A Deep Dive Into Crypto’s Cure for the Texas Power Grid

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The state’s combination of high renewable generation and laissez faire regulation results in some of the lowest electricity rates in the U.S. The problem is that Texas’ search for cheap power is what left it without enough insurance against the winter storm last February. The widespread deadly blackouts were the result of shortages of spare weatherproof generation capacity and natural gas supply, coupled with high demand. Texas’ power price hike, designed to encourage the construction of more capacity as a buffer against emergencies, proved inadequate.

Adding the demands of crypto mining to this situation sounds crazy, but it is based on an established concept: demand response. That’s when customers reduce their electricity usage, or let the utility do it for them, to reduce stress on the grid, usually for a fee.

In theory, a Bitcoin miner could run full throttle when power is plentiful and cheap (a sunny morning or windy afternoon, for example) and kick back when the market is tighter and prices are higher. This would act as the opposite of a power plant, drawing additional power in times of excess and putting power back into the grid by reducing activity in times of shortage. Doing so would tend to enhance the extremes, reducing the number of hours prices are zero or negative because the market is flooded with generation and also the number of hours prices increase due to stringent conditions. As a source of additional demand, Bitcoin mining could encourage developers to create more generation.

IdeaSmiths LLC, a power systems analysis firm, concludes in a recent white paper that adding 5 gigawatts of flexible data centers, capable of rapidly ramping up or down their power use, could foster additional renewable energy capacity on the grid. of Texas and reduce net carbon emissions.(1) Natural gas-fired power would decline somewhat, which makes sense since the reduction in price caps would discourage higher-demand plants from turning on. It should be noted that this document was paid for by Lancium, which is developing crypto mining centers as “controllable load resources” in Texas.

The advantages of crypto mining mainly revolve around its high degree of flexibility. Industrial plants can also reduce their energy consumption, but not as easily due to the interruption of physical processes (this can also apply to regular server farms). Crypto miners simply suffer a potential opportunity cost by going offline, which can be offset by network operator rewards. Plus, they can be located near where energy markets are congested and prices are low, which is why windy, sparsely populated West Texas is so attractive.

There are three caveats. First, while additional demand from crypto mining would improve the economics of existing generators, it is unclear if it would encourage new generation. Wind and solar developers often sign supply contracts with buyers for 15 years or more to finance construction. Fifteen years ago, crypto mining didn’t even exist, and the same novelty and speculative fervor that excites its adherents may be less appealing to managers of renewable energy projects betting on long-term demand. If they hesitate, crypto mining may increase the demand for conventional generation. While Texas leads the US in wind power production, it also generates more absolute terawatt-hours from coal than any other state.(3)

Second, while crypto mining is highly sensitive to energy prices, Texas’ recent experience would suggest some caution when it comes to relying entirely on price signals. In fact, the high costs of electricity should prompt miners to lower the level, freeing up energy for a stressed network. But there are several variables at play, including the price of the cryptocurrency itself. Instead of relying on miners to make an economic decision in a time of emergency, it would make sense to require demand response from these less essential facilities when the network operator sounds the alarm, at least until a track record is established. noun.

Such regulation tends to go against the general spirit of the competitive Texas energy market, of course, which prompts the third caveat.

This is less a warning against crypto mining as a controllable burden than a plea not to see it as a panacea. Crypto’s libertarian aura and backing by tons of private capital (at least for now) make it politically attractive in Austin. However, Texas could be doing other, more obvious things to make its network more resilient. The most efficient home heating is one. Another broader and smarter application of demand response for large loads such as air conditioners and water heaters. Also… insulation, anyone? Admittedly, all of these are quite monotonous compared to blockchains, requiring mandates and incentives. But they would also pay multiples of that investment through efficiency gains and blackout insurance.

It is in the nature of advocates of a new technology to identify killer applications, while it is in the nature of politicians facing complex problems to take advantage of such apparent nostrums. The Texas crypto network experiment should not be used as an excuse to disregard common sense measures.

More from other writers at Bloomberg Opinion:

• A world without cryptocurrencies is too easy to imagine: Leonid Bershidsky

• Laughing at Matt Damon and other crypto: Lionel Laurent

• Bitcoin’s latest renaissance has a made-in-China look: John Authers

(1) “Impacts of Large, Flexible Data Center Operations on the Future of ERCOT” by Joshua D. Rhodes, Thomas Deetjen, and Caitlin Smith, IdeaSmiths LLC, June 2021.

(2) Texas generated 90.4 terawatt-hours of power from coal in the 12 months through November 2021, the highest level of any state and 10% of the US total (source: Energy Administration Energy Information).

This column does not necessarily reflect the opinion of the editorial board or of Bloomberg LP and its owners.

Liam Denning is a columnist for Bloomberg Opinion covering energy, mining, and commodities. He was previously the editor of the Wall Street Journal’s Heard on the Street column and wrote for the Financial Times’ Lex column. He was also an investment banker.

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