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How Texas Bitcoin miners kept raking in profits during crypto’s crash: The grid is paying them to shut down

August 14, 2022, 12:00 PM UTC
Workers install a new row of Bitcoin mining machines at the Whinstone US Bitcoin mining facility in Rockdale, Texas, on October 9, 2021.
Mark Felix—AFP via Getty Images

Over the past few years, Bitcoin miners have flocked to Texas, enticed by cheap and readily available power. (You can read about how the state is becoming the Bitcoin mining capital here.) But this summer there’s been an even more profitable twist: the state grid is paying these miners not to mine when power is needed elsewhere—and it’s adding up to a very profitable diversification strategy for miners located there.

In interviews with Fortune, a leading expert on how the Texas power complex rewards Bitcoin miners explained that the producers benefit from no fewer than four different programs. He enriched our understanding by describing in detail how each of them operates. Gregg Dixon is CEO of Voltus, an energy software platform that works with many of the major Texas miners to ensure they get maximum bang from the ERCOT, the organization that manages the flow of electricity in Texas, and other incentives. Voltus offers software packages that pinpoint when it’s more profitable to mine, or instead shut down and sell your unused electricity, or clinch the other carrots that Texas provides. All of the plans fall under the general heading of “demand response.” “These are the essential ‘demand flexibility’ mechanisms, the methods by which the Bitcoin miners optimize their own energy economics and contribute to the health of the grid,” says Dixon. Without exception, the programs are voluntary. But as Dixon describes, the first two are so pivotal to maintaining adequate supply that the miners, to prove they’re good corporate citizens, are virtually obligated to sign on.

First on Dixon’s list: the ERCOT Responsive Reserve Services, or RRS. “It’s an instant response program where ERCOT tells the participants to lower their loads at certain times to ensure power quality,” says Dixon. “The electricity should be running at, say, 60 hertz and 120 volts. Deviations from that cause problems. RRS balances supply and demand to keep those metrics in the right range.” Under RRS, miners must commit to sending the required megawatts in 10 minutes or less from the time the power’s requested. He notes that traditional commercial and industrial customers also participate in the system. “Say lightning strikes and a big power plant goes down,” he says. “In an emergency, ERCOT calls on the reserves on the sidelines controlled by miners. The miners shut down and free up the megawatts that compensate for the power that went offline.”

For the miners, joining RRS is crucial to winning the good will of the communities where they’re seeking to settle. “Say a miner wants to build a data center in a fictional town called Utopia. The citizens argue, we have a system that provides us with reliable power. We have a certain amount of reserve today that provides a good cushion, that would satisfy an increase in demand. Suddenly, a big miner comes to town and wants to use all this power. The Utopia folks go to the town meeting and want to know, ‘Will this cause blackouts?'” says Dixon. He adds says that the residents and politicians will only approve the new facility if the data center will agree to curtail production and provide extra power at times of highest demand, especially when a brownout or blackout is looming. “If they don’t agree to practice curtailment at peak times, they’d be run out of town,” says Dixon. “That means assuring the community by signing on for demand response. It’s critical to being seen as good grid citizens.”

When ERCOT calls for supplies under RRS, it holds an auction. The miners and other participants offer megawatt hours for sale. ERCOT bids for those supplies, and pays the prices necessary to secure precisely the amount of electricity needed to meet the emergency. The more miners that participate, the more megawatt hours are offered, the lower the price ERCOT must pay. “In the auction process, the extra supply has driven the prices down,” Dixon explains. Still, he says that the miners are still well compensated for their willingness to curtail. The payments are made in cash directly to the miners.

The second program is called Emergency Response Services or ERS. It resembles RRS in that ERCOT once again taps the miners’ power when supplies get tight. The difference: Under ERS, when ERCOT demands additional power, the miners must provide it within 30 minutes, versus the 10 minute deadline for RRS. “If ERCOT blows through the RRS supply, they go to ERS as a backup,” says Dixon. He says that under both plans, the miners are an especially valuable addition because they can respond super-fast, while a big chunk of the users provide extra supply much more slowly––think amusement parks powering rollercoasters. He estimates that annual RRS payments and ERS combined, made in cash, come to around $100,000 per megawatt of capacity. For a 350mw data center, that’s a substantial $35 million. As we’ll see, the benefits from all the plans combined can cover a huge share of the miners’ energy costs.

The third tool is the Four Coincident Peak scheme, or 4CP. While RRS and ERS boost revenues, 4CP saves costs. “All the ERCOT customers get a separate line item for transmission costs on their utility bills,” says Dixon. They’re a big expense for the miners. But 4CP provides a mechanism to greatly reduce or even eliminate transmissions costs by deploying smart management. Like joining RRS and ERS, enlisting in 4CP gives miners a stronger standing in their communities by ensuring their send power back to the grid in shortage periods––this time, specifically in the summer, the period that so taxed the Texas grid this year.

The program applies to the four months from June through September, when Texas is at its most sweltering and cooling homes and offices can send megawatt consumption to blackout-threatening heights. But under 4CP, miners and other customers that shut down and devour no power at the absolute maximum peaks in demand, measured each month separately, get big reductions in their transmission charges. If a miner uses zero energy at the demand apex for all four months, they pay no transmissions charges at all the following year. The business users that keep running during the highest spikes shoulder more to fill the gap. “Our software predicts when those peaks will occur, and tells customers to curtail during those peaks,” says Dixon.

