Catalyst with Shayle Kann - The great Bitcoin energy debate

Episode Date: May 11, 2023

Depending on who you talk to, Bitcoin mines are either great for the grid or the worst thing that’s ever happened to it. These warehouses of computers essentially turn electricity into bitcoins. Proponents argue that mines can do a number of things for the grid, like: Support grid reliability by reducing demand during peak hours Incentivize new renewable generation by raising the prices that solar and wind farms receive Reduce methane emissions by capturing flare gas from fossil fuel wells and then using that gas to generate electricity for mine operations Meanwhile, opponents argue that the mines raise emissions and electricity prices. So how do we make sense of the great Bitcoin energy debate? In this episode, Shayle talks to Ben Hertz-Shargel, global head of grid edge at Wood Mackenzie. The New York Times recently reported on the role of Bitcoin mining on the grid, and Ben was part of a team that contributed to the report. Shayle and Ben discuss:  How Bitcoin mines affect electricity prices for nearby consumers Whether mines use only excess renewable generation or incentivize fossil-fuel generators to ramp up What mines’ load profiles say about their flexibility and price-sensitivity, especially during peak demand The evidence on whether mines are signing long-term power purchase agreements, repowering mothballed projects or otherwise helping to incentivize new renewables construction Alternative crypto currencies that don’t require so much electricity Recommended Resources: NYT: The Real-World Costs of the Digital Race for Bitcoin Earth Justice and The Sierra Club: The Energy Bomb: How Proof-of-Work Cryptocurrency Mining Worsens the Climate Crisis and Harms Communities Now Coinspeaker: Texas Senate Passes Bill to Limit Incentives for Crypto Miners Participating in Demand Response Programs Catalyst is a co-production of Post Script Media and Canary Media. Support for Catalyst comes from Climate Positive, a podcast by HASI, that features candid conversations with the leaders, innovators, and changemakers who are at the forefront of the transition to a sustainable economy. Listen and subscribe wherever you get your podcasts. Catalyst is supported by Scale Microgrids, the distributed energy company dedicated to transforming the way modern energy infrastructure is designed, constructed, and financed. Distributed generation can be complex. Scale makes it easy. Learn more: scalemicrogrids.com.

from the studios of PostScript Media and Canary Media. I'm Shale Khan, and this is Catalyst. Crediting minors for demand response is like saying smoking is good for your health. Smoking a pack a day is good for your health because you are able to refrain from smoking on special occasions when asked. So obviously, if I'm smoking a pack a day and I'm able in a family reunion not to smoke, that doesn't mean that smoking was good for my health to begin with. It just means in these very brief moments when I'm choosing based on someone else's request not to smoke,

I'm not kind of doing my body harm. Hey, look, on the grid, it's a battery. It's the world's most flexible load. It's a power-sucking vampire squid. It's Bitcoin mining. When utilities need flexible capacity they can count on, they turn to Energy Hub. Energy Hub works with more than 170 utilities,

coordinating over 2.5 million devices to manage 3.4 gigawatts of flexibility, built for the moments when utilities can't afford uncertainty. Energy Hub builds and operates virtual power plants that utilities actually stake their grid planning on, coordinating EVs, batteries, thermostats, and more through a single platform built for utility scale. Predictive, verifiable, and designed to perform when it counts. Learn more at energy hub.com. Trillions of dollars are flowing into clean and critical infrastructure, but those investments aren't driven by technology alone. They're shaped

by markets, by policy, by capital, and by the institutions that connect them. I'm Alfred Johnson, CEO of Crux, and host of a brand new podcast, Critical Capital. Each episode, I talk with people deploying capital, shaping policy and building the clean economy. Tune in as we unpack how progress is actually made. Listen to Critical Capital on Spotify, Apple, or wherever you get your podcasts. I'm Shail Khan. I invest in revolutionary climate technologies at energy impact partners. Welcome. Okay, so the debate over Bitcoin and Amazon.

energy is not new. It's basically been a thing since Bitcoin began because at the most basic level, Bitcoin mines convert compute, which is basically electricity into Bitcoin. That's pretty much it. So the economics and the future of Bitcoin are inextricably linked to power. And as everything with both crypto world and energy world, it's hotly debated. You want evidence that Bitcoin mining can relieve grid stress? Well, look at all the mines in Texas that are participating in demand response events. You want evidence that it's needlessly sucking up huge and growing amounts of power? Well, look at the amount of power that it consumes. But amidst all the noise, I've been curious to go a level deeper. How do Bitcoin mines actually behave on the grid

today and what drives that behavior? What determines their emissions impact? And stepping back, is it really a big deal in the first place? So let's huddle our way through it. For this one, I brought on Ben Hertz Chargel, who's the head of grid edge at Wood McKenzie, and recently participated in, I think, a really good and thorough analysis of this question that was published in the New York Times. So let's dig in. Ben, welcome to Catalyst. Thanks for having me.

