Texas is becoming a Bitcoin mining capital. Can the grid handle it?

While the collapse of cryptocurrency exchange FTX earlier this month dominates national headlines, the Texas blockchain and Bitcoin community is determined to move forward.

“Texas is home to the largest Bitcoin mining sites in North America, and is quickly achieving status as the undisputed Bitcoin mining capital of the world,” Texas Blockchain Council President Lee Bratcher said at an industry summit in Austin last week.

Lured by relatively cheap electricity, businesses that mine energy-hungry Bitcoin and other cryptocurrencies have been knocking on the government’s door. But after a summer of record demand for heat and energy, and on the heels of Winter Storm Uri in 2021, concerns about the Texas electric grid are reawakening.

Those concerned about cryptomining’s power use include Senator Elizabeth Warren, US Representative Al Green and five other federal lawmakers who wrote in October to the Electric Reliability Council of Texas (ERCOT), which maintains the state’s power grid. The lawmakers’ letter outlined concerns that the state’s cryptocurrency boom could increase Texans’ electricity bills, destabilize the grid and exacerbate climate change. Warren, Green and their colleagues pointed out that Texas is already home to about a quarter of US Bitcoin mining, and that state leaders — including ERCOT’s former interim CEO Brad Jones — have been actively courting the industry.

“Given the impact of cryptomining on the climate, the web and for ratepayers, ERCOT’s support of this industry is irresponsible and deeply concerning,” the lawmakers wrote.

The letter asked ERCOT to respond to a list of questions by Oct. 31. Almost a month later, the agency has yet to send a formal response. During a news conference introducing Pablo Vegas as ERCOT’s new CEO, Vegas said he looked forward to responding. For now, he said simply, “We want to be able to serve any business that wants to do business in Texas. And that includes crypto miners.”

Lawmakers singled out Texas in part because of its independent grid, which has few connections to the rest of the country. Independence allows Texas to escape federal oversight, but Uri showed that isolation also makes Texas more vulnerable. As the climate changes, the grid must withstand hotter summers, worse storms and less predictable weather in general.

“We do not have a means by which we can connect to another network in a time of difficult problems. We’re literally on our own … when the heat waves come our way, we have fewer options,” said Green, a Democrat who represents Southwest Houston and was the only Texas lawmaker to sign the letter.

Today’s cryptocurrency is a consequence of the 2008 financial crisis, according to Molly White, a software engineer and cryptocurrency researcher who runs the popular Web3 is Going Just Great website. Many crypto evangelists in the United States believe that the federal government sacrificed the hard-earned wealth of everyday Americans to bail out banks, and that the government cannot be trusted with people’s money. They see Bitcoin and other cryptocurrencies as a decentralized alternative.

“Crypto is really born out of very libertarian ideologies around freedom from government control of money,” White said.

It’s not a pretty partisan question: Democrat Beto O’Rourke’s gubernatorial campaign accepted $1 million from now-disgraced FTX founder and former billionaire Sam Bankman-Fried.

The most popular cryptocurrency, Bitcoin, relies on a public, distributed, digital ledger system (or blockchain) that requires participating computers to perform extremely energy-intensive calculations. Computers that complete these calculations can validate transactions for the public ledger and get their own new bitcoins in return – known as “mining” the currency. The bar for validating transactions is constantly rising, and these days mining a single bitcoin requires more electricity than the typical American household uses over several years, according to a 2021 New York Times analysis.

Some other cryptocurrencies, most famously Ethereum, use slightly different systems that require far less computing power and electricity. But Texas is dominated by Bitcoin. Because electricity is a large cost for crypto miners, they have an incentive to follow cheap energy. And in the US, Texas hits the mark.

“The main attraction is cheap wholesale electricity prices,” said Carey King, associate director of the Energy Institute at the University of Texas at Austin.

This is true across the state, but especially in West Texas, where new wind and solar farms are popping up faster than new transmission lines to get that power to major cities. This “stranded” renewable energy contributes to very low and sometimes even negative electricity prices in West Texas. At the same time, oil and gas producers in the Permian Basin and Eagle Ford Shale regularly flare or burn natural gas leaking from their wells. Cryptominers see areas with these underutilized renewable energy sources and wasted gas as prime locations for their facilities, King explained.

