Teri Viswanath: Welcome to Power Plays, a CoBank Knowledge Exchange podcast series, an audio program where we connect you with top energy and environmental innovators and policymakers who share their insights, experience, and market observations. Hello, I'm Teri Viswanath, the lead economist for power, energy, and water at CoBank. I'm joined today by co-host and CoBank Managing Director, Tamra Reynolds. Tamra, welcome to the first-year anniversary of our podcast program.
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Tamra Reynolds: Hello, Teri. Yes, I'm excited about our one-year anniversary. I don't know about you, but I think we've learned a ton about the world of podcasting and the dos and don'ts over the last 12 months. For our first podcast in 2022, we wanted to start the year off with a bang by tackling the discussion of possible growth that comes from digitalization and data centers. Not just any data centers, we wanted to narrow the field to crypto mining and the challenges that may occur with delivering electricity to this segment of customers.
Teri: That's right. The meteoric rise of cryptocurrency is grabbing headlines, but it's also dividing opinions on whether this source of load growth is beneficial or harmful. There have been a number of hearings in Washington recently, in particular the Energy and Commerce House Committee that investigated cleaning up cryptocurrency and the energy impact of blockchains.
Tamra: This is a very nuanced subject. Joining us on today's program is an A-team of guests. Jael Holzman, a journalist for E&E News outlet who has covered this topic in some detail. Steve Wright, the former general manager of Chelan PUD and CEO of Bonneville Power, and expert Elaine Johns, CEO of the technical consulting firm EnerVision. We begin our discussion with Jael.
Jael, as a reporter for E&E News, you've researched and written about the energy impact of cryptocurrency mining, recently commenting that the EPA is taking steps to rein in the environmental footprint from this activity. Why is this, all of a sudden, a particular point of interest?
Jael Holzman: Thank you for having me on. A lot of people talk about how much energy is consumed by cryptocurrency. You've seen headlines comparing it to that of a small country. It's not helpful to think about it in that way because many industries consume the same amount of energy as a small country. It's better to think about it from the perspective of what it will bring to already strained, already vulnerable electric grids to communities that weren't preparing for an added increased load. That's why I think it's really interesting.
We really need to be thinking about how the world is going to adapt and change in result of climate change. In this case, many parts of this country of the United States are trying to migrate away from fossil fuels to cleaner, in some fashion, energy sources. The idea of doing that while dealing with an added strain on the grid, that's something that we haven't been thinking about, how society expands as it goes net-zero, so as a climate journalist, even though I cover mining, crypto counts.
Teri: Let's just go back why are we seeing the growth and why particularly in the US? What's driving the activity? Why is it occurring, Jael?
Jael: Generally speaking, the popularity of cryptocurrency can be traced over decades. This is not a new phenomenon. The reason why we're seeing a growth and exploration into cryptocurrency in the United States recently, in terms of production, in terms of energy use, this conversation is happening because China recently banned crypto mining. A lot of that migration has come to the United States because power is cheap.
Teri: It's been happening for more than a decade, but we've had this big growth occurring because of really the ban that happened in China, so it's migrating to the US. Where is it coming from, in particular? Is it one particular state, is it dispersed? What are you seeing?
Jael: What we're seeing is actually the parts of the country that are most interested in cryptocurrency at this moment are the places where fuel is cheap. Generally speaking, the states that are attracting investment are the ones that are also passing laws to incentivize crypto. We're seeing it happen in Kentucky. We're seeing it happen in Texas. We're seeing it happen in Wyoming. We're seeing it happen in Washington, New York. We're seeing it happen in various parts of the country.
But predominantly, we're seeing it happen in places that pass laws to encourage it. At the same time, many of the places that are seeing this deployment also have legacy oil and gas plants, coal plants. That I think is the challenge here is what are we going to do with the meeting of blockchain, of this technological marvel, and fossil fuels? The past that we're trying to get rid of.
Teri: Yes. We've talked a little bit about the growth and where it's occurring. How much are we talking about?
