As a severe winter storm descends on Texas, cryptographic miners are shutting down operations to help ease the burden on the state’s already besieged power grid.
The main concern is that we can see a repeat of February 2021, when a freeze devastated large areas of the state, leaving 10 million Texans without electricity and resulted in a merger of several systems that “was within minutes of a much more serious and potentially complete. ” Hundreds of people died in the middle of the multi-day shutdown.
Riot Blockchain, one of the largest publicly traded cryptocurrency mining companies in the United States, began cutting power at its Rockdale mine on Tuesday, a process that occurs in stages.
“As the storm progressed, we continued to reduce our energy consumption by between 98% and 99%. So we’re currently only using 1% -2% of our energy,” said Trystine Payfer, director of communications for Riot. Payfer told CNBC Riot that he will continue to manage his energy use as needed until “there is no extreme stress on the ERCOT network.”
Riot shares closed nearly 7% lower on Wednesday and down more than 31% so far this year.
Several other Texas cryptographic miners have followed suit to voluntarily reduce energy consumption before the Arctic explosion.
The CEO of Rhodium Enterprises, a fully integrated bitcoin miner that uses liquid-cooled infrastructure, he tweeted that Texas bitcoin miners were downsizing their cargo as of Wednesday in order to “help provide surplus energy reserves” for the storm.
“We are proud to help stabilize the network and help our fellow Texans stay warm,” wrote Rhodium CEO Nathan Nichols.
Other cryptocurrencies have said they will respond in real time to the needs of the network.
The network is called ERCOT, which stands for Electric Reliability Council of Texas, the organization in charge of operating. To function properly, ERCOT requires a perfect balance between supply and demand. Having too much power and not enough buyers is as bad as everyone who wants to turn on their air conditioning units on the same day in July.
Whinstone CEO Chad Harris takes CNBC on a tour of North America’s largest bitcoin mine.
For years, ERCOT has struggled with fluctuating energy prices and sporadic service, so it has reached agreements with flexible energy buyers, such as cryptographic miners. Through established “demand response” programs, ERCOT will actually pay major industrial users to cut off energy.
“They’re expecting the same kind of network load they would have in the summer, so they’re likely to cut down on miners at some point on Friday or Saturday,” said Fred Thiel, CEO of Marathon Digital, another major U.S. player. mining industry.
According to Lee Bratcher, president of the Texas Blockchain Council, Bitcoin miners in particular, and the response to demand in general, are a powerful tool in the network management toolbox.
Thiel de Marathon tells CNBC that the miners have been coordinating with ERCOT since last week to anticipate any possible network problems.
“Everyone wants to collaborate, everyone wants to voluntarily do whatever it takes to support ERCOT,” he said.
The question now is when the base load used by miners (the accumulated energy demand of miners as a collective) is turned off and transferred back to the grid, does that provide what it needs to continue operating normally?
“This is a key test moment for the industry,” Thiel continued.
If cryptographic miners who disconnect en masse in one of the largest cryptographic mining jurisdictions in the world will move the price of bitcoin, the answer is probably no.
The supply delta of changing the pace of mining is usually minimal, and any price movement in bitcoins or other major working test cryptocurrencies is likely to have more to do with macro factors and overall risk behavior.
Great test for bitcoin miners
Many in the mining industry are telling CNBC that in the coming days they are a way to test whether the narrative that cryptographic miners are good for the network withstands pressure. The growing crypto mining contingent in the state then shot up China banished all cryptocurrencies last May.
“Bitcoin miners want to be good administrators of network stability,” said Alex Brammer of Luxor Mining, a cryptocurrency group built for advanced miners.
“We are encouraged financially but also from a political narrative and therefore from a normative perspective. We want to show the world that we contribute to the health and resilience of the network, and we know that all eyes will be on us throughout this first great test . of the year, “Brammer continued.
That financial incentive is key. Miners do not altruistically choose to make the network solid, sometimes shutting down some or all of their bitcoin miners to release electricity to those who need it. On the contrary, there are many financial benefits to your agreement with the non-profit organization that operates the Texas network.
“Imagine how much you would have to pay Amazon to say, ‘Hey, there’s too much power demand. Turn off your data center,'” said bitcoin mining engineer Brandon Arvanaghi, who now runs Meow, a company that allows corporate treasury. participation in cryptographic markets.
