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The Dynamics of Bitcoin Mining and Energy Consumption, Part IV: Utility Strategies

Jul 26, 2018

This blog is the final part of a four-part series.

Over the past months, I have taken a systems-level view of proof of work (POW) and digital currency mining (DCM): why its energy consumption is a problem, the economics of mining, and how those economics—together with regulatory and technology evolution—paint a bleak picture of DCM’s future.

The stage is set for the million-dollar question: if utilities must deal with roughly 92 TWh of annual energy consumption from DCM now but long-term deals with the industry aren’t sustainable, what can be done?

Discouraging Mining Could Have Unintended Consequences

Bans and restrictions are an experiment playing out in Washington, New York, and other states in the US. Utilities and utility commissions have two main options at their disposal: create premium tariffs for DCM (which can discourage miners from establishing or help offset rate spikes) or advocate for regulatory changes that restrict or ban mining activities directly.

The downside of this approach is that it might force miners underground, where their activities are harder to detect or regulate. Unlike most industrial-scale customers, DCM companies can disaggregate their loads. A DCM facility might be 40 MW in total, and it is convenient for mining companies to keep all that hardware under one roof, but they could just as easily divide their machines into 10 separate 4 MW facilities, or hundreds of kilowatt-scale facilities that could be set up in residential areas.

This trend has created public health concerns in some territories, as stacks of DCM hardware are piled in basements or old apartments not designed to handle high electricity loads and concentrated waste heat. Utilities will benefit from keeping an eye on customer meters, watching for unexpectedly high loads or unusual load curves that could indicate unsafe DCM. In the absence of broader regulations, the public safety argument may be utilities’ best bet for taking action.

Utilities Must Minimize and Shift Risk

Utilities absolutely should not be building new capacity to power DCM. DCM will be transient, and utilities risk being left with stranded assets as miners go out of business or relocate. However, some utilities are asking DCM companies to front the cash for new generation infrastructure, which shifts risk from the utility to the company. An arrangement like this could allow utilities to benefit from DCM in the short term, but long-term contracts should be out of the question.

A second option is to restrict DCM to regions where surplus electricity is available, or where curtailment is necessary (where increased power consumption benefits the grid). Doing so may prevent rate spikes for customers, but feeding electricity to DCM facilities rather than exporting it at a premium still comes with a cost. It is difficult to calculate a tariff that would reliably make the difference; the value of electricity fluctuates, and the value of digital currencies (which translate to DCM revenue) fluctuates even more.

Tread Carefully

It’s not impossible for utilities and DCM companies to reach win/win outcomes, but it is perilous. Utilities need to think long term and structure deals accordingly. The 20-30-year operational timescales for utilities do not mesh well with the hour-to-hour volatility of the DCM industry. China, once a stronghold of DCM, first encouraged mining by offering low electricity rates in exchange for profit sharing. Now China is doing its best to kick miners out—which suggests lessons learned.

Oh, and one more piece of advice for utilities: don’t let miners pay you in Bitcoin.