you do best, let us come in and optimize the rest.

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How Bitcoin Mining Can Lower Customer Bills

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How the Future of Generation Portfolios will Look

Generation Needs by a Regulated Utility to Serve 1 GW of PRMR by Generation Type in MISO

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Optimizing Generation Portfolios with Crypto Mining

• Intermediate resources like wind and solar tend to bring a significant amount of curtailments
• DPO’s regulated utilities model would attach a substantially smaller bitcoin mine relative to the nameplate of the generation asset. It is used as an optimization tool to solve energy headaches like curtailments.
• Using the CAISO image below as an example, instead of curtailing solar during the day and selling wind at a discount when demand is low, DPO would optimize that excess generation with bitcoin mining. All economic benefits can be credited back to the ratepayer.

CAISO Curtailed 2.2 TWh of Energy in the 1^st Seven Months of 2022

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Thank you!

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Appendix: Additional Info

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Considerations

• Operating Dynamics:
• Power usage metering and remote monitoring
• Tracking of PTC opportunity costs and other offtake requirements
• Curtailment of operations for demand response (i.e. capture higher wholesale grid prices)
• Off-the-shelf software modified with custom DPO programming integrations allows maximum operating flexibility
• Hourly profit margin analysis and opportunity cost comparison
• Liquidation vs custody strategy

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• DPO Model Assumptions: Beware Lofty Projections from Other Miners
• Continued near-term growth of network hash rate and difficulty
• Very conservative scenario with regard to the 2024 halving
• No leverage to boost returns (which is available)
• Modest rate of BTC spot price growth, well below historical performance

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• Hedging and Risk Reduction Options:
• Selling forward production via CME futures contract
• Execute recurring structured block trades for daily production with DPO partners specializing in institutional-scale crypto trading
• Structure ASIC acquisitions over time to dollar-cost-average entry into scaled position
• Share equity risk with PE/Infrastructure partners

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• Procurement & Build-Out Considerations:
• Partner and DPO are well suited to evaluate and purchase transformers and other long-lead-time electrical infrastructure
• ASIC purchases can be structured directly with the manufacturers and other intermediaries within the time horizons
• Pricing discounts on ASICs are available, but most discounting is a factor of delivery date rather than scale…i.e. later delivery is cheaper because you lose out on highly-profitable, lower-risk near-term production

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DPO gets you more value for your power

We are built around one strategy: helping the power industry most effectively use cryptocurrency mining for their own benefit. Adding cryptocurrency mining to a power generation asset can capture over $80 / MWh of net profit over the life of the equipment.

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• Alignment of Interests: DPO’s core strategy is to enter into contracts that provide 100% alignment of interest between DPO and its clients. We only seek to make money when our clients make money, and we take risk when our clients take risk.

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• Power and Utility Focus: DPO is built exclusively around partnering with companies in the power and utility space. We understand the unique concerns of renewable developers, IPPs, co-ops, and public utilities. We also understand that power companies are the future of cryptocurrency mining and will benefit from learning about it now.

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• Institutional Experience: DPO’s founders and employees are veterans of major investment banks, private equity firms, public utilities, and manufacturing firms. We understand what it takes to provide white-glove service to institutional clients.

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• Flexibility: We do not seek to impose our preferred business plan or deployment type on our clients. Rather, we view each partnership as a unique opportunity to evaluate all relevant factors and recommend a path forward that is most appropriate for the client. We can work from very small (pilot) operations to data center-scale 100MW+ deployments.

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• Impartial Third Party: We do not tie ourselves to any given vendor, manufacturer or service provider. Even our strategic investors, including NYDIG, expect that we canvas the market for each deployment and recommend the services that are the best fit for that client.

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• Transparency: We want our clients to have the opportunity to become experts on cryptocurrency mining. Much of our job is to teach everything we know, and build trust throughout the process. We pride ourselves on institutional-grade reporting, with as much detail and analysis as our partners care to review.

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• Expertise: Our team of experts come from diverse backgrounds ranging from public utilities to bitcoin mining to high-spec data center and medical facility buildouts. Given our recent capital raise, we continue to add expertise and grow the team.

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• Financing Partnerships: Given our client-focused strategy, we do not seek to own cryptocurrency mining operations. Instead, we work to connect the most attractive capital provider with the right project. In many cases, the equity comes from the client itself. In others, DPO works through its network of investors who want to invest in energy assets paired with cryptocurrency mining and introduces them to the project. Our founders’ 15 years of experience in investment banking, private equity and hedge funds are unique benefit to our clients.

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Standard DPO structure

Power Partner

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Computer Purchase and Location Build-out Capex

Crypto-Mine #1

Management Oversight of Setup and Operations

Operating Profits after Management Fees

Management Fees

(% of Revenue)

“Behind the Meter” / “Inside the Fence”

Payments for Electrical Usage

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Flexibility and scalability

A variety of solutions, sizes, and options to suit your needs asset-by-asset and site-by-site.

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DPO Pilot: 20kW

• 100% free to Potential Partners
• Temporary deployment reduces regulatory friction
• Five state-of-the-art mining ASICs operated for three months
• 100% transparency and clear reporting
• Potential Partners keeps all USD (or BTC) revenue produced during the pilot
• 90-day planning and deployment timeline
• Self-contained data network is totally segregated from Potential Partners infrastructure resulting in no IT risk
• Requires ~10’ x 20’ footprint to allow for airflow
• Can be deployed inside existing structure without the custom container if desired.
• Requires ~20kW at 240 or 277VAC power

Next steps

Site Selection: “Point to where it hurts”

• Areas of excess curtailment
• Inadequate/delayed interconnection agreement
• Transmission congestion
• Wind asset repowering
• New solar and wind developments
• Areas with generally low grid prices (i.e. low opportunity cost)

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Project summary

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Project returns

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Bitcoin mining profitability is dependent on both BTC spot price as well as network difficulty (which is driven by volume of competing ASICs). The sensitivity table below shows likely outcomes given certain levels of BTC spot price growth and certain levels of network difficulty growth.

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Scenarios involving higher BTC spot price growth are also likely to result in higher network difficulty growth. Scenarios involving lower BTC spot price growth are likely to result in muted network difficulty growth.

• It is highly unlikely for network difficulty to grow significantly in scenarios where BTC spot price is flat or lower. The scenarios below reflect a realistic illustration of how each of these variables may change if BTC spot price moves higher or lower.

Bitcoin price & network difficulty scenario analysis

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Bitcoin is a $400 billion industry that is totally dependent on energy

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Assumptions impacting bitcoin mining returns are all interrelated

Because one variable’s movement offsets others, risk and volatility is automatically dampened.

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How much is a bitcoin worth? Fidelity provides an updated framework…

Bitcoin’s spot price could reach $100,000+ in the next 3 years if it follows internet adoption rates, and over $200,000 if it paces cell phone adoption.

Other adoption curves are more drawn out, meaning it could take longer, but there is little doubt we are still early in adoption of this bitcoin and blockchain technology.

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Cryptocurrency is here to stay

“Goldman Sachs Makes Its First Bitcoin-Backed Loan”

- CoinDesk, April 2022

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“Federally Chartered Banks and Thrifts May Provide Custody Services for Crypto”

- Office of the Comptroller of the Currency, US Dept of Treasury, July 2020