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Glenn Hegar
Texas Comptroller of Public Accounts
Glenn Hegar
Texas Comptroller of Public Accounts
Glenn Hegar
Texas Comptroller of Public Accounts

economy


Translation:

Cryptocurrency in Texas Opportunities and Challenges in Mining Digital Coins

By David Green and Siddhartha Kazi Published August 2022

In 2008, the city of Rockdale lost about 80 percent of its workforce following the closure of the Alcoa steel plant. Today, the old Alcoa plant is occupied by Riot Blockchain’s Whinstone facility, believed to be the largest single Bitcoin mining operation in North America. As an industry that relies on high levels of electricity, the company was drawn to the facility due to its existing power infrastructure, including valuable high-voltage transmission lines and large substations.

The Whinstone operation has added 300 direct jobs and an additional 900 to 1,200 indirect jobs to the city. For the first time in the city’s history, sales tax revenues are on track to exceed $1 million this year, Rockdale City Manager Barbara Holly testified to the Texas Work Group on Block Chain Matters. (The Texas Work Group was created by the Texas Legislature in 2021 to develop a master plan for the expansion of the blockchain industry in the state and to recommend state investments related to blockchain technology.) She called Whinstone’s operation “an extremely positive economic impact.”

Notwithstanding the city’s recent good fortune, there are reasons to be cautious. Mining operations are tied to the price of bitcoin, a highly volatile digital currency asset that has suffered sharp losses in recent months. And mining’s energy requirements are substantial — by 2030, mines in Texas could demand as much energy as the city of Houston.

Despite the uncertainty, Bitcoin and its related blockchain technology have strong advocates in the state. The Texas Work Group is exploring the potential benefits of blockchain technology. And a few local areas are diving in — in April, Fort Worth became the first city government in the U.S. officially to mine bitcoin.

The Mining Process

Cryptocurrency is “mined” by computers solving a series of difficult mathematical problems needed for processing transactions. A “reward” in the form of cryptocurrency (e.g., bitcoin) is supplied to the machine that solves the problem first. Computers that can do more calculations per second have a higher chance of receiving a reward, and thus are favored by miners. The transaction is then added to the blockchain — a secure, perpetually generating ledger of transactions.

As more transactions are conducted, however, the mining difficulty increases and requires greater computing power. Today’s successful mining operations are essentially specialized data centers, filling entire warehouses with thousands of interconnected network servers.

Winning the rewards race and verifying transactions comes with substantial benefits for miners. Bitcoin prices rose sharply in 2021, closing above $61,000 on Nov. 1 (Exhibit 1), and trading as high as $68,790 later in the month. Although prices over the last several months have dropped significantly, mining remains profitable in some areas, largely depending on the input cost of electricity.

Exhibit 1: Monthly Price of Bitcoin, Jan. 2017-Aug. 2022

Bitcoin prices rose sharply in 2021, closing above $61,000 on Nov. 1, and trading as high as $68,790 later in the month.

Note: Monthly price data are equal to the prices on the first day of the month.
Sources: Yahoo! Finance; CoinMarketCap


An Appetite for Electricity

Bitcoin is only one type of cryptocurrency but serves as a useful example of the increase in mining. As bitcoin’s price has risen, so, too, has the mining activity to verify transactions and secure the lucrative rewards. According to Digiconomist, a web platform focused on digital currencies, the worldwide power demands of bitcoin mining nearly tripled in 2021, rising from an annualized rate of 78 terawatt-hours (TWh) of electricity to 204 TWh (Exhibit 2). Recently though, the power demands have fallen sharply, coinciding with declines in bitcoin prices.

Exhibit 2: Daily Bitcoin Energy Consumption, Feb. 10, 2017-July 9, 2022

Worldwide power demands of bitcoin mining nearly tripled in 2021, rising from an annualized rate of 78 terawatt-hours (TWh) of electricity to 204 TWh. Recently though, the power demands have fallen sharply, coinciding with declines in bitcoin prices.

Source: Digiconomist


In mid-July, the global electricity used in bitcoin mining equated to an annualized rate of about 132 TWh of electricity, comparable to the power consumption of Argentina. A single bitcoin transaction used nearly 1,452 kilowatt-hours (kWh) of electricity, equal to the power consumption of an average U.S. household for nearly 50 days.

Mining’s power demands — and its associated environmental effects — are one reason that China, which was the global leader in mining activity, imposed a ban on cryptocurrency mining in September 2021. The Chinese government also cited efforts to curb financial crimes and financial instability caused by cryptocurrencies. Perhaps the greatest concern to China, some experts contend, was that cryptocurrency could facilitate capital flight out of the country.

Whatever the reason for China’s ban, the moratorium opened the door for more activity in the U.S., with Texas being one of the most attractive destinations.

Texas Steps In

Cryptocurrency mining can operate from anywhere in the world. It is not bound by transportation networks or access to raw materials or a specialized workforce. What its data centers do require is a massive amount of electricity to cool and operate the mining machinery, and Texas provides an attractive draw for such needs.

