Bitcoin mining could be great for Texas’s grid — according to Bitcoin miners

Now that Bitcoin’s China-based hash rate has plummeted due to shutdown orders from regulators, Texas is not-so-quietly positioning itself as the new place to be for Bitcoin miners.

In the past few months, the state has passed legislation to establish a blockchain working group and formally define virtual currencies for legal purposes. Meanwhile, the Texas Department of Banking gave state-chartered banks the green light to custody crypto.

While multiple other states passed similar legislation to make themselves more attractive to crypto firms, what makes Texas stand out is the state’s deregulated energy market.  Industry advocates in the state say an influx of miners could actually benefit Texas's grid.

In theory that may be true. In practice, it’s hard to know.

Good for the grid?

The idea that an influx of Bitcoin miners could actually be good for the Texas grid came up last month, during the first-ever meeting of the so-called Bitcoin Mining Council — a loosely affiliated group of U.S.-based mining firms organized by Microstrategy CEO Michael Saylor.

Chad Harris, the CEO of Whinstone, which founded North America’s largest Bitcoin mining hosting facility in 2019, explained why the mining firm chose Rockdale, Texas as the site. “We knew that Texas offered opportunities for large controllable loads to achieve low power prices due to deregulation,” he said. “As an infrastructure builder, my team and I packed our bags and we moved to Texas.”

In April of this year, Nasdaq-listed Riot Blockchain acquired Whinstone’s Texas operations, calling the acquisition part of its “goal of increasing the American footprint in the global Bitcoin mining landscape.”

Harris said one of the things his team learned when they got to Texas was how Bitcoin could actually help the state's electricity grid.

The argument is that since Bitcoin miners don’t have to run all the time, they can make the grid more efficient. First, Bitcoin miners can set up shop in rural areas where there tends to be overcapacity. Second, Bitcoin miners don’t have to run constantly — they can pick and choose based on the price of electricity at any given time.

Power grid operators can’t always anticipate demand, but they have to have a ready supply for when it peaks. Overbuilding supply in anticipation of peak demand can be inefficient and even weaken the grid.

Bitcoin miners can make the grid more efficient and resilient in two ways, according to Lee Bratcher, President of the nonprofit Texas Blockchain Council. They can help address overcapacity issues by creating more consistent demand during normal times. Then, during times of especially high demand, they can turn their machines off, Bratcher said.

But how do you get miners to close shop during, say, a heatwave that causes everyone to crank up their air conditioners? Bratcher’s theory is that this will happen naturally, thanks to Texas’ deregulated energy market.

Unlike other parts of the U.S. where electricity markets are regulated and pricing is centrally controlled, Texas passed legislation to “unbundle” its public electric utilities, eliminating regulated rates in 1999. “When demand gets really high, the price goes through the roof, and other people are less price-sensitive than Bitcoin miners,” Bratcher said.

If you’re running a cloud computing server farm, you have to keep running, but if you’re a bitcoin mining farm, you can — and Texas seems to be betting you will — shut down and wait for more favorable price conditions. According to Bratcher, mining farms will turn off when the grid needs them to turn off, just based on market conditions.

According to Harris, this approach is already working. On June 14, the Texan grid asked residents to conserve power during a heatwave. Harris said despite public outcry about mining energy use, multiple plants did shut down according to plan.

“There was outrage on Twitter that I have to turn my power off because of Bitcoin miners,” he said. “Several of these mining facilities actually turned their power off and supported over twenty thousand households.”

Theory versus practice

But while this may be a symbiotic relationship in theory, it’s unclear how it’s been working in practice so far.

Joshua D. Rhodes, Ph.D., a Research Associate at the University of Texas at Austin’s Webber Energy Group and founding partner of IdeaSmiths recently completed a study for companies looking to mine Bitcoin in Texas. According to that research, in order to actually create the grid resiliency many of these firms tout, they’d have to be between 15% and 25% flexible, meaning their uptime could be as low as 75% depending on community needs.

Though bitcoin mining centers have the luxury of being flexible unlike other types of data centers, that uptime would still be considered low, according to Rhodes.

“I do think the potential [for mining centers to create resiliency] exists, but whether or not that potential is actually realized will be a consequence of how these facility owners decide to operate their plants,” said Rhodes.

It's challenging to verify how those facility owners are operating. Information on energy use by companies isn’t public in Texas, so it would be up to companies to release information on their own consumption levels. Outside of voluntary transparency, Rhodes said the only way to really check if operators are as flexible as the grid requires is if they’ve signed up to participate in a formal demand response program.

In his own research, Rhodes says he’s spoken with a handful of firms that have either signed up with demand response programs or have indicated that they’re planning on doing so.

The BMC has positioned itself as a facilitator of this kind of coordination but it’s still unclear how exactly that organization will operate. Most of the standards and communications among members are facilitated by MicroStrategy CEO Michael Saylor and a handful of mining leads. There is no clear leadership structure or governance practices yet.

As of now, all company disclosures pertaining to energy use are voluntary and members can pick and choose which information they make public.

Member firm BlockCap founder Darin Feinstein said he expected the council to develop into a more sophisticated organization.

“As it evolves — I wouldn’t say it’s in its final form yet — we anticipate the council filling roles that describe some of the objective information that you would want to see," he told The Block.