Let's talk about Bitcoin and electricity. And I don't want to start by defining Bitcoin or Bitcoin mines or anything like that. I think we can safely assume everybody knows what Bitcoin is and the fact that Bitcoin mines are basically data centers that use a bunch of money. to energy. But let's talk about how big Bitcoin is as a consumer of energy today and sort of where geographically that is taking place. So where are we today in the world of Bitcoin mines and the grid? Yeah, sure. So right now, total capacity is around 3.9 gigawatts. And that is the finding of this New York Times study that I'm sure we'll be talking about a little bit later.

mines themselves, well, in terms of geography, they are scattered across the country. Yeah, I should say 3.9 gigawatts in the U.S. In the U.S., correct. So there's a kind of a clustering, I would say, in the northeast from Ohio to New York. It's a cluster in the southeast, around Tennessee, and the Carolinas and Georgia. It's much more scattered across the Midwest and the Mountain West, but then there's a lot in Texas. So 3.9 gigawatts, I mean, let's contextualize. is that for a second. That's a big number. It's measured in gigawatts. But I mean, as compared to,

for example, broader data center world, still pretty small in the U.S. Do you think of that as being like a meaningful number in the context of overall electricity dynamics in the U.S.? I mean, it is. If you think of kind of the scale of, you know, the size of, let's say, the competitive markets like Urquat and PJM, I mean, no, PJM is a large market. But in Ercot, you know, several gigawatts, which is around what we think, around two, is, you know, a pretty sizable chunk of if Ercot is on the order of 70, that's something. So it partly has to do with where it's located and can have an, like, an outsized impact in one region. And, you know, the mines themselves are pretty broad in terms of the range of capacity.

They go down to around 10 megawatts, and then up to 450, which is the largest. And, you know, you can compare that. You can compare it to the overall grid or to data centers. which is one way of doing it, you can also compare it to homes. And if you, you know, a reasonable baseline of a home is around one and a half KW.

So, you know, they range roughly from 10,000 homes to several hundred thousand homes in load. And so you mentioned the regions. I know there's a big cluster in Texas and Urquat, which we'll probably talk more about. Interesting that there's a cluster in the northeast because my sort of incoming assumption here

is basically Bitcoin mines chase cheap electricity, sort of high level. And the Northeast in the US is not where I think of as having the cheapest electricity. So do we have an understanding of sort of why they are where they are? Yeah, I mean, I think you're right that they do chase cheap electricity, but they also chase defunct oil and gas plants because those can be sort of rehydrated and turned on and used directly for mining. And so that has happened a lot, especially in New York, of these sort of mothballed plants that are able to be turned on and run pretty much exclusively for Bitcoin mining. So that's part of the reason they started there, although states like New York have now, you know, through regulations and various kinds of policy, tried to prevent that from

happening. That's interesting. So it's an interconnection-driven siting decision there. Basically, the reason you would want to turn back on a defunct existing site is predominantly that the grid infrastructure is ready for you to put something on the grid. that, I mean, it's doing the opposite, right? You're saying it was generation, now it's load, but at least the infrastructure is there? Yeah, that's right, because the infrastructure is a really key part. It's, you know, it also not only is it costly to set up this kind of T&D infrastructure to support a massive energy consumer like a mine, but it also takes time to do it. You need to get permitted. So if you have everything kind of already set up, then it's a sort of an easy win for

them to do it. And if you have a sort of very dependable generation source where you kind of know the cost, you know, you have this arbitrage that the miners have of, you know, knowing roughly what Bitcoin is going to be. And if you know what your supply is, you can say, this is going to pencil really nicely. I want to sit right here, kind of run my own generation, and know that I'm going to make money a vast majority at the time. Okay, so that gets to the next question, which is, and we'll talk more about this, but just high level, in terms of the load profile of Bitcoin mines, what have we seen so far? Are they, to your point, basically, they're just arbitrageing electricity price versus Bitcoin.

