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December 14, 2021

The cryptic beginnings of a midstream power market

In areas with limitless renewable energy, power companies are digging up gold by mining for cryptocurrency.

By Matt Farmer

What is power, incarnate? If energy had a physical form, beyond the particles and fields that push and fuse chemicals in a cell, what would it look like? If power generation grew to develop a “midstream” sector, processing the electricity it makes into new products to be bought and sold on gleaming markets of the future, what would that essential product be?

You probably already know about cryptocurrency for its avid “get-rich-quick” fanbase and supposed possibilities, almost all of which remain unrealised. Still, amateur investors want it, criminals have it, and newsrooms want to write about it.

Despite the headlines, the details of cryptocurrency remain confusing to many and irrelevant to power producers. All an energy company needs to know is that when power goes into the right infrastructure, a saleable product comes out.

This idea of cryptocurrency “mining” has opened the door to a midstream power market never seen before. Just as oil companies refine their crude produce into a diversified portfolio of products, now power companies can refine energy into a variety of virtual currencies.

These have their own market forces with sharp highs and lows, mirroring the peaks and troughs of a transmission grid. Even so, diversifying into another market could allow a wise business to insulate themselves from fluctuations in the power market. Has a sunny day caused an unexpected rush of solar power, pushing the grid off balance? Fire up the computers and let on-demand cryptocurrency mining balance increasingly volatile transmission systems.

The cyber gold rush

So far, the cryptocurrency conversation has focused on mining currency for its own sake. Its die-hard fans line up behind the technology , with few tolerating anything less than total commitment to cryptocurrency moneymaking. The rabid arms race for greater processing power has led to parts shortages, massive power draws, and legal ramifications.

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The growing understanding of cryptocurrency has led lawmakers to fear it. Restrictions on cryptocurrency-related activities prevent development in Russia, India, and Turkey. The biggest move so far came with China’s blanket ban earlier this year. This change effectively moved gigawatt-hours of energy demand out of the country. A new wave of bitcoin prospectors emerged, with mobile miners search the globe for rich seams of cheap electricity.

Iceland offers a perfect package for bitcoin miners. The country’s prolific geothermal and hydroelectric generation gives reliably cheap power for miners to build crypto farms. An often-chilly climate also helps keep these farms cool, further minimising costs.

The country lies at the centre of a silent crypto-gold rush. Farmers cut deals with technologists to turn excess energy from private geothermal boreholes into digital currency. Cryptocurrency mining operations in Iceland consume more electricity than all of the nation’s homes, according to local geothermal power company HS Orka.

HS Orka geothermal plant, Reyksjanes peninsula, Iceland.

In areas with abundant renewable power, cryptocurrency offers a method to convert excess energy to profit. Credit: HS Orka/Oddgeir Karlsson.

While HS Orka has recently reached agreements with land-based fish farms and green hydrogen/methanol producers to take its excess power, the local cryptocurrency industry continues to flourish on its own. In a nation with excess renewable power, cryptocurrency can establish itself. Beyond the shores of Iceland, other wells of excess power have started to grow a cryptocurrency market.

“We do not intend to carry the risk of bitcoin prices on our power system”

In the US state of Washington, the Chelan district has found itself surrounded by the rising waters of crypto. On one side, a stream of cheap hydroelectric power provided by the Columbia River benefits the town. On the other, the technology hub of Seattle leaks its pool of IT knowledge into areas of the state without the infrastructure to handle it.

Between October 2017 and February 2018, the Chelan County Public Utility District received inquiries concerning four cryptocurrency farms that would each draw more than 100MW.

These enquiries represented only the commercial mining operations aiming to work with state utilities in minimising the negative effects on the transmission system. At the same time, hobbyist mining continues to mean large power draws with little oversight. In places, these large power draws threatened to overwhelm power infrastructure.

The utility drafted new rules to regulate crypto’s effects on the system, drawing significant attention. General manager Steve Wright told the Wall Street Journal in 2018: “We’re getting requests for service that are just astounding. We do not intend to carry the risk of bitcoin prices on our system.”

But after the rules passed, this is what the system did. Implementing hefty fines for private and commercial miners allowed the utility to keep them on the system and within tolerable limits. Meanwhile, a consultation process aimed to keep mining operations economical and retain a fair deal for industrial users.

