AUSTIN, TEXAS – The Texas power grid is struggling with fluctuating energy prices and sporadic service, but the state's growing bitcoin mining community believes it can help fix it.
Republican Sen. Ted Cruz agrees. "A lot of the discussion around bitcoin views bitcoin as a consumer of energy," said Cruz at an event in October. "The perspective I'm suggesting is very much the reverse, which is as a way to strengthen our energy infrastructure."
The grid is called ERCOT — short for the Electric Reliability Council of Texas, which is the organization tasked with operating it — and it's fussy and temperamental.
ERCOT powers about 90% of the state, but to run smoothly, it requires a perfect balance between supply and demand. Having too much power and not enough buyers is just as bad as everyone wanting to fire up their AC units on the same day in July.
Maintaining that balance has proven to be a real challenge this year, and Texans are feeling it.
The price of power per hour is all over the place, routinely going negative. Rolling blackouts at moments of peak power consumption no longer come as a surprise. A lot of people lost faith in the grid altogether after a winter storm earlier this year resulted in a multi-system meltdown that "was within minutes of a much more serious and potentially complete blackout."
Crypto enthusiasts believe the fix to this problem is actually to add another electricity consumer into the mix — a buyer who will take as much power as they're given, whatever the time of day, and are just as willing to power down with a few seconds' notice. These flexible buyers are bitcoin miners.
Mining for cryptocurrencies is the computationally intensive process by which new tokens are created and transactions of existing digital coins are verified.
At the Texas Blockchain Summit in October, Cruz pointed to the ability of bitcoin miners to turn their rigs on or off within seconds — a feature that is hugely beneficial during times when energy needs to be shifted back to the grid to meet demand.
"If you have a moment where you have a power shortage or a power crisis, whether it's a freeze or some other natural disaster where power generation capacity goes down, that creates the capacity to instantaneously shift that energy to put it back on the grid," Cruz said of the ability of bitcoin miners to shut down their operations within seconds.
But not all are convinced that bitcoin miners are the solution.
"Miners are a strain on the grid, not a help," said Ben Hertz-Shargel of Wood Mackenzie, a provider of commercial intelligence for the world's natural resources sector. Hertz-Shargel is concerned that bitcoin mining would only raise peak demand, ultimately adding stress to the system.
Avoiding a grid 'heart attack'
ERCOT has a heartbeat. That may sound like a romantic metaphor, but it actually gives off a hum like when a guitar isn't properly plugged into an amp.
It's the sound of 60 hertz, a frequency common to all grids in North America. A steady tone means there's as much electricity going onto the grid as there is coming off it. If the power supply surpasses customer demand, the beat speeds up. If customers use more power than what's available on the grid, the heartbeat slows down.
The grid can manage small gyrations to its heartbeat, according to Shaun Connell, the EVP of power at Lancium, a Houston-based energy tech company that specializes in bitcoin mining. But Connell tells CNBC that when ERCOT's grid pulse falls to 59.4 Hertz or below for more than nine minutes, machines start to protect themselves by automatically shutting off and disconnecting from the grid. In some cases, that might mean power plants going dark.
If the heartbeat falls even farther than that, it could trigger a "heart attack" scenario. Think grid-wide blackout and a hard restart of the whole system.
These fluctuations also correspond to the grid's volatile price swings. Connell tells CNBC that in 2020, the price of energy in West Texas was negative between 10% and 20% of the time. The price dips below zero when supply outpaces demand.
So far this year, the price of power per hour has been negatively priced 9% of the time, while 5% of all hours this year have peaked above $100.
Extreme tails like the ones shown in the chart below aren't a good thing.
The trouble with ERCOT
Keeping a steady heartbeat is tough for ERCOT for a couple of reasons.
For one, the Texas grid functions as its own isolated and deregulated electrical island. Unlike the rest of the continental U.S., which belongs to either the Eastern or Western interconnection (the names of the two American power grids linking states), 90% of Texas runs on ERCOT. This means ERCOT cannot quickly turn to neighbors for help when large generators trip offline or renewables do not deliver as expected. This can prove especially problematic when there's a natural disaster, like the winter storm in early 2021.