price, are they enough in the money at all times that basically they're just behaving like 24-7 load for the most part? We'll talk more about their participation in demand response and stuff like that, but just like in a baseline scenario, are they baseload load? They're close to it, but they're not, it's not 24-7. What I have seen surveying a number of minds is they're kind of, they're online roughly in the high 70s and percentage, you know, say 78% of the time all the way up to the high 90s. So, majority of the time they are consuming, but it's not quite as regular as that, like you are kind of flat, you know, demand for a long period of time and then maybe you're off for 10 hours. It is very

spiky. So if you kind of follow these load curves, they're kind of on for a while, then they drop off precipitously, maybe off for an hour or like, or a few minutes and go pop right back on. And so you have this very irregular shape. But they are, the bottom line is that they are on a vast majority of the time, and some miners, really almost all the time. That's super interesting. And is there a direct correlation between the price of electricity and their spiky load profile? Like, is it clear from the data that when electricity prices spike, Bitcoin mines turn off and then they turn right back on when prices come down? Or is it more complicated than that? So I haven't really, I haven't done that analysis. I haven't sort of aligned it with the price of Bitcoin and to get that dynamic. I, you know, honestly, I a little bit scratched my head looking at some of these load curves because I don't really.

believe there could be rhyme or reason. The price movements don't move intra-hour in this way that would kind of explain the sort of the craziness of it. So I think there's probably a lot of factors going on. Some of them are probably, you know, you don't want to ascribe strategy when it's just, you know, could just be O&M-style stuff going on or some other sort of issue that's not really intentional. But one thing to highlight is that some of the power purchase agreements that miners have secured require a high load factor, meaning, you know, you need a high, average power relative to your max power, which basically requires you to be on most of the time. And so I've seen one contract that requires above 85%. So in some cases, the energy supplier

is requiring them as a term in the contract to be mostly on. That's really interesting. All right. So we're going to come back to this. I think the sort of core questions that we want to interrogate are around this debate regarding the relationship between Bitcoin mining and both electricity, meaning the market, the prices and so on, and also emissions as a result of that. So let's contextualize a little bit on this New York Times study that you just mentioned. Tell me a little bit about what the study entailed and the sort of core of the analysis. Then we'll talk about what we actually found. Sure. So the study was done by a guy named Gabe Dance, who I came to know over many months leading up to the publication. And what he did,

basically, it's been a lot of time doing a careful survey of minds in the U.S., you know, everything about where they are, how much they're consuming, you know, all the public. policies involved, the contracting. And then he worked with a couple companies, my company, Wood McKenzie, but also Watt Time, to do some specific studies. He kind of provided data that he had delivered, and we ran certain calculations to inform sort of the price impact of Bitcoin mining and also the emissions impact. And he also dug into things like demand response and how miners make money, how they've acted in certain, you know, kind of grid sensitive times like the winter storm ori in Texas.

So that was kind of the nature of the study. All right. So I want to get to all those findings. And I want to talk about what the, in this ongoing ever and never ending debate about, is Bitcoin good for the world, bad for the world from an omission's perspective. I want to get to sort of the claims and see if we can evaluate them individually. But first, I do want to get into the weeds a little bit because one of the things you always find when you're, when people are having this discussion, at least I find. is that it lacks a little bit of nuance and a little bit of the detail around like the methodology,

the importance of the methodology that you use to figure out what impact Bitcoin mining load has on electricity. And the details of that methodology drive different outcomes. So let's talk a little bit about that. For example, how do we think about the relationship between both Bitcoin mines and electricity pricing? and also how we think about emissions impact and sort of the different ways to calculate that. Okay, we can kind of, I guess, take those in two parts. So on the power price part,

it certainly depends on what kind of market you're in. If you're in a sort of vertical utility market, there's one world. The one that I focused on in this study that Wood McKenzie did for this study was in Erkot, which is an organized power market. So as most people are aware, ERCOT is a central clearing market.