Jael: Well, this is actually something I've been trying to figure out. In terms of what we're seeing publicly available information, we're seeing growth in parts of this country that have cheap power, that includes rural parts of this country. We're looking a lot now at how parts of this country that used to be engines of coal and oil are now becoming hubs for mining cryptocurrency.
Teri: Yes, and I guess with that growth when we think about that recent house testimony where we looking at what it might mean, half a percent of the world's total electricity supply could be used toward this data use and possibly growing. In terms of regulation, why are they concerned on the mining that's occurring in the US?
Jael: Definitely I think if to speak from a banking perspective as well when you're a bank and you're evaluating whether or not to give someone a loan, you look at the bankability, the feasibility of the thing that they're trying to do. In this case, this is still a very novel practice, a novel currency, and miners are seen in the financial space as not being the safest bet because when the price goes down, the value of their mine goes down. What happens if we sink the future of our power infrastructure on something as fragile as the value of gold? That's essentially what we're in a broader stakes, what some of these deals suggest.
Teri: When we think about the underlying valuation, the wild ride we've had over the past year, and we are going to bank on 30 years of depreciable infrastructure in our communities? This is a challenge.
Jael: It's a challenge.
Teri: Thanks so much, Jael. Super helpful.
Jael: Thank you.
Teri: Jael provided great context on why Tamra and I decided to feature a podcast on crypto mining, but now let's hear from Steve Wright whose organization had very early firsthand experience with serving crypto mining load. Here's that discussion.
We're welcoming Steve Wright this morning who is the former general manager of Chelan Public Utility District, and also former CEO of Bonneville Power Administration. Steve, you had a great conversation with the House Committee on cryptocurrency and the impact to electricity demand, and I thought it was really great. We're really excited to have you on the program.
Steve: Thanks so much for the opportunity.
Tamra: Steve can you tell us about your experience while at Chelan with growth associated with this type of business?
Steve: For those who are really interested I'd refer you to my testimony, and even that's a short summary of what we went through because our experience lasted for four years. It went from 2014 through 2018. We began to notice in 2014 people showing up with cryptocurrency miners in a variety of different forms. They came in shipping containers, and they would look for the jumper cables to hook up to our power system. They showed up in residential homes. They showed up in vacant commercial businesses. Didn't really understand what the implications were for the power system, didn't really care about that, to be honest, and mostly they just wanted to try to make cryptocurrency and generate profits from that.
We had a lot of problems associated with that. This is a bunch of folks who understand the electric industry, so you're going to understand overloading circuits and the potential risks that are associated with that all the way up to fire risk. We did have at least one fire that we know about that was created as a result of overloaded circuits. We were dealing with that, and then the industry did begin to mature, so it was a mix.
We still had some of those early adopters, let's say, but then we began to see bigger companies all the way up to the biggest Bitcoin machine maker in the world, Bitmain out of China came and wanted to do much bigger locations that potentially could be 100, 200-megawatt type loads. The community had a very robust conversation about do we want this or not, or how do we manage this? When cryptocurrency miners tell us we could be the cryptocurrency capital of the world, is that something we're going to be proud of? At the end of the day what we did was we have obligation to serve.
The only way we had of managing it was to address the cost risk through rate making. The final rate that we adopted had three components to it which I think everyone in the utility industry would recognize. One was managed for stranded asset risk relative to the transmission and distribution system by requiring upfront payment for any T and D needs and we did something that was basically a pro-rata share of what the marginal cost would be for transmission and distribution.
Second, given that these loads can come and go, and this is the key element about cryptocurrency that's different from something else, it's the portability of the load that is critical to electric utility. We said that the pricing for generation for the energy contribution should be based on short-term market prices because we wouldn't be willing to invest in an asset or even tie up an existing asset given that we don't know how long that load will be there.
Finally, we looked at a whole bunch of other risks to the system everything from who would pay the transmission and distribution operation maintenance costs to risk to our bond rating, and calculated probabilistic approach to what the cost of that would be and included that in the rate as well.
