Texas and Cryptomining: Friends or Foes?

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Cryptomining is going to be a significant issue on the Texas power grid. Globally, cryptomining accounts for 0.5% of the global electricity consumption. Up until very recently, China was responsible for around 65-70% of the global cryptomining. The U.S. share of mining was around 11%. The main drivers for why up until recently why most global mining occurred in China had to due with its low electrical rates and until recently government support.

China recently started clamping down on cryptomining with some provinces instituting outright bans. China no longer is a stable place to mine. Speculation is that this is due to China missing their environmental goals. Cryptominers are looking around where to relocate their systems, and new companies are looking to get a foothold in the industry.

What does this have to do with Texas?

There are a couple reasons why Texas is attractive to miners. First, electricity is cheap within Texas. The state has easy access to cheap natural gas and renewable generation is also very competitive. Combined turbine natural gas generation is presently the cheapest form of dispatchable generation. Residential electrical rates are around $.10 per kwh. Industrial customers can achieve rates around $0.03-0.05 per kwh. Globally, these are very low rates.

The second reason is stability. Governor Abbott fully supported cryptocurrency by signing a bill in June that effectively recognized cryptocurrency under codes that govern business transactions. This made Texas the second state after Wyoming to do this. While mining didn’t need the state’s blessing, it gave a clear indication to the industry that the state wants to be a hub for cryptomining and blockchain technology. Many of the cryptominers leaving China are very sensitive to the sentiments of local government towards their industry. Iran put a 4 month moratorium on cryptomining over concerns of not having enough generation to prevent blackouts. Miners don’t want to have to relocate again nor be suspended due to a moratorium.

Why should your average Texan care about this?

Texas has for a a number of years had capacity issues. There were brownouts in 2011, blackouts February this year, and conservation notices put out by ERCOT this summer. Mining is electrically intensive, and the facilities that are being planned and built are massive in size. BIT5IVE LLC and GMine LLC are working to build a 1 GW facility in Texas. To put this in perspective, that is close to the output of a nuclear power plant unit or what is needed to power 250,000 homes. ERCOT forecast that the summer peak this year will be 77 GW. Under peak load, over 1% of the electricity used inside of the ERCOT region, will be used at this one facility. There are many other mining operations that are setting up in Texas. Argo is planning a 200 MW facility by the end of the year. Layer1 is looking to scale up a facility to over 100 MW in the next few months. Marathon Digital Holdings is planning to build a 300 MW facility to house 73,0000 bitcoin mining rigs. Riot’s Whinstone facility has 300 MW in mining and capacity to quickly expand to 750 MW. The reality is that several percent of the electrical load in Texas is going to just be dedicated to just cryptomining.

Why would this potentially be an issue?

Electrical load inside of Texas usually grows at around 2% year. The amount of cryptomining load coming online will equal several years of load growth in a short amount of time, which likely will create transmission and generation issues. It takes at least 2 years to build a generation facility. Generation capacity won’t have had a chance to grow quickly enough to meet these large loads . There will be greater utilization of existing generation, namely inefficient or expensive units , which will lead to higher electrical rates. These plants are typically unprofitable but will be activated to meet high rates caused inelastic demand. Some cities are less welcoming than Texas and Wyoming. Platsburg, NY put an 18-month moratorium on cryptomining when two miners were using 10% of the city’s electricity and double and sometime trippling local’s electrical bills. What will Gov. Abbott do to prevent people and unrelated industries from being affected by his desire to make Texas a crypto hub?

There also will likely be a reduction in the amount of Reserve Margin of generation. The reserve margin has been historically low inside for ERCOT due to plants retiring. Given the cryptomining load coming to Texas, the state might not have a chance to dig itself out of not having enough reserve capacity. Unplanned outages of dispatchable thermal generation of 6.2 GW, instead of 3.6 GW planned, of capacity this summer triggered ERCOT conservation notices. Similar to how Benjamin Franklin said “A dollar saved is dollar earned”, a reduction in load is an increase in capacity or vice versa an increase in load is a reduction in capacity. A large and quick increase load might have the affect of exasperating Texas’s existing capacity issues.

What about job creation from cryptomining?

The Canadian utility Hydo-Quebec commissioned KPMG to carry out a study to determine the impact of cryptomining on a community. The number of jobs created per MW of cryptomining ranged from 0.4 to 1.2 depending on the size of the facility. This is very low in comparison to data centers, which can employ up to 25 people per MW. Cryptomining is a very energy intensive process that produces very few jobs. If every single MW of generation, every single electron generated, inside Texas was used solely for cryptomining, it might only support 36,000 jobs. There is a reason why cities aren’t bidding on these facilities like Amazon data centers.

Isn’t this going to be a huge industry?

The mining portion of at least bitcoin has a fairly certain end. Only 21 million bitcoins are allowed to be created by the algorithm. Almost 19 million have already been created. The coins get exponentially harder to create as the number gets closer to 21 million. The mining of bitcoin will cease when it costs more to mine a coin than to buy a coin or the last coin has been created. After that, all mining will be about facilitating transactions. Not all cryptocurrencies operate in this fashion but most have some type of system after maturation that prevents the currency form being devalued by continuous mining.

Isn’t cryptomining green?

Renewable energy is non-dispatchable. Whatever is generated is put into the grid, and someone buys it through a contract or on the market. If someone buys up all the green power, someone else has to buy dispatched non-renewable power. Cryptomining makes the total power used less green due to the difference between the green power produced and the total load being made up with non-renewable dispatchable power, which likely in Texas will be natural gas generation.

What in your opinion is the bottom line about cryptomining?

It can be a good thing if managed properly. If not managed, it will use up needed reserve capacity, drive up electrical prices, and end up affecting other industries. The state could get into a very precarious situation if not monitored or controlled. A situation similar is that the city of Houston has major issues with flooding due to the fact that the city let developers build on ,flood preventing, wetlands without creating replacement wetlands. Allowing one developer to build on wetlands didn’t create Houston’s flooding problems but the aggregate of many developers did. There could be problems related to reliability and electrical rates as the aggregate result of interconnecting many large mining operations. Unmanaged cryptomining has the potential of impacting the electrical rates of people and unrelated industries as well as souring the environment for further growth of the cryptocurrency industry in the state by making Texas no longer center with low electrical rates.