How Texas Bitcoin miners kept raking in profits during crypto&x27s crash: The state is paying them to do nothing | Fortune

for miners, joining rrs is crucial to earning the goodwill of the communities where they seek to establish themselves. “Let’s say a miner wants to build a data center in a fictional city called Utopia. citizens argue, we have a system that provides us with reliable energy. we have a certain amount of reserve today that provides a good cushion, which would satisfy an increase in demand. Suddenly a big miner comes to town and wants to use all this power. people from utopia go to the town meeting and want to know, ‘will this cause blackouts?’” says dixon. He adds that residents and politicians will only approve the new facility if the data center agrees to reduce production and provide extra power at times of peak demand, especially when a brownout or blackout is looming. “If they don’t agree to practice restrictions during peak hours, they will be kicked out of town,” Dixon says. “That means reassuring the community by signing up for demand response. it is fundamental to be seen as good citizens of the network”.

when ercot orders supplies under rrs, it holds an auction. miners and other participants offer megawatt hours for sale. ercot bids for those supplies and pays the prices necessary to secure precisely the amount of electricity needed to meet the emergency. the more miners participate, the more megawatt hours offered, the lower the price that ercot will have to pay. “In the auction process, the additional supply has pushed prices down,” explains Dixon. still, he says miners are still well compensated for their willingness to cut back. payments are made in cash directly to the miners.

Reading: Some bitcoin miners texas

The second program is called emergency response services or ers. it resembles rrs in that ercot once again harnesses the power of miners when supplies are low. the difference: under ers, when ercot demands additional power, miners must provide it within 30 minutes, compared to 10 minutes for rrs. “If Ercot bypasses the RRS supply, they go to RRS as a backup,” Dixon says. he says that under both plans, miners are an especially valuable addition because they can respond super fast, while a large portion of users provide much slower additional supply – think amusement parks that power roller coasters. He estimates that the combined annual RRS and ERS payments, made in cash, come to about $100,000 per megawatt of capacity. For a 350 MW data center, that’s a substantial $35 million. as we will see, the benefits of all plans combined can cover a large portion of miners’ energy costs.

The third tool is the four matching peaks scheme, or 4cp. while rrs and ers increase revenue, 4cp saves costs. “All Ercot customers get a separate line for transmission costs on their utility bills,” says Dixon. they are a big expense for the miners. but 4cp provides a mechanism to greatly reduce or even eliminate transmission costs by implementing intelligent management. just like joining rrs and ers, signing up with 4cp gives miners a stronger foothold in their communities by ensuring they send power back to the grid during lean periods, this time specifically in the summer, the period that hit the texas network so hard this year.

The schedule applies to the four months of June through September, when Texas is at its sweltering and cooling homes and offices can drive megawatt consumption to heights that threaten a blackout. But below 4cp, miners and other customers who shut down and don’t gobble up power at absolute peak demand peaks, measured each month separately, get big reductions in their transmission fees. if a miner uses zero power at peak demand for all four months, he pays no transmission charges at all the following year. business users who keep going during the highest peaks take it more seriously to fill the gap. “Our software predicts when those spikes will occur and tells clients to reduce activity during those spikes,” Dixon says.

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Of course, even the best technology can only measure probabilities, rather than forecast exactly, when the highest demand of the month will occur. therefore, miners must shut down for a series of peak usage periods to ensure they hit the high mark that generates the big savings. For example, Riot in June closed for the equivalent of three days to secure savings below 4cp. Dixon estimates that 4cp is worth another $50,000 a year per megawatt of capacity to miners. That’s an additional $18 million for a 350 MW data center. add the dollars from the two reserve programs, rrs and ers to 4cp, and the total comes to $150,000 per year. in our 350-megawatt data center example, that’s a $53 million profit per year. that number could easily cover a third of the annual cost of a miner deploying power at an estimated average cost of $50 per megawatt hour.

the final show is the one that just benefited riot so much

The fourth potential saver is the “price response.” this is the lever that delivered most of that relative king’s ransom in July. it is the plan that allows miners to sell the electricity they do not use when the rate is correct, by funneling the lost electricity back to the grid. that practice is a form of electrical arbitrage. It can be extremely lucrative when the highly fluctuating spot or market rate jumps much higher per megawatt hour than the revenue miners make from producing bitcoin, for the same megawatt hour.