Teri: You’re talking about a new type of customer. I think the point that you've made is when we take a look at the rates very advantageous to a strong electricity load of 3 cents compared to the national average of 12 cents. But this idea that in the age of electrification we're going to see consumers that are going to become very savvy, data centers in particular, that are going to territory shop.
Steve: Teri, I think you've hit on the number one key point that makes this unique and different from the electric killer standpoint because the question we were asking ourselves initially is, well, this is just load growth, right? We're utilities. We deal with load growth all the time. And yet this was different because of the portability of the load.
With cryptocurrency miners and their ability to pick up and move on short notice, you just have to think differently about the way that you price and set rates. This was really the key element for us of the new adopted rate is the fact that they could be here today and gone tomorrow means that we have to just think about, in effect, short-term pricing for them and how do you price for a load on a short-term basis.
Tamra: I think in your testimony you mentioned that some of the elements that made mining unique when compared to other loads is really important. Maybe you could expand on that a little bit and talk about some of the related challenges or potentially system risks that this type of business provides and maybe even talk a little bit to the delivery aspect and how that changes.
Steve: I want to be clear that portability creates both threat and opportunity and I want to speak to both. We’ve spoken some about stranded asset risk with respect to transmission, distribution, and generation. There also is the opportunity because if you have underutilized transmission or distribution, they can move these miners.
The ones that we saw were shoebox-size, those are pretty darn easy to move and you can size them into whatever size you want them to be. In fact, they would come and they'd say, "Where do you have a spot on your system where I could put 10 megawatts?" If you have a spot on your system that has 10 megawatts of capability, then you can start generating revenue from something that isn't generating revenue today.
The issue that came up at the hearing that I thought was fascinating was the trade-off between crypto miners that are going to places that are served by coal plants and the vision that was articulated by some of the witnesses that crypto-mining could be used as a way to expand renewable resources. I would say that likely the biggest difference there is the question as to whether the crypto miners are willing to curtail their load in response to either market prices or the availability of a variable energy resource like a wind or a solar resource that they would be able to make that economic model work.
If I've invested a bunch of money in something and I want to produce a product and then I'm told that I can't operate my machines for a period of time, then that means I've got less revenue. It was argued at the hearing that crypto production could be a good match with solar. I have to admit that what was going through my head was, well, that means that you're not going to produce any crypto at night. How many hours can you go without crypto production before you'd say, "No, uncle, I can't do this anymore."
Teri: Exactly. We try to be really efficient with our electricity use. You got back to the point of it's still using a lot of electricity. I think that's an important point.
Steve: There are at least two issues that came up in the hearing that are relevant here. The first is the question as to coal plants that were planned to be shuttered that are apparently reopening due to co-location of cryptocurrency. There were four examples, New York, Pennsylvania, North Dakota, Montana that were discussed at the hearing and concern candidly from some about how does this fit with our goals for greenhouse gas emissions reduction. The point that probably got even more attention at the hearing was the efficiency component. I've been an energy efficiency advocate for most of my career.
One of the things that I tried to argue though is it's much more efficient to do energy efficiency at the time you're starting rather than to do a retrofit. I think that applies, in this case, to think about what is the pathway that we are going down, and is it better to find mechanisms to produce cryptocurrency that are the most efficient mechanisms. I do want to add though that I feel like I looked at-- It was like walking past a house with the drapes open and looking in the window from 2014 to 2018 and then walking away for three years and then walking back again and, you know what, the furniture is different inside house right now. The crypto industry is becoming more sophisticated; it's becoming bigger.
Some of them are becoming publicly traded companies. As publicly traded companies, they are having to deal with ESG requirements. Our experience was limited in time and I think it would be important to understand what folks are going to see today and what I saw at the hearing was a more mature industry beginning to think more carefully about their implications. Having said that, I would not say it is a fully mature industry yet. For example, I don't think that they have many people who really do understand electric power operations.
