It’s no surprise that bitcoin has found its way to Texas in a big way. The Texas ethos and bitcoin ethos are perfectly aligned. Texas culture embraces individualism, hands-off government, and personal sovereignty. Add to that a business-friendly environment, low taxes and cheap electricity and it becomes clear why the bitcoin mining industry is flocking to Texas.
Bitcoin mining is energy intensive. At the current level of difficulty, mining one bitcoin requires about 145,000 kWh of electricity. Bitcoin miners can lock in long term agreements to purchase electricity from Texas electricity producers for as little as 5¢ per kWh. That means the electricity cost to mine one bitcoin in Texas is as little $7,200. There are, of course, other expenses involved including hardware and facilities. But cheap electricity is a huge benefit of operating in Texas. And when bitcoin miners relocate to Texas, the arrangement is mutually beneficial. Bitcoin mining can have a positive impact on the Texas electricity grid.
Benefits for the Texas electricity grid
One of the major challenges of any electricity grid is maintaining enough peak capacity to meet the needs of the grid during times of peak demand. During normal times, much of the capacity in a grid sets idol because there is no need for the power and no place to put it to use. But that capacity must be available for when there is a surge of demand on the grid. This can happen on hot summer days or during a winter storm.
Many regulated jurisdictions address the peak capacity dilemma by operating what is known as a capacity market. In a capacity market, power producers are paid not just on what electricity they sell to the grid, but on what capacity they add to the system. This is one way of making sure there is enough spare capacity to meet the demand.
Texas doesn’t operate a capacity market. Texas has an energy-only market which relies on market forces to ensure that producers are incentivized to build enough power to meet the state’s needs. Such a system relies on market signals to encourage private companies to build generation capacity. When demand for electricity rises, the real-time price of electricity goes up. The increase in prices during these peak demand periods can be dramatic. Many producers make most of their money during these events.
So how does bitcoin help solve the capacity problem?
When the grid is demanding more electricity than is being produced by power plants, there are two basic ways to solve the problem. You can either put more electricity into the grid or reduce the demand for power. When it comes to balancing out the real time supply/demand equation on the grid, an extra watt of power added to the grid is indistinguishable from a watt removed from the demand side. What is important is to balance out the power going into the grid with the power being drawn from the grid.
This is where bitcoin mining operations can help solve Texas’ demand/supply balance challenges. Bitcoin mining operations require huge amounts of electricity to power the computers that solve the algorithms that keep the bitcoin network secure. Cryptocurrency mining is a process that helps secure the blockchain and rewards miners with bitcoin for their efforts. Miners use computer hardware to solve complex mathematical problems in order to add new blocks to the blockchain and are rewarded with bitcoin for their work. Each bitcoin mining facility is only a tiny part of the global network. They can be powered down in seconds when the need arises with no consequences for the wider network.
In this way they become a perfectly responsive element of the electricity grid. They can reduce power demand even faster than new electricity production can be brought online. That means that during times of strain on the grid, they can instantly relieve stress on the system.
Why would they be willing to temporality stop their mining operations?
There is a concept in the power markets know as demand response. Demand response means that consumers of electricity can be paid to reduce their electricity consumption at times when the grid is strained, and power prices are spiking. As mentioned before, reducing demand on the grid is functionally equivalent to adding more power into the grid.
Bitcoin operators don’t need turn off their computers out of pure altruism. Once again, market forces are at play here. When the demand for electricity surges, bitcoin mining facilities then can act as virtual power plants. They will be compensated for the amount of electricity demand they remove from the system. As demand on the grid goes up and prices rise, it will become more profitable for these companies to not run their mining operations and instead be paid as a demand response resource.
Bitcoin miners will increase capacity on the Texas grid
Bitcoin mining operations will encourage additional electricity capacity for the Texas grid at no additional cost to the average electricity consumer. They become ready made steady customers for power producers and they use power at a constant rate around the clock. This makes it profitable for new power capacity to be developed. Bitcoin will build new power generation in Texas.
The largest operations prebuy large amount of electricity from producers. This creates a baseline of demand for electricity that incentivizes power producers to build and maintain larger amounts of low cost electricity in Texas. During times of stress on the grid bitcoin miners can reduce or completely turn off their power consumption to help balance out the grid.
Large bitcoin miners will enter into contracts to make long term purchases of electricity from producers. They will buy large blocks of electricity at a fixed and low price. When wholesale prices go up, it becomes profitable for them to sell that electricity to the grid. Because producers have long term contracts to produce large blocks of electricity, they are financially incentivized to build new capacity. During times of need, that capacity is available to feed the grid.
Large scale crypto mining operations act as shock absorbers in the system. When demand for electricity is low, they can use the excess power being generated by the system. When demand and spot electricity prices spike, they can curtail their operations to relieve strain from the grid. They are financially incentivized to do so because during those periods, it will become more profitable to turn their computers off than to continue running them. They will increase the overall capacity of the Texas grid and make it more stable at the same time.