dixon uses an airline example to explain how “price response” works. “We’ve all been to airports where a flight is overbooked and the airline has 103 passengers for 100 seats,” he says. “They offer $500 to passengers, who may have paid $150 for their ticket, to give up their seat and take another flight in 4 hours. but only two hands go up. now the airline has to offer $1,000 to get enough people not to take the flight.” Similarly, in times of extreme scarcity, the grid that supplies electricity to homes and businesses is “oversold.” Demand is rising so sharply that they aren’t generating enough megawatts to keep amplified AC units running and construction sites buzzing. Under the ercot system, miners are rewarded for giving up their seats on the plane, shutting down so that the juice they stop using is redirected back into the grid, increasing supply and alleviating shortages.

but securing those marginal megawatts is very expensive. In this summer’s heat wave in Texas, prices frequently rose above $200 MWh and reached $5,000, compared to the normal average of less than $20 MWh for an entire year. Those super-high fees are required to persuade electricity “grid riders” to give up their free space on the “flight,” which means cutting back on what they consume. a backup source: older coal and natural gas facilities that are closed or operating at low capacity most of the time. although their costs are high, they increase production in tight markets to command the big prices. likewise, miners are paid very well for freeing up those “seats”, for providing much-needed flexibility to the network. In response to price, Ercot pays miners’ power suppliers the spot price for power, the standby power they transfer to the grid. providers then compensate miners by reducing their energy bills by the same dollar amount.

The turmoil from winter storm uri in February 2021 shows just how big the dollars can get in a severe outage. When the storm froze windmills and shut down nuclear plants, rates rose as high as $9,000 MWh. By ordering shutdowns in just a few days, Whitstone, then owned by North German data, won energy credits totaling $125.1 million. that number far exceeded his total energy bill for that year.

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A favorable contract empowers riot to reap big bucks from power outages like this summer. but not all texas miners have that option. Dixon points out that bitcoin producers obtain two main types of energy deals from retail electricity providers, or representatives, to operate their data centers. only one allows data centers to enjoy closure in tight markets.

In many contracts, the miner’s representative buys electricity on the wholesale market at the prevailing rate. the supplier resells the power to the customer at that spot price, plus a fee. therefore, those miners cannot exploit an increase in the market price; they are already paying the same spot prices for their electricity, so there is no profit in reselling the megawatts. by comparison, other miners have forged long-term, fixed-rate “power purchase agreements.” Riot’s ppa with txu is a notable example. Riot reportedly pays a fixed cost of less than $30 per megawatt hour, in a contract that runs through 2030.

How did you get such a seemingly attractive deal? According to analysts, the contract requires Riot to hand over its power to Txu for up to six days a year at Txu’s choosing. On those days, TXU can resell to the network, and it has a strong incentive to pick times when spot prices are highest. “But the other 359 days, riot would choose to sell their electricity when the market price reaches the level where they make more money selling energy than mining bitcoin,” says pipes.

pipes calculates that at bitcoin’s current price of $23,000, riot generates increased revenue by shutting down and selling power whenever the spot price exceeds $128 per megawatt hour. That break even number has dropped a lot along with the price of the main crypto: when bitcoin was hitting $30,000, riot did better by cutting production only when the market rate per megawatt hour exceeded $300 in this summer of texas super hot, the spot price has risen “in the money” for many hundreds of hours. at the top, he jumped to the last $5,000. and riot’s ppa gives you the freedom to attack anytime the gap moves in your favor.

for pipes, that flexibility is a big plus. “It opens up a huge opportunity to make more money than you would from mining bitcoin at certain times,” he says. “Market power prices don’t always go above $128, but they are most of the time. if they drop below that level, riot can mine bitcoins again. it is an important source of diversification. they are not only beholden to the price of bitcoin. they can arbitrate between that price and the price of electricity. many other deals don’t provide that right to resell.”

According to Dixon, which serves many of the big texas miners, about half have flexible contracts that allow miners to sell power to the grid. miners also get a tremendous boost from the other three programs, payments for holding power in reserve for emergencies and reduced transmission costs to shut down when demand spikes in the summer months. once again, those programs alone can easily pay for a third of miners’ electricity costs. For a player like Riot with an ultra-low-cost contract and the freedom to resell power when the spot price is right, the contribution can be half or more. In its July report, Riot claimed that its sales to the network alone erased 100% of its electricity expenses for one month, not counting benefits from its other three plans. It’s no wonder the Lone Star State is fast becoming the bitcoin capital of the world. How can you beat paying some of the lowest electricity costs in the world when you burn the power and earn even more when you don’t, when you shut down for cleaning and win widespread acclaim as a model corporate neighbor who sacrifices to ensure that texas keeps the lights on and the air conditioning cool.

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