Of course, even the best technology can only gauge the probabilities, rather than forecast exactly, when the month’s highest demand will occur. So miners need to shut down during a number of maximum-use periods to ensure they hit the top tick that wins the big savings. For example, Riot in June closed for the equivalent of three days to secure savings under 4CP. Dixon estimates that 4CP is worth another $50,000 a year per megawatt of capacity to the miners. That’s an additional $18 million for a 350MW data center. Add the dollars from the two reserve programs, RRS and ERS to 4CP, and the total comes to $150,000 per year. In our 350 megawatt data center example, that’s a benefit of $53 million a year. That number could easily cover one-third the annual cost for a miner deploying energy at an estimated average cost of $50 per megawatt hour.

The final program is the one that just benefited Riot so richly

The fourth potential saver is “price response.” This is the lever that delivered Riot most of that relative king’s ransom in July. It’s the plan that allows the miners to sell electricity they don’t use when the rate is right, by channeling foregone electricity back to the grid. That practice is a form of electrical arbitrage. It can be extremely lucrative when the highly fluctuating spot or market rate jumps much higher per megawatt hour than the revenue the miners secure producing Bitcoin, for the same megawatt hour.

Dixon uses an example from the airlines to explain how “price response” operates. “We’ve all been in airports where a flight is overbooked and the airline has 103 passengers for 100 seats,” he says. “They offer $500 to the passengers, who maybe paid $150 for their ticket, to give up their seat and take another flight in 4 hours. But only two hands go up. Now, the airline has to offer $1000 to get enough people to not take the flight.” Similarly, at times of extremely short supply, the grid that furnishes electricity to homes and businesses are “overbooked.” Demand spikes so sharply that they’re not generating enough megawatts to keep amped-up AC units running and construction sites buzzing. Under the ERCOT system, the miners get rewarded for giving up their seats on the plane––by shutting down so that the juice they stop using gets redirected to the grid, boosting the supply and relieving the shortage.

But securing those marginal megawatts is super-costly. In this summer’s Texas heatwave, prices frequently rose to over $200MWh, and jumped as high as $5000, versus the normal average of below $20MWh for a full year. Those super-high rates are required to coax extra the electricity “grid passengers” to give up their make room on the “flight,” meaning reduce what they consume. One backup source: aging coal and natural gas facilities that are closed or operate at low capacity most of the time. Although their costs are high, they ramp production in tight markets to collect the big prices. Likewise, the miners get paid royally for freeing up those “seats,” for providing sorely needed flexibility to the grid. In price response, ERCOT pays the miners’ power providers the spot price for the power the standby power they transfer to the grid. The providers then compensate the miners by reducing their energy bills by the same dollar amounts.

The upheaval from winter storm Uri in February of 2021 shows how big the dollars can get in a severe disruption. As the storm froze windmills and shuttered nuclear plants, rates rose as high as $9,000mwh. By ordering shutdowns over just a few days, Whinstone––then owned by Northern Data of Germany––earned energy credits totaling $125.1 million. That’s number far exceeded its total power bill for that year.

A favorable contract empowers Riot to reap big money in power shortages like the ones this summer. But not all Texas miners have that option. Dixon points out that Bitcoin producers secure two main types of power agreements from retail electricity providers, or REPs, for running their data centers. Only one enables data centers to feast from shuttering in tight markets.

In many contracts, the miner’s REP purchases electricity on the wholesale market at the going rate. The provider resells the power to the customer at that spot price, plus a fee. Hence, those miners can’t exploit a spike in the market price; they’re already paying the same spot prices for their electricity, so there’s no profit in reselling the megawatts. In comparison, other miners have forged long-term, fixed rate “power purchase agreements.” Riot’s PPA with TXU is a notable example. Riot reportedly pays a set cost of less than $30 per megawatt hour, on a on contract that runs until 2030.

How did it get such a seemingly-sweet deal? According to analyst Pipes, the contract requires that Riot hand its power to TXU as many as six days a year at TXU’s choosing. On those days, TXU can resell to the grid, and it has a big incentive to pick the times when spot prices are highest. “But the other 359 days, Riot would choose to sell its electricity when the market price reaches the level where they make more money selling power than mining Bitcoin,” says Pipes.

Pipes calculates that at today’s Bitcoin price of $23,000, Riot generates higher revenues shutting down and selling power anytime the spot price exceeds $128 a megawatt hour. That breakeven number has declined big time along with the lead crypto’s price: When Bitcoin was fetching $30,000, Riot did better curtailing output only when the market rate per megawatt hour exceeded $300. In this super-hot Texas summer, the spot price has jumped “in the money” for many hundreds of hours. At the peak, it’s leapt as high last $5,000. And Riot’s PPA gives it the freedom to pounce anytime the the gap moves in its favor.

For Pipes, that flexibility is a major plus. “It opens a tremendous opportunity to make more money than they’d make mining Bitcoin at certain times,” he says. “Market power prices are not always higher than $128, but they are a lot of the time. If they fall below that level, Riot can go back to mining Bitcoin. It’s a major source of diversification. They are not just beholden to the Bitcoin price. They can arbitrate between that price and the price of electricity. Many other agreements don’t provide that right to resell.”

According to Dixon, who serves many of the big Texas miners, around half do have flexible contracts that allow miners to sell power back to the grid. Miners also get a tremendous boost from the other three programs, payments for holding power in reserve for emergencies, and reduced transmission costs for closing down when demand soars in the summer months. Once again, those programs alone can easily pay one-third of miner’s electricity costs. For a player like Riot with an ultra-low cost contract and the freedom to resell power when the spot price is right, the contribution can be half or higher. In its July report, Riot stated that its sales to the grid alone erased 100% of its electricity expenses for a month, not counting the benefits from their other three plans. No wonder the Lone Star state’s fast becoming the Bitcoin capital of the world. How can you beat paying some of the world’s lowest electricity costs when you burn the power, and make even more when you don’t––when you shut down to clean up, and win widespread praise as a model corporate neighbor sacrificing to ensure that Texas keeps the lights on and the AC chilling.

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