In testimony to the Texas Work Group, Holly said miners care about three things: electricity rates, electricity availability and the speed at which massive amounts of electricity can be delivered.

Joshua Rhodes, a research associate at the Webber Energy Group at the University of Texas at Austin, says miners are drawn to Texas for its historically lower costs of electricity. “A big input to these mining operations is the cost of electricity, so the lower the electricity costs, the greater the profit.”

Perhaps an even greater competitive advantage, he says, is the state’s fast process to get mines connected to the electrical system.

Texas' Power Concerns

Cryptocurrency mining’s large appetite for energy is certainly a concern for Texas, especially in the wake of Winter Storm Uri and the state’s electric grid vulnerabilities. Experts believe that, per day, about 3,000 megawatts (MWs) of mining operations operate in Texas, or about 4 percent of peak demand (i.e., demand for electricity on its hottest days). The Electric Reliability Council of Texas (ERCOT) projects that mining operations could rise by 6,000 MWs in the next couple years and potentially increase to 17,000 MWs by 2030. By comparison, peak demand in Lubbock is 444 MWs and in Houston about 20,000 MWs.

This potential surge in power demand presents major challenges, says Rhodes. “The Texas grid has grown year over year, and supply and demand have grown in tandem with each other. With mining, we could see demand growing quite a bit faster than in the past, which presents challenges because we can only build power plants and transmission lines and substations so fast.”

Holly expressed similar concerns in her testimony to the Work Group. A modest-sized cryptocurrency mine uses about 200 MWs of power daily, which is equivalent to the downtown area of Dallas. Making Texas home to 10 similarly sized mines could effectively de-couple power demands from the state’s rapid population growth — a main driver of power supply — and could throw a wildcard into the balance between supply and demand.

It is hard to say how many mines are operating in the state, as there are no requirements to register operations, but according to the Texas Blockchain Council, there are at least 27 mining operations, with more on the way.

One such mine, Helios, located an hour east of Lubbock, plans to have 50,000 servers occupy a 1,050-foot-long structure by the end of the year. The site’s computing power is extraordinary, executing four quintillion (four billion billion) calculations every second, with plans to generate more than 1,000 bitcoins per year. Texas has about 10 large-scale mining operations like Helios, according to state and industry officials.

An Energy Partner?

Despite its heavy power needs, cryptocurrency mining offers a potentially beneficial and symbiotic relationship between power usage and power generation.

First, miners can participate in demand response programs, incentives offered by ERCOT to quickly turn off miners’ power during periods of peak demand. When electricity prices are high or supply is straining to meet demand, miners can reduce their energy use. Supply and demand run in tandem, so if a miner stops using electricity, it’s the equivalent of a power plant producing extra electricity that could assist in meeting grid demand and help with grid stability. Many large load operations already do this, such as petrochemical plants along the Gulf Coast. Between June and September of last year, for instance, Riot Blockchain shut down 72 times for up to four hours during periods of peak demand.

Second, simple economic theory suggests that increased mining activity could spur additional energy infrastructure. Mining facilities often are located near wind and solar farms that provide access to cheap electricity prices, such as in remote areas of West Texas. If mining operations increase in these areas, the price of electricity could rise, and those price increases could drive a greater supply of power plants to be built in that area.

Yet cryptocurrency mines are not like other entities that place big electrical demands on the grid, such as manufacturing facilities or industrial chemical plants, which can be expected to be around for decades. “The difference is that bitcoin mines can come in so fast and may be gone so fast depending on the price of bitcoin,” says Rhodes.

Cryptocurrency mining potentially could spur renewable generation if the mines were setting up contracts, but there isn’t much evidence that mines are entering into long-term contracts with electricity providers, says Rhodes. If miners are willing to be flexible, such as by participating in a controllable load resource program, then they could be a valuable asset to the grid.

There also has been some discussion about repurposing surplus gas for crypto mining, which according to research by Crusoe Energy Systems, one of the largest Bitcoin operations in the U.S., could significantly reduce emissions. In the meantime, to help stave off concerns about crypto mining operations taxing the state’s grid, ERCOT sent a memo to market participants in March notifying them about a new interim process that requires reliability studies to be submitted and approved before interconnecting large loads to the grid.

What's Next?

Texans certainly can use and invest in cryptocurrencies as individuals, and the state is a leader in the industry. But in her address to the Texas Work Group, Holly said if Texas wants to remain an industry leader, it will need to proactively work with the electricity industry to speed up the deployment of substations. She noted substations take 24 months to design, construct and activate, while cryptocurrency miners often ask to be operational within two to four months.

Additionally, she said Texas should renew sales tax exemptions on electricity used in data centers and that cities and counties should grant property tax abatements to the facilities.

Ultimately, however, mining at its core is a race to verify transactions in an extremely competitive industry, and what matters to miners is the price of electricity and how fast they can connect to the grid. FN

To learn more about the electrical grid and legislation passed by the 87th Legislature following Winter Storm Uri, see our special issue of Fiscal Notes.