(Bloomberg Opinion) -- Blackouts spring from the occasional void between power supply and demand. The usual fix involves increasing supply (spare generating capacity) or reducing demand (energy efficiency). Bitcoin bulls propose a counterintuitive alternative: more demand.
Texas Governor Greg Abbott is welcoming crypto-miners to his state, touting their ability to strengthen the electricity grid (see this in-depth report by Michael Smith for Bloomberg News). Mining cryptocurrencies requires ever more computing power and, therefore, energy. Miners seek cheap electricity, which made Chinese coal power attractive and provoked an environmental backlash. China cracked down on crypto last year, and miners have flocked to other places with cheap power, including Texas.
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 catch is that Texas’ pursuit of cheap power is what left it without enough insurance against last February’s winter storm. Widespread deadly blackouts resulted from a dearth of weatherized spare generating capacity and natural-gas supply, along with high demand. Texas’ surge pricing for power, designed to encourage more capacity to be built as a cushion against emergencies, proved inadequate.
Adding the demands of crypto mining to this situation seems like madness, but it rests on an established concept: demand response. That’s when customers cut their consumption of electricity — or let the utility do it for them — to reduce stress on the grid, usually in return for some payment.
In theory, a Bitcoin miner could run full tilt when power is plentiful and cheap — a sunny morning or a windy afternoon, say — and ease off when the market is tighter and prices are higher. This would act like the inverse of a power plant, drawing spare power at times of excess and effectively putting power back onto the grid by reducing activity at times of scarcity. Doing so would tend to ameliorate the extremes, reducing the number of hours when prices are zero or negative because the market is flooded with generation and also the number of hours when prices spike due to tight conditions. As a source of extra demand, Bitcoin mining could encourage developers to build more generation.
IdeaSmiths LLC, an energy-systems analysis firm, concludes in a recent white paper that adding 5 gigawatts of flexible data centers — able to rapidly dial their power use up or down — could both encourage extra renewable-energy capacity on the Texas grid and reduce net carbon emissions.(1)Natural gas-fired power would decline somewhat, which makes sense as the reduction in peak pricing would discourage peaker plants from switching on. It should be noted that this paper 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 power consumption, but not as easily because of the disruption to physical processes (this may also apply to regular server farms). Crypto miners merely suffer a potential opportunity cost from going offline, which may be offset by rewards from the grid operator. Moreover, they can be sited close to where power markets are congested and prices are low — which is why windy, sparsely populated West Texas is so attractive.
There are three caveats. First, while the extra demand from crypto mining would improve the economics of existing generators, it’s not clear that it would encourage new generation. Wind and solar developers typically sign supply contracts with offtakers for 15 years or more in order to finance construction. Fifteen years ago, crypto mining wasn’t even a thing, and the same novelty and speculative fervor that thrill its adherents may be less appealing to renewables project managers making bets on long-term demand. If they hesitate, crypto mining may instead raise demand for conventional generation. While Texas leads the U.S. in producing wind power, it also generates more absolute terawatt-hours from coal than any other state.(3)
Second, while crypto mining is very sensitive to power prices, Texas’ recent experience would suggest some caution when it comes to trusting wholly in price signals. High electricity costs should indeed prompt miners to dial down, freeing up power for a stressed grid. But several variables are at play, including the price of the cryptocurrency itself. Rather than rely on miners to make an economic decision at a moment of emergency, it would make sense to mandate a demand response from these most nonessential of facilities when the grid operator sounds the alarm, at least until a substantive track record is established.
Such regulation tends to cut against the overall ethos of Texas’ competitive power market, of course — which segues into the third caveat.
This is less a caution against crypto mining as a controllable load than a plea for it not to be seen as a cure-all. Crypto’s libertarian aura and backing by tons of private capital (for now, anyway) make it politically appealing in Austin. Yet Texas could be doing other, more obvious things to make its grid more resilient. More efficient home heating is one. More widespread and smarter application of demand response for big loads such as air conditioning and water heaters is another. Plus ... insulation, anyone? Admittedly, these are all rather humdrum compared with blockchains, and they require mandates and incentives. But they would also pay back multiples on that investment through efficiency gains and insurance against blackouts.
It is in the nature of advocates for a new technology to identify killer apps, while it is in the nature of politicians confronting complex problems to grasp at such seeming panaceas. Texas’ crypto-grid experiment shouldn’t be used as an excuse to overlook common-sense measures.
More from other writers at Bloomberg Opinion:
- A World Without Crypto Is Too Easy to Imagine: Leonid Bershidsky
- Laughing at Matt Damon, and Other Crypto Metrics: Lionel Laurent
- Bitcoin's Latest Rebirth Has a Made-in-China Look: John Authers
(1) "Impacts of Large, Flexible Data Center Operations on the Future of ERCOT" byJoshua 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 Nov. 2021, the highest of any state and 10% of the total for the U.S. (source: Energy Information Administration).
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was 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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