I walked away from that hearing thinking, boy, these are two industries that are likely going to end up needing to find ways to collaborate and there aren't very many bridges between them right now. It would be a really good thing to find ways to create some bridges between these two industries because we're talking different languages for the most part.
We know in the electric utility industry, it takes a depth of knowledge about markets and the very different kinds of products that are necessary, the characteristics that are necessary to maintain reliability and that's going to have to be communicated to the crypto industry and similarly, their needs and wants are going to have to be communicated back. I think there's a set of questions around impacts on communities that's bigger than just the electric utility impact. Those of us that are in the consumer-owned utility world, we have an obligation that is bigger than just making sure that the rates are low. There's this question as well about, what is it doing for the community?
Tamra: I think that's a great point. Steve, we really appreciated the conversation today. Anything else that you want to recap with us or anything that you wanted to finish off with?
Steve: I hope the message that I've left is that there is threat and opportunity in this. If a cryptocurrency miner can modulate their load and could do it a lot from the perspective of someone who's run a hydro system and a hydro system is a variable energy resource too whose output is defined by mother nature. 30, 40 years, we've been seeking loads that could modulate to match the output of hydropower system.
If there is a way to be able to do that and especially as we move to more variable energy resources operating on the system, that is a really unique opportunity that could help solve a whole bunch of problems. You have to start from the perspective of making sure I think that your community is protected while looking for the opportunities that could create value.
Teri: That's really helpful. Thanks so much, Steve, for being with us today, really appreciate your comments.
Steve: Thank you.
Tamra: Teri, I really enjoyed Steve's discussion. He made some great points that it really takes a depth of technical knowledge to understand how to maintain and reliably serve different types of load. This understanding needs to be communicated certainly to the crypto industry, but more broadly, to the industries that are going to experience this sort of profound growth from digitalization. In turn, this enterprise needs to communicate back their requirements, and in particular, is this new baseload, or do we indeed have some level of load flexibility?
Teri: I agree. Tamra, I know we wanted to have a deeper conversation about the operational risk, what Steve outlined in his discussion. Joining us for the final segment of our podcast is Elaine Johns, she's the CEO of EnerVision. Elaine has a terrific way to provide context around Steve's comments and provide our listeners with a great checklist or maybe a how-to guide for serving crypto mining load. Here's our discussion with Elaine.
Elaine, it seems like we've got an emergence of a new consumer class in the U.S. They are energy-intensive and they are basically rate shopping.
Elaine Johns: They are rate shopping and this is where we ask the utilities to sit back and say, is this what you really want to do? Do you really want to serve these loads? It is a strategic decision. In Texas, you've got great pricing and you have a very business-friendly environment. That's why they are centering in on Texas. They are also centering on different parts of the United States too and it's really looking for that flexibility that they want to be able to get low pricing.
A lot of these loads are coming in and saying, "We're going to be here 10 megawatts in two months, six months, or before the end of the year." In all practicality, can you really serve this load in six months? Can you really serve this load within the next year? What do you need to know to be able to serve those loads? Do you have the one single-blind diagram? Do you have the transmission in place? If you don't, how long is it going to take to build the infrastructure in all practicality?
While they have maybe picked locations and sites and utilities that they think they want to serve at, I think utilities need to sit back and say strategically, can we meet this schedule? We do want to serve this load if that's what you want, so you want to show that you are cooperating. Then the question is, this is what we can reasonably do, and then work from there. They need to understand your situation as well as you need to understand their situation.
Do you believe that someone's going to grow 50, 70 megawatts in two years, three years? Sure. I mean, if their business does well, they probably will grow, but the question is, will they? To keep that in the back of your mind is you want to make sure that they are legitimate business. That's probably the most important thing. That while they are with you, that they are paying for their share of the cost and any kind of infrastructure that you are required to put in to serve them.
Teri: I think this idea of know your customer, know your member has never been as important as it is today, but all of a sudden, we have this new emerging class, very energy-dense, whether it is a crypto miner, it is a data center. How does the lens begin to change in terms of understanding how our consumers, how our members may be changing, new membership that's coming into the area?