And so basically, ERCOT is stacking up all the generation offers and then looking what load is. And then they basically dispatch least cost generation to match whatever demand is. And they need to do that subject to physical grid constraints and just the realities of the grid. So it's not literally a just pure kind of economic exercise. And so broadly speaking, so the methodology leverages what we have. have in Wood-McKennsey in-house, our market intelligence team works with traders and asset

owners across markets in the U.S., in particular in Urquot, to every morning, to, we have detailed grid models that incorporate the topology of the grid, what congestion looks like, what are all the assets and how they are dispatched, and so using that and kind of load forecasts, weather forecasts and a set of proprietary grid sensors for kind of real-time congestion are, you know, running sort of scenarios and simulations of how clearing will happen on the grid and therefore how an asset owner or trader should operate. And so what we did in this case was we took that same model that we do in real-time for kind of real-time commercial purposes and did some one-if scenarios. So you can kind of have a base case of what actually happened on a certain day.

and then you can say, what if this amount of Bitcoin load was not present in these locations on the grid? And then you can rerun the simulation to see what is the impact on prices. And what happens is, in general, prices decrease as you remove this load because you're kind of walking down the supply curve. In some cases, in very specific instances, prices go up. And there's some interesting kind of findings there, which I think we're still kind of working through. but there's certainly kind of congestion-related phenomena and which asset is dispatched. Maybe you dispatch an asset in a different zone of a recat based on low dynamics that can cause prices actually to go up.

But generally speaking, they go down a considerable amount. And so we look at that, we look at that price delta. You do that across seasons, and you get an overall price impact throughout the year. And then just so that that is the kind of the wholesale price impact of my. in a market like ERCOT, you then say, well, what is the impact of customers, which is ultimately what was reported in the article. And to do that, you need to carry it forward and say, you know, retail electricity providers or reps in ERCOT, who are the ones who serve customers, they, you know, they don't buy all their energy in the real-time market. They buy it in forward markets where they're,

you know, buying contracts for power. And contracts for power are essentially expectations of future real-time prices. Because if they weren't, there would be an arbitrage opportunity to sort of buy a contract and sell in the real-time market in the future or vice versa. And so, you know, by basically a Bitcoin mine existing on the grid, raising prices and signaling to the market that it's going to be there in the long term, it will raise the expectation of forward prices. That raises the cost of reps to, you know, serve their customers by by hedging their load. And then that price is passed on to customers.

And it's different for commercial and industrial customers who generally face fairly small margins on energy and margins that are generally not sensitive to what power prices are. Maybe if you're a medium-sized commercial customer, you pay five bucks extra per megawatt hour. If you're an industrial customer, you may pay pennies more. Whereas retail customers pay much larger margin in Texas, and that margin, in fact, does grow.

row with the price of electricity. So the impact that miners have on real-time price is magnified for these kind of residential customers and small commercial. So they face an even larger additional cost. Can we just put a number, rough number on that? Like how big an impact have we seen thus far on retail electricity customers in Texas as a result of Bitcoin mines? So collectively, it's $1.8 billion conservatively per year. And that's sort of a run rate, I would say. And that represents around a 5% increase in costs of Texans, of non-Bitcoin mining consumers.

And that's across all the different subsets. It's not just retail, but that's retail and commercial and industrial. Okay, so that's the first big question. What is the impact on prices and on consumers? And that's meaningful, particularly for retail consumers. Let's talk about the other side, which is the emissions side, effect on emissions. So talk a little bit about the sort of methodological question there, and then similarly kind of high-level conclusions. Sure.

So methodology-wise, there's a couple ways of doing it. You can look at kind of short-term impacts, long-term impacts. Short-term impacts, there are two major camps, I would say. One is focuses on average emissions. The other is marginal emissions. And there's a lot of contention, I would say, in terms of which is correct, although the vast, majority of experts believe that, well, let me back up. Which type of methodology you use for emissions depends on the question that you are asking. If it's just about, like, we have a given

market today, these are the emissions on the grid. You know, what is your share as a person or as a business? Average emission says, we're just going to divvy up all those emissions by load share. So what is your share of the load of the system? And we're going to assign you that much. And that makes sense for that question. But when you are doing a kind of intervention, you're considering an intervention like, what if I were to change something? What if we were to remove Bitcoin as a load on the system? Then you want to think about marginal emissions, which is to say, let's look at all the emissions that happened today in the base case. Let's do our scenario of Bitcoin were to not be there. What are the emissions then? And you ascribe that delta to your change, within this case,

would be removing Bitcoin. And the way that you can do it in particular is to say that Bitcoin adds load to the system. That load is dispatched kind of by, you know, the way it works is by higher cost and generally speaking higher emissions resources. And so those, that incremental dispatch that ERCOT is forced to do can be ascribed to Bitcoin mining. Because if mine errors were to go away, you would no longer be doing that. And so Watt Time, that is the general methodology that they use. They found that 85% of incremental load from Bitcoin mining comes from coal and natural gas plants. Which is interesting because if you just, well, I guess high level, most new generation is not coal and natural gas.

