Why municipal electric utilities seek deals with cryptocurrency miners

What to do when your municipal electric utility is slammed by huge bills after the state electric grid failed to balance supply and demand?

Bring in a new power-hungry customer to help pay off those bills.

That’s what Denton, Texas, is doing.

Now, the money it realizes from having Core Scientific as a customer will pay the town’s $7 million in annual debt service it has from the $140 million in debt Denton issued to cover the cost of power when the price of electricity from Electric Reliability Council of Texas, ERCOT, soared to $9,000 per kilowatt hour, said Tony Puente, general manager of Denton Municipal Electric.

“We will get about $8 million net revenue from the utility that will offset that $7 million in debt service,” Puente said.

Denton signed the agreement with Core Scientific in October. The company, which uses its facilities and technology for both hosted mining and self-mining of digital assets, is expected to start operations in March.

“One of the advantages is that we had land available,” Puente said. “The land also happened to be next to a substation where we had additional capacity.”

The company agreed to pay for any and all system improvements and expansions and will deed those improvements to the city, Puente said.

“In the event this company decided to pick up and move elsewhere, we could have the site ready for another customer, another crypto operation or a traditional data operation,” Puente said.

Bitcoins and other cryptocurrencies do not exist as physical bills or coins. They are lines of computer code that are digitally signed each time they travel from one owner to the next.

Records are kept through virtual encrypted ledgers known as blockchain, which demand massive amounts of computing power, and therefore electricity.

Given how Texas power prices soared in the wake of Winter Storm Uri, Texas might not seem an obvious fit for cryptocurrency mining.

But outside of Uri, Texas typically offers low power rates, light regulations and state officials eager to welcome them.

Gov Greg Abbott’s appeal to Texans is that the demand generated by the cryptocurrency miners will result in construction of more power plants needed to bolster the grid.

Cryptocurrency miners, unlike other power customers, can also power down rapidly if there is too much demand, which takes pressure off the system, said Kathy Masterson, a Fitch Ratings analyst.

Fitch said in a Jan. 24 report that cryptocurrency mining could pose power supply risks in states like Washington and Texas.

But analysts wrote that the public power utilities they rate have “successfully limited their risk by restricting the scope of crypto mining operations in their service area or by defining their power procurement commitments in a way that protects the utility from nonpayment, including due to a sudden closure of the mining facility.”

The industry has been a boon as well as a challenge for eastern Washington where utilities had unused generating capacity after energy-intensive aluminum smelting operations closed.

That, coupled with abundant low-cost hydroelectric generation, made the region an attractive location for data centers historically and cryptocurrency mining operations in recent years, Fitch analysts wrote.

Power providers in Washington State, particularly in the adjoining Chelan, Grant and Douglas counties, have experienced the utility pressures from Bitcoin mining since the nascent days in 2012.

Eastern Washington also experienced a cryptocurrency mining boom in 2018 when Bitcoin prices soared, pushing a number of towns and counties to put moratoriums on new operations.

The moratorium gave the region time to implement systems, similar to agreements struck recently in Texas, that protect the utilities from risk.

“We lifted the moratorium in 2019,” said Andy Wendell, director of customer service for Chelan Public Utility District. “At the same time, we adopted a rate schedule for high density loads.”

Cryptocurrency mining has its own rate schedule in Chelan, because its power usage has enough unique characteristics to have its own category, Wendell said. There is also an upfront capital charge, he said.

Prior to cryptocurrency mining, the system’s demand was growing from 1% to 1.5% a year, Wendell said. That increased exponentially when crypto miners entered the region, he said.

“We had to work out a way to serve the crypto miners, but not have them eat up all of the capacity designed for our traditional customers,” he said. “The upfront capital charge based on kilowatt usage gives us the capital funding we needed to build the infrastructure to accommodate the new demand.”

Given the volatility in the cryptocurrency industry, Wendell said they also wanted to make sure that if those businesses left town, the utility’s other customers would not end up footing the bill.

Core Scientific will double Denton’s power load, but Fitch’s Masterson said city leaders have structured an agreement that protects it from risk.

“They have a specific rate for the crypto mining company,” Masterson said. “They are paying a rate that will move with the market rates charged by ERCOT.”

They also shortened up the billing cycle, she said. Unlike the 30-day billing cycle residential customers have, cryptocurrency mining companies are being charged on a daily or weekly basis.

Over the past decade, cryptocurrency mining has morphed from individuals working out of a garage or their apartment to have their computers solve the complex math problems that put cryptocurrency units on the blockchain to national and international companies working out of data centers with networked super computer systems.

Instead of power utilities learning they had a crypto miner in their region drawing power when demand spiked, as frequently happened in the early days, some crypto mining companies are now approaching cities and power utilities to work out mutually beneficial agreements.