miners say: “trust us”.
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Cryptocurrency miners are flooding into Texas, lured by an unregulated energy market and low electricity rates. The industry promises that this influx is good for the state because, it argues, miners will help stabilize the grid by increasing demand for renewable energy and acting like a “battery,” instantly reducing their energy use when other Texas consumers need it most. .
But an investigation by the Technology Transparency Project found that bitcoin miners are adding new strains to the state’s already fragile grid and taking advantage of programs that allow large energy consumers to resell energy at a markup. gain. The result: miners are raking in millions of dollars while ordinary Texans foot the bill, and they still have reason to worry about whether the state can keep the lights on.
A review of SEC filings, public utility commission records, industry publications, social media posts, and data from state energy authorities reveals how texas cryptocurrency miners They use long-term energy contracts and other market-distorting agreements to position themselves as power players on the Texas gridiron. they have effectively established themselves as “mini-enrons” in the midst of the state’s precarious power grid, securing cheap wholesale power and reselling it at a premium when Texans are desperate to stay warm. These complex deals, negotiated in secret with little public scrutiny, could cost Texans hundreds of millions of dollars.
the review found that:
- cryptocurrency miners in texas have long-term contracts that lock in deeply discounted electricity prices for a decade. these contracts secure miners’ position in the network well beyond the point where anyone can reasonably predict the value or energy demand of bitcoin mining, holding the state hostage to forces beyond miners’ control or regulators.
- programs that appear to be unique in the country allow miners to take advantage of their contracts to resell electricity at massive markups and collect millions of dollars in incentive payments from the state grid operator.
- miners’ disclosures to shareholders make it clear that they will resell energy when it is more lucrative than mining bitcoins, positioning them to become energy traders if market dynamics change.
- some miners they already see themselves as energy traders. one bitcoin miner called his company “an energy arbitrage operation disguised as a bitcoin mining company.” the damaging winter storm that hit in February 2021. the state still owes the miner $86 million, and that amount is likely to be paid by ordinary utility customers.
- texas also pays some miners from bitcoin millions for their willingness to reduce their energy demand, whether or not they actually reduce their energy use. according to one miner, they only reduce their load 3% of the time the state pays for their participation in the program.
- bitcoin miners can collect up to $170 million a year from programs that pay for large amounts of energy . consumers for their willingness to shut down.
- miners have proposed that texas expand a program that pays miners to reduce their energy use, which could increase payments to the cryptocurrency industry under that program to more than 500 million dollars a year. year.
- Cryptocurrency advocates say texas miners will “do the right thing” and reduce their electricity consumption in times of need, even if it doesn’t align with their economic interests. in communications with investors, mining companies seem more concerned with their bottom line. the parent company of a mining company tells shareholders it will “opportunistically sell electricity” depending on the market price.
- texas’ reliance on the honor system leaves the state dependent on a variety of actors dark, some with checkered pasts. the CEO of a texas mining company has faced extortion charges and a lawsuit in 2017 for more than $1.2 million in non-performing loans.
- texas has allowed cleaner alternatives to grid stabilization, such as projects of batteries, languish at the same time that it has welcomed bitcoin miners as a panacea for the state’s energy reliability problems. Despite projections that the state would have more than 1,500 megawatts of battery capacity by the end of 2021, the Texas Grid ended the year with 833 megawatts of installed capacity, just over half the projected level.
- Under certain market conditions, some texas crypto miners already earn more from energy arbitrage than bitcoin mining, analysis by ttp shows. bitcoin’s structure virtually guarantees that mining will be less lucrative for years to come, likely making energy trading even more attractive.
Nearly two decades ago, Americans were outraged when recordings surfaced of Enron traders boasting of manipulating the energy market, stealing from California and defrauding consumers facing widespread blackouts. In one particularly shocking exchange, merchants joked about stealing money from “Grandma Millie,” who “wants her [expletive] money back for all the power she’s charged for [expletive] $250 per megawatt hour.”
Today, crypto miners have essentially recreated this highly volatile system in Texas, with low long-term energy contracts and a privileged position in the power grid that could allow them to decide where electricity flows and how much it costs. A devastating heat wave that hit Texas in July 2022 underscored the stakes, as officials told Texans to prepare for rolling blackouts and the price of power soared to $5,000 per megawatt hour.
Weaknesses in the Texas grid were exposed when winter storm Uri hit in February 2021, throwing the state’s deregulated energy market into chaos. demand for energy to heat homes and businesses outstripped available electricity supply, forcing utilities to cut power to avoid catastrophic failures. Millions of Texans were without power for days and as many as 750 lost their lives.
To incentivize energy providers to sell more electricity to the grid and encourage consumers to conserve energy as much as possible, the texas public utility commission (puc) raised the price of energy to $9,000 per megawatt hour. While ordinary Texans froze to death, the state’s nascent cryptocurrency mining industry capitalized on inflated electricity prices. bitcoin miners, who run collections of powerful computers that process bitcoin transactions for financial reward, shut down their data centers, sold electricity to the network, and collected a bonus for doing so.