ERCOT's market-driven approach to energy planning shows up in another feature – and occasional shortcoming – of the grid: Its "just-in-time" delivery model. At the best of times, this saves everybody money. No one needs to hoard backup fuel when Texas' elaborate underground maze of wells and pipes can deliver it on demand. But February laid bare the worst-case scenario, when the state's natural gas production (burning natural gas is a major source of electricity for the state) fell by almost half during the cold snap.
Third, Texas is flush with renewables and rapidly onboarding these inherently unstable sources of power to its grid. While this is helping to decarbonize ERCOT by replacing less environmentally friendly power sources like coal and natural gas with wind and solar, renewable energy is unpredictable. At any given hour, it could be breezy and sunny, or it could be cloudy with no wind, meaning the grid has to brace for all renewable energy to go offline at any point and have a backup power source on deck.
Finally, the state's biggest population centers are often far from where power is generated. For example, low-cost renewable energy sites stretch across West Texas, hours from major hubs like Dallas and Austin.
Or take the rural town of Rockdale. It was once home to the largest aluminum plant in the world, run by Alcoa. But starting in 2008, it began to shut down its operations. That energy capacity was going to waste, as it would've been prohibitively expensive to build the transmission capacity necessary to carry it to major population centers. The arrival of crypto miners helped to resolve that imbalance by consuming the surplus energy.
Forcing demand to meet supply
To ensure grid reliability at all times, demand must be even with supply. ERCOT operators can tinker with the supply side, spinning natural gas turbines up or down on short notice to make up for the volatility of renewables, but typically, grid operators aim to reduce customer demand to maintain balance.
Through established "demand response" programs, ERCOT will actually pay major industrial users to cut power. If that curtailment does not prove sufficient, the grid can also request that residential buyers conserve their power use voluntarily. And when all else fails, ERCOT can run rolling blackouts, shutting down different parts of the state in quick succession — but with no one patch suffering an outage for an extended period of time.
The problem with that first — and best — option is that many of these arrangements between ERCOT and energy buyers require response times of ten to thirty minutes. But because ERCOT is going it alone, the grid requires a much faster reaction, sometimes in the range of sub-seconds, according to Lancium's Connell.
This is where bitcoin mining comes into play. Miners function as "interruptible load," meaning they are able to turn off all of their machines with a few seconds' notice when the grid is in a pinch and needs the extra power. Bitcoin has no uptime requirement, nor is the gear worn down by regularly powering off and on.
It also makes good economic sense for the miners. Miners commit to buying a certain amount of power, and either use it for mining if the grid doesn't need it, or sell it back at a profit if the grid demands it.
"Imagine how much you would have to pay Amazon to say, 'Hey, there's too much demand for power. Please power down your data center,'" said bitcoin mining engineer Brandon Arvanaghi, who now runs Meow, a company that enables corporate treasury participation in crypto markets.
"But it can do that with bitcoin very easily, because all you have to do is pay the miners slightly more than what they would have made mining for bitcoin that hour," continued Arvanaghi.
Even bitcoin miners that haven't cut a deal with ERCOT sometimes voluntarily power down at times of peak consumption when prices shoot higher.
Unlocking stranded assets
Lancium is building bitcoin mines where wind and solar are abundant and the transmission system is constrained, meaning that power wants to flow down the line, but the lines are full.
As Lancium Chief Executive Officer Michael McNamara describes it, these sites act like a large power station but in reverse. The mines will absorb abundant renewable energy at times when supply outpaces demand, thereby monetizing these assets when there are no other buyers. And on the flip side, the mines will incrementally ramp down their energy intake, as demand on the grid rises.
In a sense, you can almost think of bitcoin miners as temporary buyers keeping these energy assets operational until the grid is able to fully absorb them.