“But you can do it with bitcoins very easily, because all you have to do is pay the miners a little more than they would by mining bitcoins that hour,” continued Arvanaghi, who describes the setup as “win-win”. “
If network operators pay miners a penny more than they would earn with mining at a given time, then they will gladly shut down. And according to Thiel’s experience, they receive requests for a reduction of less than 3% of the time in the course of a year, which is estimated to be about five to ten hours a month.
Even bitcoin miners who have not closed a deal with ERCOT have sometimes voluntarily shut down at peak consumption times when prices skyrocket.
The price of energy per hour is everywhere, and it is usually negative.
Shaun Connell, the executive vice president of power at Lancium, tells CNBC that in 2020, the price of energy in West Texas has been negative 10% to 20% of the time. The price falls below zero when supply exceeds demand.
In 2021, the price of energy per hour was negative 9% of the time, while 5% of all hours reached a maximum of $ 100. Extreme queues like the ones shown in the chart below are not good.
By 2021, if miners voluntarily reduced their uptime expectancy from 100% to 95%, they would reduce their price per megawatt hour from $ 178 to $ 25, according to data from Lancium, a Houston-based energy technology company that specializes in in bitcoin mining. .
Strategically scheduled power reduction is especially vital to the Texas grid, which exists as its small island.
Unlike the rest of the continental United States, which belongs to the eastern or western interconnection (the names of the two interconnected power grids that unite the states), 90% of Texas operates with ERCOT, a deregulated, independent network of power suppliers that is not linked to ERCOT. any other network in the US
While this competitive market tends to lower the price of energy as suppliers compete in costs to attract customers, it also means that there is less network security built into the network. This presents problems with calamitous events, such as a power outage or a natural disaster, such as the fatal winter storm of early 2021.
Adding a “controllable payload resource” as bitcoin miners to the network acts as a sort of life insurance policy. It’s almost like a disaster cover.
And there’s no skin on the backs of bitcoin miners. Bitcoin has no uptime requirements, nor is the computer worn out when turned on and off regularly. It’s almost a victory, a win.
“That’s the beauty of bitcoin, it’s something no other industry can really do,” Arvanaghi told CNBC. “It’s very synergistic.”
Not everyone is convinced that bitcoin miners are the solution.
“Miners are a strain on the network, not a help,” said Ben Hertz-Shargel of Wood Mackenzie, a commercial intelligence provider for the world’s natural resources industry. Hertz-Shargel is concerned that bitcoin mining only raises the maximum demand, eventually adding stress to the system.
Hertz-Shargel predicts that bitcoin could more than double demand growth in ERCOT territory, but unlike pro-crypto Republican Sen. Ted Cruz, Hertz-Shargel doesn’t think additional demand is a good thing.
“The analogy I like to use is that if you start smoking two packs a day and then reduce to one pack during the holidays, that doesn’t make smoking good for your health, ”he says.
Hertz-Shargel argues that ERCOT should focus on network improvements to facilitate the supply of energy from solar and wind farms to large consumption centers, and that bitcoin miners are not the right way to manage fluctuations in demand. Instead, he argues, “the intermittency of renewable energy must be met in response to the demand for loads beneficial to society, such as industrial facilities, commercial buildings and residential air conditioners or energy storage.”
But interim ERCOT CEO Brad Jones thinks bitcoin miners can be useful.
Jones has been touring the state and organizing public events to answer questions from Texans about the power grid. In addition to winter weather, the impact of cryptocurrency mining on the network is a common question.
“I’m in favor of bitcoin … but I’m too reluctant to risk being a bitcoin investor,” Jones told a crowd in Frisco, Texas in December. The ERCOT chief explained the mutually beneficial relationship between the network and bitcoin miners.
“Many of these solar and wind turbines can produce energy up to a negative power range, $ 23 negative per megawatt hour,” Jones said. “These bitcoins see this as a great opportunity. They can be paid to use power. And that’s why they’re coming to the state. But that’s not necessarily bad.”
Jones points out that negative power is not healthy for the market. Bitcoin miners “absorb” some of that negative power, and when the cost of electricity is slightly higher than they are willing to pay for it (about $ 100, according to Jones), they go off.
“So I think it’s really a potentially valuable resource for us.”
Correction: A storm devastated large areas of Texas in 2021. An earlier version erroneously stated the year.