More recently, the cryptocurrency rush has slowed. The utility says that while it continues to receive inquiries over the regulation process, it received no formal applications to start crypto farming in January to November 2021. This mirrors changes within the cryptocurrency space where smaller miners found themselves outpaced by larger operations with greater efficiency.

Integrating cryptocurrency mining with utility-scale power generation

While low-cost generation and periodic generation can enable lucrative cryptocurrency mining, the reverse can also be true. Despite the intense sunshine and low cost of land, desert projects rarely have the demand required for lucrative development. Now, shipping container-sized cryptocurrency mining farms can provide demand for otherwise unviable projects.

In the sunny scrubland of California, US, start-up company Intelligent Mining has begun development on a five-acre solar farm for its crypto operations. The operator of the local transmission grid takes power supplied by the company and supplements its fee- in tariff by supplying energy at night. This allows the company to run its computers to run around the clock, farming cryptocurrencies.

The company plans to build its first large-scale farm in Arkansas to avoid the heat issues and maintenance costs that trouble desert development. CEO Daniel Elimelech says: “We have farmers and landowners contacting us, wanting to implement crypto systems in their solar farms. The power we generate is worth $0.02 to $0.03 per hour. With a cryptocurrency farm, this becomes $5 to $14 per hour in bitcoin.”

Promotional videos remark that the project’s regulation will make it “one of the only companies in the blockchain that will be 100% legitimate”. In blockchain-friendly US states, this means opening the doors to money laundering regulation officers.

Cryptocurrencies rely on a shared record of digital transactions, known as a blockchain. While this is inherently public and transparent, the mostly anonymous nature of its users makes it a potential tool for money launderers. Few mining operations work entirely above board, with many preferring to stay outside of regulation and oversight. While not transparent, these schemes break no laws, unlike some of their competition.

Crypto regulation for a future generation

Elimelech finds the criminals “annoying”, but not a significant threat to legitimate operations. He continues: “It’s not as easy as it was, let’s say, two years ago. There were so many scams, so I can understand why regulation improved. But if you’re really going to solve a problem, then you shouldn’t have a problem [with regulation].

Daniel Elimelech

Solar-mining CEO Daniel Elimelech on site. Credit: Intelligent Mining.

“The reason we went through with it is because I believe the public need an observer to give them more confidence. As humans, we make mistakes and we’re designed to learn from them. Having regulation allows flexibility, meaning you’re not stuck in a certain way of doing things. It allows people to observe the larger scale of things, and maybe change certain things to allow for new ideas.

“Regulation isn’t about today, it’s generational. Investors can make a lot money now without regulation, but 100 generations from now, how are we going to deliver a [cryptocurrency] system that can grow itself? There’s always going to be a mother and father company.”

Intelligent Mining operates a buy-in system, where token-holders receive a say in how the company’s computing power is used as well as a share of profits. A local solar installer contributed to development of the site’s power infrastructure, receiving several tokens in return. Anyone can invest in these tokens, keeping the system open.

This approach has allowed the enterprise to tackle the risks of setting up infrastructure and regulation, as well as gaining the trust of consumers.

Should a midstream power market come at the expense of pollution?

Many articles and papers have highlighted the massive total power consumption for something often seen as a hobby. Given the urgent need to shut down polluting power operations, the massive power consumption of the international cryptocurrency community has likely increased demand on fossil-fuelled power plants and made the energy transition more precarious.

Earlier this month, US power company Greenidge Generation attracted criticism for its cryptocurrency operations in the state of New York. The company operates a gas-fired power station in Dresden that converted from coal in 2017, despite the apparent lack of local demand. To prevent this from becoming a stranded asset, the company created demand by installing a cryptocurrency farm in 2020.

This invoked legal challenges, refreshed by the recent announcement of a planned expansion. The plant produced 220,000 tons of carbon dioxide in 2020, 10 times more than the year before, and a planned expansion would increase this further. Congresspeople have spoken up, asking: should cryptocurrency come at the direct expense of pollution?

For companies like Elimelech’s, this is a question with no need to answer. “I think cryptocurrency is giving a massive, massive push to the green energy sector,” he tells us. “Once people will be more aware of the profit in green cryptocurrency, the world will become extremely green.”

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