Right. But this is not new generation that is getting built, generally speaking. I guess is what they're finding. It's just ramping up. existing generators, which tends to be coal and natural gas. Is that basically the logic? That's right. I mean, you have this, you know, the supply stack in any market is, you know, the first to get dispatched or is wind because it has a PTC solar, which historically has an ITC, increasingly will have a PTC and can big negatively. But generally speaking, you always, the early

loads on the system, or a small amount of load will always be met by renewables. But as you start increasing upwards, you're always getting into the part of the supply curve served by coal, natural gas, combined cycle, open cycle, oil plants, oil fire generation. And so at the end of the day, by you being there, you are causing those most expensive and those most dirty plants to be dispatched. So that is the effect of, you know, of when you're considering an intervention, that intervention, in this case, adding Bitcoin mining. Virtual power plants are becoming a reliable way for utilities to manage capacity. But in Rolling devices is just the start.

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at energy hub.com. We're living through a profound economic shift, and energy sits at the center of all of it. Trillions of dollars are flowing into power plants, transmission lines, battery factories, data centers, but the future of energy isn't shaped by technology alone. It's shaped by markets, by policy, by capital, and by the institutions that connect them. I'm Alfred Johnson. CEO of Crux, the capital platform for the clean economy. Join me for my brand new show, Critical Capital, as I talk with people deploying capital, shaping policy and building projects. Together, we unpack how risk is priced, how incentives are structured, and how progress is actually made. Listen to Critical Capital on Spotify, Apple, or wherever you get your podcasts.

Okay, so I think we've laid out kind of the case where Bitcoin mining is is bad from an energy environmental perspective, which is basically, one, it raises prices, especially on retail customers. And two, the load that it introduces onto the grid is met disproportionately by fossil fuel generators, at least currently. I do want to give fair attention to the arguments that Bitcoin proponents make about the benefits of Bitcoin from an energy and environmental perspective. And I think they fall into kind of two and a half categories maybe. One is that, hey, look, Bitcoin mines can be actually really great load from what the grid needs.

They are super price responsive. They can participate in demand response. They're flexible load, basically. That's one. Two is they can incentivize and support new renewable energy generation, particularly in markets where new renewable energy generation is hard. hurting because we've got a lot of it where we're hitting saturation points and wholesale prices are really low at the times when there's generation and Bitcoin mines can step in and soak up

that load. And then the sort of half is this sort of nichey case of you can attach a Bitcoin mine at a natural gas wellhead where gas would have otherwise been flared and you can remove flare gas. So we'll take that one as kind of its own unique case. But let's talk about those first two. So starting with Bitcoins are a form of flexible load that can participate in demand response programs and thus make the grid more reliable and support more renewable generation. How do you think about that? So yeah, I mean, definitely mines are incredibly flexible in maybe an unprecedented way. So there's absolute truth to miners' claims about that.

Most mines can drop up to close to 100% of their load within seconds, if not minutes. and I've seen this within data. They really do demonstrably drop quickly. So that's true. Mines are certainly acting as demand response very aggressively. In ERCOT, they are participating as what are called load resources, which is a kind of class of participation model for large loads. There's two types.

There's controllable load resources or CLR, and there's non-controllable, which is NCLR. Most mines are NCLR, which basically means they're treating. to buy the grid as these blocky sort of on-off resources, where if Urquat dispatches them or if the frequency dips below a certain point, they will automatically need to trip off immediately and kind of reduce their load. CLRs are more rare in that there are fewer minds doing it. It requires much more granular dispatch. They need to be able to follow what's called a Sked dispatch, essentially what the market engine instructing them on a five-minute basis. So they are participating in demand response.

It is incredibly lucrative. If you were to participate in the responsive reserve service, RRS, last year, you would have earned $180 per kilowatt year, which is a really high number, very attractive. And so I think in general, mines have been, from a DR perspective, have been following dispatch. So they've been, you know, reasonable and kind of effective sort of actors as demand response resources. There's a very basic question as to whether, you know, should they be providing demand response? Should they being paid for it? Because the fees they capture in-demand response are coming from other customers. Right.

So I guess the broader question there, as we think about, like, is Bitcoin mining good for the grid or bad for the grid or somewhere in between? is, okay, so you introduce a new form of load that otherwise raises prices and perhaps increases emissions, but it is super flexible, it is a great participant in demand response, and it can be highly price-sensitive, and it's very flexible.

