Texas’ weak electric grid is a boon to crypto miners
Economically efficient markets often appear corrupt, and the latest example to get stuck in Texans’ craw is the electric grid paying cryptocurrency miners millions to solve a problem they helped create.
Miners build computer farms that consume enormous amounts of energy to generate currencies like bitcoin and ether. About a dozen have come to Texas, partly because China and other jurisdictions are kicking them out. The main draw is the wholesale electricity market operated by the Electric Reliability Council of Texas.
ERCOT offers some of the cheapest power in the country, often as little as $20 a megawatt-hour. While the price can go up to $5,000 a megawatthour when demand overwhelms supply, ERCOT will pay industrial users to shut down during those periods.
Planners at ERCOT said they expect demand from crypto miners to grow to 27 gigawatts in the next four years, almost as much as Houston uses. ERCOT struggled to meet 80 gigawatts of demand during the hottest hours this summer, leading critics to question whether Texas’ fragile grid can handle a 33 percent increase in load.
Crypto miners promise to shut down when demand spikes; it’s part of their business plan.
Riot Blockchain, one of the pioneers in Texas crypto mining, operates from a former aluminum
smelter in Rockdale because it has an industrialscale interconnection with the ERCOT grid.
Riot Blockchain’s game plan is simple: generate bitcoins when power is cheap and collect financial incentives to shut down when electricity gets expensive. The company claimed its business
plan would help stabilize the grid, but more on that later.
Last July was the hottest on record, and generators on the ERCOT grid struggled to meet demand. Riot Blockchain said bitcoin production dropped 28 percent compared to last July because the grid was wobbling.
As a result, Riot only generated 318 bitcoins in July and sold 275, generating about $5.6 million, significantly less than last year. But Riot said it voluntarily curtailed
11,717 megawatt-hours in
July, enough to power 13,121 average homes for one month, the company said.
ERCOT gave it $9.5 million in return, more than making up for the lost bitcoins.
“When applied to anticipated power costs for the month, the power credits and other benefits are expected to effectively eliminate Riot’s power costs for July, further enhancing the company’s industryleading financial strength,” the company said in posting July results.
By reducing power consumption by 21 percent last month, Riot got ERCOT to pay 100 percent of its electricity bill. So even though the company created fewer bitcoins in July, the company made about $7 million more than it would have if it had not curtailed its operations.
Cue the villagers with pitchforks who saw their electric bills go through the roof.
Readers have asked me why ERCOT allowed Riot Blockchain and the other crypto miners to connect if it did not have the supply to meet their demand. And isn’t it perverse to pay a company to solve a problem it created by adding load?
I asked ERCOT and Riot those questions and asked for interviews. Only ERCOT replied with a statement just before my deadline.
“ERCOT works to interconnect all load and generation equally. We don’t have a rule that says certain loads cannot connect,” it said.
Not every month is like July, thank goodness. The pinch points typically only come every July and August and sometimes in January and February.
During the so-called shoulder months, electricity generators lose money because prices drop so low. One reason we don’t have more generators is that they don’t make enough money to justify building power plants when prices are averaged across the year.
This is where crypto miners claim to save the day.
Miners love running flat-out when power prices are low during the shoulders months. Generators love serving the higher demand, which lifts prices and makes them money during their slow season. The additional sales are supposed to inspire generators to build more power plants, which they can use to meet peak demand in the summer and winter.
More power plants would stabilize the grid, but the greater demand also raises prices in the shoulder months. Some predict summer prices will fall and balance out over the year. But that seems unlikely.
Electric companies will not add more power plants unless they are sure their annual revenues are much higher, which means higher prices for you and me.
In past columns, I’ve explained the many ways we can fix the grid, and I’ve even explained how data centers can soak up excess electricity stranded due to a shortage of transmission lines. But adding more demand to the grid is not a good idea.
Unless, of course, your business generates wealth from solving a problem it helped create.