Elaine: It is a strategic decision if you want to serve these loads. It's almost like you are duplicating your organization internally that you've got to have a call person, a key accounts person--or persons --that know that customer and understand when they call, they expect immediate response. The other thing is that they understand we do have customers right now that can't afford dips in power quality. It's almost as if you need to have another branch of the co-op staff that is totally dedicated to these loads. It goes all the way into the county, your billing. If they have a question on the billing, you need to make sure your rate's right.
Tamra: It sounds like, in your mind, you've got this checklist that you think about or you walk through with clients when you talk about what it means to evaluate potential new loads.
Elaine: I would say the legitimacy of the company is probably the first thing that is on my checklist. With these crypto mining loads, in particular, there is a scare that they could just up and leave. I think we've heard that comment. They can just up and leave. Having them pay upfront for all the planning that you have to do, all the construction, all the procurement of your materials, have them pay and make that contribution in aid of construction as almost mandatory. Well, it is. It's mandatory.
If you think about it, if they pay for all this infrastructure for your system and they up and leave, it might be a beneficial upgrade for your system that they just paid for. The other thing about these loads that is different from any other industrial load is, they are not a jobs creation group. There's one crypto miner that we've been working with that is actually in an office, one single office in a Google building that is 20 floors.
Now, when it comes to interruptions and helping utilities not keep their capacity payments low. When you're in a wholesale power agreement that you have a capacity charge and an energy charge, and that capacity charge has a billing determinant of, say a coincident peak, maybe 12CP or 4CP, like in ERCOT, 4CP coincident peak and transmission is a big deal. If they're on your CP, then that means you get charged from your transmission service provider for this extra load being on the peak, and so you want them off. You need the ability to be able to send them signals to get off.
I think it's very, very important because-- let's just use an example. If a 100-megawatt crypto miner is sitting on co-op A’s 4CP to ERCOT, their transmission rate just went up, and it went up for the next year. It didn't just go up for one month, it went up for the next year, and therefore, the co-op is incurring that additional cost.
A lot of us have load management programs or BYOT programs where we're saying, "Hey, if you let us control your load and we decrease it a little bit or we're able to save some money from our capacity payment, we'll return some dollars to you." This is an extraordinarily large load management load to be offering that kind of stuff, but it's things like that that's really important, being able to interrupt and being able to get them off your peak. If they're on your peak, make them pay for it.
Teri: That's a great point. Elaine, it goes back to the fact of why you really need to be close to your member. You need to be very aligned. This is a rate-seeking entity, right? What you're talking about are some costs that are involved, and that has to be on the table upfront. Absolutely.
Elaine: That's correct.
Tamra: Elaine, thanks so much for joining us today to talk about this. More to come in this area. We really appreciate your knowledge and insight on crypto mining loads and what they mean for co-ops. Thank you.
Elaine: Thank you very much for having me. I've thoroughly enjoyed this.
Teri: Tamra, Elaine is so sharp and really grounded. I think she provided terrific framework for evaluating consumer risk from a co-op perspective.
Tamra: Elaine makes this point that the legitimacy of the enterprise and the company tops the list, and these are the same credit issues as a banker that I understand. It's at the heart of what we refer to as “know your customer.”
Teri: I hope our audience found this discussion helpful. For our next podcast, we're going to provide a preview of our NRECA conference content and tradeshow booth that will feature electric vehicles. We'll be catching up with the CEO of Pierce Pepin Cooperative Services and senior executive sponsor for CHARGE EV. That's a coalition of more than 50 electric cooperatives that are supporting member EV adoption through a series of programs and initiatives that will provide greater charging access across their regions.
Tamra: Thanks for joining. Please listen to our next Power Plays Podcast and join us in Nashville, March 7th through 9th as we stream our Power Plays program at NRECA's 2022 TechAdvantage Expo. See you then.