Does that, I mean, I guess from the perspective of the need of the grid for load flexibility, which clearly we have, how strong a factor in favor of Bitcoin mining, is that to you? So I would take that into kind of two parts. And I want to strongly challenge the price sensitivity part. In terms of just the basic part of load flexibility and providing DR and, you know, isn't DR a good thing, isn't flexibility a good thing. I mean, the analogy I like to give is that it's like saying that crediting minors for demand response is like saying smoking is good

for your health. Smoking a pack a day is good for your health because you are able to refrain from smoking on special occasions when asked. So obviously if I'm smoking a pack a day, and I'm able in a family reunion not to smoke, that doesn't mean that smoking was good for my health to begin with. It just means in these very brief moments when I'm choosing, based on someone else's request, not to smoke, I'm not kind of doing my body harm. And I think that's really the way to view it.

This is an enormous load that has come onto the system and that we're basically paying it, which is creating all these kind of burdens that you just enumerated, and that you're then saying, I'm going to pay it to sometimes go off and see I'm willing to come off, so I'm helping people. So it's like basically, you know, the brief absence of a harm doesn't make something a good. That's how I view it.

We could also get into kind of talking about system reliability and how they contribute to that. But maybe first I wanted to speak to price sensitivity because one of the main things that miners claims is that they're price sensitive. And as prices go up, they don't run. And therefore, they're say, we're basically doing no harm. And that is only partly true. So some miners do have a price threshold, which empirically is between $100 and $300 per megawatt hour, but many have basically no threshold. And they will continue running up even into the thousands, up to $4,000 per megawatt hour. So there is some behavior change.

It's not like they're using power willy-nilly, but it is not the case that there is some sort of threshold for each minor where it's going to just drop off once it gets above even $300. So I think we have to kind of clarify that first. I've certainly seen instances of miners going through these extremely elevated pricing periods. And we have to remember that even when prices are low and they're on the system, they are driving up prices that others are paying. So it's not as if no harm is done if we're operating in a low price environment. Okay, so it sounds like you're saying overall here, yes, they participate in demand response. Yes, they are super flexible in theory, assets. know they are not, you know, sort of reacting constantly to changes in fluctuations in pricing.

And really, you know, they're just new loads, so we shouldn't give it that much credit for turning off that load some of the time if the price signals make it economic for them to do so. Yeah, I agree. And one other thing to point out is that, you know, miners also claim credit for reselling power back to the grid. So in certain cases, their power purchase agreements allow them to, you know, they're usually paying a fixed price for power in these arrangements, but they can, in certain cases, sell that power back to the grid when they choose not to take it. And so they have this really attractive arbitrage opportunity, where when prices are low, they can choose to, let's say, with the price of Bitcoin is much higher, they choose to mine.

And when prices in the real-time market are high, they can choose to, you know, not mine. And it said, sell that power back in and make money there. And they claim, see, we're kind of helping the system, we're producing or we're contributing we're acting as generation when the grid needs it. But really the way to view this is this was a generation that was sitting there that they were otherwise consuming. They are just refraining from consuming it during these periods. So you can't credit them for, again, for a good.

You can only credit them for, let's say, avoidance of a harm or overburden. Right. Okay. So then let's talk about the other argument, which is price signal for new generation. So let me see if I can lay out the argument in a little bit more detail and then you can pick it apart. So the argument is we'll stay with Urquat, right? So we're in Texas.

We've built an incredible amount of wind in Texas in particular, such that there's areas of Texas where if you're, you know, in West Texas, if you're building a new wind farm, there's going to be significant periods of zero to negative pricing that you will be able to achieve. It's eroding the economics of new wind projects. And as a result, maybe we won't build as much. but if you introduce a new form of load that can be, in theory, at least,

highly price sensitive, can sign a PPA and offtake a bunch of that wind, particularly when the price would otherwise have been low, zero or negative, then you can create enough of an incentive to get that wind built. And if that new source of load, in this case of Bitcoin mine,

is not soaking up 100% of that win, the rest of that goes into the grid and still provides value in decarbonizing the grid overall. So I think that's the argument. Does that hold any water for you? No. So I think let's break this apart into different pieces. So how are mines buying power today?