"In times of scarcity, our data centers will go down, and those lines can carry the renewable energy to Houston, Dallas and Austin where they need the energy," said McNamara.
McNamara tells CNBC the net effect of this is retiring coal and gas faster, while rapidly adding wind and solar at the same time, essentially making bitcoin mining a fundamentally decarbonizing technology.
Bitcoin can also be used to unlock the state's sequestered deposits of natural gas.
For years, oil and gas companies have struggled with the problem of what to do when they accidentally hit a natural gas formation while drilling for oil. Whereas oil can easily be trucked out to a remote destination, gas delivery requires a pipeline.
If a drilling site is right next door to a pipeline, they chuck the gas in and take whatever cash the buyer on the other end is willing to pay that day. But if it's 20 miles from a pipeline, things start to get more complicated.
More often than not, the gas well won't be big enough to warrant the time and expense of building an entirely new pipeline. If a driller can't immediately find a way to sell the stash of natural gas, most look to dispose of it on site.
One method is to vent it, which releases methane directly into the air – a poor choice for the environment, as its greenhouse effects are shown to be much stronger than carbon dioxide. A more environmentally friendly option is to flare it, which means actually lighting the gas on fire.
But flares are only 75% to 90% efficient, according to Adam Ortolf, who heads up business development in the U.S. for Upstream Data, a company that manufactures and supplies portable mining solutions for oil and gas facilities. "Even with a flare, some of the methane is being vented without being combusted," he said.
This is when on-site bitcoin mining can prove to be especially impactful.
Ortolf says that when the methane is run into an engine or generator, 100% of the methane is combusted and none of it leaks or vents into the air.
"But nobody will run it through a generator unless they can make money, because generators cost money to acquire and maintain," he said. "So unless it's economically sustainable, producers won't internally combust the gas."
Bitcoin makes it economically sustainable.
"50% of the natural gas in this country that is flared, is being flared in the Permian right now in West Texas. I think that is an enormous opportunity for bitcoin, because that's right now energy that is just being wasted," said Cruz in October.
Not everyone agrees
Hertz-Shargel from Wood Mackenzie predicts that bitcoin could more than double demand growth in ERCOT's territory, but unlike Cruz, he doesn't think that additional demand is a good thing.
"The analogy I like to use is that if you start smoking two packs a day and then cut back to one pack on holidays, that doesn't make smoking good for your health," he says.
"The net impact is a very large addition of load onto the grid," agrees Adrian Shelley, who runs the Texas branch of Public Citizen, a consumer advocacy and lobbying group. Shelley suspects that not all of that consumption is concentrated during times where there is a surplus of energy.
"I don't know that it would be the case that they would only use energy that there otherwise wasn't demand for," Shelley told CNBC.
Hertz-Shargel argues that ERCOT should be focused on grid improvements to make it easier to get power from solar and wind farms to big consumption centers, and that bitcoin miners aren't the right way to deal with demand fluctuations. Instead, he argues, "the intermittency of renewables should be met with demand response from societally-beneficial loads, like industrial facilities, commercial buildings, and residential air conditioners — or energy storage."
But ERCOT interim CEO Brad Jones thinks bitcoin miners can be helpful.
James has been touring the state and hosting public events to answer questions from Texans about the electric grid. Besides winter weather, the impact of cryptocurrency mining on the grid is a common question.
"I'm pro bitcoin...but I'm too risk averse to be an investor in bitcoin," James told a crowd of residents in Frisco, Texas on Wednesday night. The ERCOT chief went on to explain the mutually beneficial relationship between the grid and bitcoin miners.
"A lot of these solar and wind can produce power down to a negative power range, negative $23 per megawatt hour," James said. "These bitcoins see that as a great opportunity. They can get paid to use power. And that's why they're coming to the state. But that's not necessarily bad."
James makes the point that negative power isn't healthy for the market. Bitcoin miners "soak up" some of that negative power, and when the cost of electricity gets slightly higher than what they're willing to pay for it (around $100, according to James), they shut off.
"So I think it's really a valuable potential resource for us."
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