Even Texans who did relatively well in the storm faced astronomical electric bills for heating their homes during the unusual cold snap. some utilities reportedly charged consumers more than $2,000 a day. Two subsequent studies found that the price imposed by PUC was thousands of dollars above what was needed to persuade power generators to sell more electricity during the storm, resulting in $16 to $26 billion in excess charges for consumers. consumers.
In an echo of “Grandma Millie’s” famous comments, one miner described the surge in energy prices during the 2021 Texas Storm as “great for bitcoin miners.”
Bitcoin proponents tout the windfall as a success story and say miners’ move to shut down operations during the crisis shows how the energy-intensive industry can help stabilize fragile power grids. Texas Sen. Ted Cruz has echoed the industry line, saying that bitcoin mines can act like a “battery,” consuming excess power during periods of low demand and releasing it during peak hours.
Cruz and other cryptocurrency supporters have also argued that the ability of miners to rapidly increase or decrease energy consumption means the bitcoin industry may create new demand for renewable energy sources that generate power intermittently. , which allows the development of green infrastructure.
In reality, miners’ voracious appetite for energy has outpaced the development of renewable energy facilities in Texas. Between 2020 and 2021, coal-fired power consumption increased in Texas, mirroring trends in other states where the crypto mining industry revived dying coal plants. skeptics have pointed out that increasing total energy demand without generating an economically useful product is a step backwards. “A good thing about crypto mining is that it adds flexibility to the system,” a former Ercot board member told the Washington Post last year. “but the problem is that you are consuming real resources, doing a function that has no value.”
The promise of greater network flexibility may also turn out to be empty. bitcoin miners are far more motivated by profit than network stabilization, and the vast majority of the power they control can only be voluntarily reduced. As the TTP analysis shows, changes in the bitcoin mining economy that are outside of the state’s control could change the calculus for miners, leaving the state out in the cold at the worst possible time. energy storage technologies that exist for the sole purpose of providing flexibility, such as batteries, do not carry the same risk. and large-scale industrial batteries can store energy produced intermittently and release it during peak hours without consuming large amounts of power, as cryptocurrency miners do. “miners are a burden to the network, not a help,” an energy analyst recently said.
since winter storm uri, more cryptocurrency miners have rushed to texas. The state’s cheap power and unique opportunities for energy arbitrage attracted many miners who fled China after the country banned bitcoin mining in May 2021. Bitcoin advocates predict up to 5 gigawatts of new mining capacity, enough electricity to power more than 5 million homes. it will be online in the next two years. Representatives for the Texas network operator have said that Bitcoin miners’ footprint will grow even more in the coming years, with an additional 25 gigawatts of online mining demand over the next decade. the 30 gigawatts of projected additional demand would amount to more than 35% of current grid capacity.
In July 2022, congressional investigators sounded the alarm about the growing burden that cryptocurrency miners have placed on power grids across the country. The research, which surveyed seven major bitcoin miners, including four with operations in Texas, warned of energy and environmental issues posed by the industry. “Lawmakers and the public do not have a complete source of information about where these operations are located, how much energy they consume, and what their energy sources are,” the lawmakers warned.
the precise details of most of the industry’s agreements with the energy reliability council of texas (ercot), the nonprofit organization that operates the state’s grid, remain largely hidden from public view , as well as the ways he negotiated such a favorable environment in the state.
but it’s clear that the industry has made extraordinary strides in ercot. In late 2021, the Texas Blockchain Council said that one of its top advisers, a former U.S. rep. bill flores, had been named vice chairman of ercot’s board of directors. the following month, ercot’s chief executive said he was “pro-bitcoin” and endorsed the idea that bitcoin mining could help improve the stability of the texas network.
Cryptocurrency advocates have also recently stepped up their lobbying efforts in the state, tapping into well-connected allies who appear to have helped them advance their agenda. A leading industry lobbyist worked for the Texas government. greg abbott for several years, rising to occupy an important position in his administration, a relationship that cryptocurrency advocates appear to have used to secure at least one meeting with the governor.
At that meeting, in the fall of 2021, Abbott appeared to acknowledge that the miners have the power to hold the state hostage. “Help me get through the winter,” he told industry leaders, according to Bloomberg.
Fortunately for Abbott, the bitcoin price fell by nearly 20% in January 2022, making it easy for miners to shut down when a winter storm hit in early February. But even if miners are interested in downsizing, Texans will still pay a price. cryptocurrency miners’ position in the network, which is locked down by long-term power supply contracts, adds unnecessary margins to state power bills. Meanwhile, Ercot has allowed real battery projects, a cleaner and less wasteful way to stabilize the grid, to languish.
The network operator may be starting to realize the danger of his big bet on cryptocurrencies. In late March 2022, concerned that increased power demand from cryptocurrency miners in Texas could overwhelm the network, Ercot said it would require large miners to obtain permission from the state before connecting to the network.
that increased demand, coupled with unpredictable weather patterns and cryptocurrency market fluctuations, could spell disaster for Texans. All new bitcoin miners gobbling up cheap Texas energy are subject to market factors beyond their control. If the cryptocurrency price skyrockets, Texas will have to pay miners more to sell power the next time a natural disaster strikes. Conversely, if bitcoin’s price remains stagnant or declines as mining becomes more difficult, the state could find itself stuck with a cabal of mini-enrons that add unnecessary margins to Texans’ energy bills.
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