Industry insiders argue that harnessing this energy is a service to the grid and to the public, as is the ability of cryptominers to shut down quickly during high electricity demand. ERCOT has agreements called “demand response programs” in which industrial customers, including most major Bitcoin facilities, are paid to cut their energy use when statewide demand threatens to outstrip supply.

Over the summer, crypto miners did just that, shutting down while Texans sweated through extreme heat waves and ERCOT called for energy conservation. Along the way, these miners made a lot of money. In their letter, Warren and the other lawmakers called out Riot Blockchain’s 750-megawatt facility in Rockdale, an hour northeast of Austin. The company received an estimated $9.5 million in credits in July to curb operations and energy use — much more than the $5.6 million profit it made that month on selling Bitcoin.

Participating in a grid operator’s demand-side program is not unusual for all facilities that use a lot of electricity. In fact, ERCOT treats crypto mining no differently than any other industry.

“There is a set of rules. And the crypto miners come in, and they fit the definition of being able to provide … emergency services,” King said. “And so they sign up.”

But maybe treating everyone the same is the problem. Cryptominers are extremely sensitive to energy costs, meaning they will shut down no matter when electricity prices get too high. (In Texas’ current market, prices go up on hot or cold days, when everyone runs their air conditioners or heaters.)

Bitcoin miners check power prices “minute by minute,” said Bratcher, head of the Texas Blockchain Council. “The market functions of the web are actually very efficient at sending them price signals.”

Other large power consumers, such as factories, are not necessarily as sensitive to energy costs, and often cannot shut down easily. Without the incentive of payment or credit from ERCOT, other customers may have no reason to cut back. But for cryptominers like Riot Blockchain, those credits — which are ultimately added to ratepayers’ bills — are a bonus.

Representative Green called this “a new form of arbitrage.”

Miners may not go that far, but some agree that demand response is probably not necessary. Bratcher is involved in ERCOT’s Large Flexible Load Task Force, a committee set up to figure out how utilities should connect large new customers like cryptominers to the grid and how they can use their flexibility to turn off or on. The group has not made any major decisions yet, but at some point it may recommend that cryptomining be subject to different rules.

Cryptocurrency mining in Texas currently uses about 2,000 megawatts of power, according to a September report from the White House Office of Science and Technology Policy. That’s out of roughly 80,000 megawatts total on the Texas grid during peak demand.

Prospective cryptominers have requested to put roughly 33,000 more megawatts into the ERCOT interconnection queue over the next few years (enough to power the entire state of Florida). That eye-popping number worried Green and other lawmakers, but it doesn’t predict exactly what will happen. Basically, anyone can apply for this pairing queue.

“ERCOT doesn’t know if it’s real or not,” Bratcher said.

He estimates that only a tenth of what’s in the queue is viable, and the Texas Blockchain Council predicts that the state’s cryptomining load will roughly double to 4,000 megawatts by the end of 2023. That’s still a lot of electricity, but not the destabilizing amount lawmakers fear.

The more realistic concern is how much crypto mining will exacerbate climate change. Bitcoin founders explicitly state that their businesses stimulate more energy production. And while Bratcher and many of his colleagues are happy to run Bitcoin on renewable energy, the state’s political leadership is not so happy to let wind and solar grow unfettered. Indeed, the Public Utility Commission of Texas recently proposed a redesign of the electricity market that would reward utilities for building new fossil-fueled power plants in the name of grid reliability and explicitly exclude renewables from reliability incentives.

Supporters of cryptocurrency hail the technology as the money of the future. Critics see it as gambling, and a waste of precious electricity when the world should be focused on energy efficiency and shutting down polluting power plants.

“The thing about crypto is that they really don’t do anything useful,” said White, the cryptocurrency researcher. “It is primarily used for speculation. I think that’s important to realize. And it is somehow worth the power consumption of small countries? It blows my mind.”

Even through many booms, the overall use of Bitcoin and other cryptocurrencies continues to increase. Despite her criticism of the industry, White and other experts believe crypto is here to stay.

In the wake of the FTX collapse, state lawmakers have expressed interest in regulating cryptocurrency to protect consumers from losing their life savings. But when it comes to tackling crypto’s consequences for the web and the climate, there is much less interest. The Republican majority is not interested in reducing Texas’ energy consumption. Given the urgency of climate change, and given the Biden administration’s seriousness in addressing climate issues, cryptomining’s energy use may eventually become a federal matter. The members of Congress who wrote to ERCOT are clearly interested. It remains to be seen how ERCOT and Texas leaders respond.