Coordination between utilities and crypto miners – when does it make sense?

Crypto mining has experienced significant growth over the last decade, uses more energy every year and is increasingly located in the United States. Given the growth of cryptocurrency production in the United States, there is growing federal, state and local interest in crypto mining’s impact on electricity costs and carbon emissions.

In January, Steve testified at a Hearing in the US Congress on the production of cryptocurrency and its impact on the operation of electric utilities, a complicated relationship that deserves a deeper consideration.

An option explored here is to investigate whether coordination between cryptominers and utilities can be a win-win for both parties. ONE recent Utility Dive article laid out the nuances of treating cryptomining as an online resource, and in a nutshell, “it’s complicated”.

The crypto-web dilemma

For the most part, electric companies have a duty to serve customers and do not choose whether or not to offer load services to specific customers. But the high energy intensity and portability of cryptominers creates a unique and challenging business relationship between cryptominers and power tools.

Utilities around the country have been hesitant to offer long-term cost-for-service pricing for cargoes that can be moved easily and also have high regulatory risk and commodity price volatility. Crypto miners are not aluminum works that, once built, are unlikely to move elsewhere.

One approach that mitigates these risks and supports the partnership between cryptomining and electric utilities is to use short-term energy pricing in the wholesale market with upfront capital cost contributions for the transfer of cryptomining loads.

The focus on short-term wholesale pricing of energy creates opportunities to find areas of cooperation between cryptominers and utilities, especially given the increasing use of variable energy resources (wind and solar) on utility systems. Load modulation that reflects the value of wholesale energy markets can be attractive to both parties. But there are limits to how far these synergies can be reached before it works to the detriment of one or the other.

This relationship can be controlled from the utility’s perspective using demand response – either active demand response through incentive programs or contractual mechanisms requiring load reduction, or passive demand response by using price signals (e.g. time of use or hourly pricing).

When Does Crypto Demand Response Make Sense?

Two types of decisions are typically considered by crypto miners: planning decisions around where they will place their facilities and how they will structure utility contracts, and operational decisions which defines hour-by-hour or minute-by-minute options to control the mining machines.

We performed an analysis to identify the operating conditions that support crypto demand response. We looked at the effect of several factors on demand response potential: cryptocurrency prices, wholesale electricity prices, building energy efficiency, and end-user pricing schemes (time of use vs. hourly pricing).

In general, the business case for crypto demand response is greater for both utilities and crypto miners when several hours of the year have higher electricity costs than miner revenue. If mining is always profitable, it makes sense to power the miners as much as possible – although crypto demand response can still be beneficial by giving miners better control over their power costs.

The business case for responding to crypto needs is strongest during periods of

(i) low crypto prices

(ii) high electricity prices

(iii) when the miners use older machines

(iv) when the miners are housed in energy-inefficient facilities.

How Much Crypto Demand Response Makes Sense?

Crypto demand response works when both miners and utilities are better off financially with coordinated load shedding than without.

When utility contracts are negotiated, the big question for crypto miners is around the lifetime return on investment for mining machines. How many hours can mining machines reasonably be shut down without affecting returns, with both fixed and variable costs?

Assuming an average miner lifetime of four years and taking capital costs into account, we calculated the return on investment (ROI) for an Antminer S9 miner in 2021, with different levels of load throttling and using ComEd’s hourly rate. We also calculated a simplified incremental utility value as the difference between the hourly wholesale price of electricity and the end-user revenue for the power plant from a miner at a fixed price.

As we see below from zero constraint, the return of our chosen miner (gray line – left axis) initially increases when it is switched off during hours with the most expensive electricity. The return peaks at approx. 400 hour reduction and then decreases with further reduction.

The incremental utility value for curtailment (green line – right axis) is initially zero without curtailment. It increases as miners are restricted during hours of high wholesale prices – during those hours the utility’s savings on the wholesale market exceed its lost retail revenue. The utility value peaks at around 850 hours of shortening and then declines beyond that.

Although these numbers are illustrative and depend on several assumptions, they indicate that there is a win-win area with limited hours, when both the utility and the cryptominer are better off than the status quo of no coordination and no demand response. This type of analysis can also identify the optimal number of cut-off hours that maximizes the overall benefit to both parties or societal benefit (including, for example, emissions or resource adequacy).

We expect that market changes in mid-2022 (lower cryptocurrency prices, higher wholesale electricity prices) should further strengthen incentives to coordinate load shedding and expand the zone of positive ROI for both utilities and crypto miners.

The value of the grid

There are several key web and societal benefits of crypto demand response:

• Reduced tooling system costs. With the right demand response signal, miners are incentivized to reduce their load during periods of high wholesale market prices or grid congestion and to maintain their load during periods of low or negative pricing.
• Load flexibility. While crypto demand response isn’t quite a battery, since it doesn’t feed energy back into the grid, it can act as a flexible load, with more flexible load-limiting benefits since demand response can potentially extend beyond a few hours. This characteristic is valuable to the system and should be encouraged.
• Emission reductions. Wholesale prices are generally correlated with grid emissions intensity, and crypto demand response can reduce emissions as a side effect or even as a primary goal. We plan to investigate how an emissions intensity signal can be used to modulate crypto load and help reduce grid emissions.

The value for crypto miners

Demand response also has concrete benefits for crypto miners:

• Increased return on investment. A demand response price signal or incentive allows for more profitable mining during hours of low electricity prices. This can extend the useful and profitable life of older mining equipment with lower efficiency.
• Crypto demand response can be especially important as a hedge against low crypto prices, when several hours a year can be unprofitable.
• Demand response can also be useful for cutting costs when mining in energy-inefficient or retrofitted facilities that are more sensitive to electricity prices.

Collaboration is the key

This analysis shows that crypto demand response can be a win-win for utilities and crypto miners. Similarly, more detailed types of analysis can help define public policy to encourage efficient production of cryptocurrency and can help utilities evaluate potential programs or awards when there is net societal value.

In conclusion, we encourage a more formal, organized dialogue between cryptomining and the electric power industry for better public policy making and program/rate design that is a win-win for both parties.