So they are not signing new PPAs with new wind as off-takers to kind of make these plans happen. They're signing PPAs with retailers and utilities, mostly conventional types of deals, such as being put on base interruptible rates. So, you know, it provides demand response. but it's basically whatever the supply mix of the utility or of the retailer, that is the power they're consuming. As we mentioned, sometimes they can sell power back. None of the big mines have indicated any sort of off-takes with new renewables.

I think there's some fundamental reasons for that. One is a sort of tenor mismatch where most PPAs, you know, the tenor used to be well above ten years, maybe up to twenty years. Today, ten years can even be fairly long, but it's still, let's say, eight to ten years is what a new project would look for. You know, Bitcoin mines are, I think, to put it lightly, a very volatile type of, in a very volatile business. And so signing very long-term agreements is maybe challenging, if not impossible, or at least

costly to do. And to add to that, even if you were going to sign one, right, like it's not a, you're probably your Bitcoin, your average Bitcoin miner is not a credit worthy off-taker. So it's not like you can go get wind farm developer can go get project finance based on underwriting the credit worthiness of the Bitcoin miner. Exactly. So there is some sort of premium that is being paid for credit somewhere along the way if you were going to do that. And so most of the deals that Bitcoin, that miners are signing today are like five-year deals with utilities or just five-year contracts.

I've seen one seven-year. But it shows you they're generally, by necessity, it's kind of shorter term. But bottom line is no, they're not doing this. They're not off-takers of new projects. And that is where you can really claim additionality, where by kind of our actions, we are enabling or causing new renewables to be developed. So then you kind of, okay, you're not doing that. Well, so are you citing, what are you doing with existing renewables? And so, yes, there are a number of mines that, you know, a number of, I'd say the minority, but a number who are citing next to renewables.

The question is kind of what is the value of citing next to an existing renewable? So then the question is, if for these miners who are, you know, locating next to or behind the meter even of existing plants, existing renewable facilities, what is the value of that? And so there is a, what kind of relevant here is a principle in math that you learn when you take, you know, upper division math class in college called the pigeonhole principle. And it's very simple. And what it basically says is if you have a number of holes and you have a number of pigeons

and you have more pigeons than holes, it doesn't matter how you assign pigeons to holes, you are not going to have enough holes for your pigeons. And while that sounds like a sort of overly obvious thing, it really applies here in a non-trivial way, which is to say, even if a mine, so the holes in our case are supply, are basically power plants, and the pigeons are load. And so some of the holes, some of the supply is renewable. And so Bitcoin mines can arrive, add load to the system, add the total number of pigeons, but like claim, but sit right. next to in one of these holes and say, you know, I am renewable because I'm sitting next to a wind farm. Or even I've signed a, you know, a financial agreement, a PPA with an existing

wind farm. And so therefore I'm consuming its power. I'm sustainable. The reality is that the total number, the total amount of load on the system has grown and therefore all you've done is displaced other customers who would be served by that renewable generation. So it's, and so your number of pigeons has grown. And so you, you know, you can't really claim that you're effect is a beneficial one, ultimately, from a system perspective, you are increasing load, increasing again, back to the cost and the emissions intensity for the entire system. So from a system perspective, it is not beneficial to be setting next to these plants. A lot of these existing plants would be happy to sign agreements with, or new PPAs with the Bitcoin mine. In fact, there was a significant

build out of wind in Texas, started in 2012. So there's a lot of farms that have kind of rolled off their PPA and rolled off their PTC that they originally had qualified for and are now kind of living in this merchant world. And so, yes, we'd be happy to sign an agreement. But there's a more important option they have, which is to repower their facility, which many, if not all, can do in order to qualify for the new PTC under the IRA. And so this is a really attractive option just because of how valuable, how kind of lucrative the PTC is under the new law, repowering, which enables the PTC to be claimed, is around two-thirds as expensive as developing a greenfield project. You know, you already have permitting and land ownership

and interconnection kind of done. So it's a really attractive thing to do. So these existing plants, which are, especially in West Texas, are really not in a sort of handout need where they're desperate for an offtake for a Bitcoin miner. And, I mean, Shell, as you pointed out earlier on, Texas has consistently been one of the leaders in the deployment of wind. And so if all of these new projects, including the opportunity now to repower existing projects, is happening, you know, it's just a very hard argument to say that minors coming in and being potential off takers, even if they're not currently off takers, but offering the potential to be, is going to have any sort of difference here. If all this money is being poured in, clearly they are not dependent on that. Right. I can imagine like two scenarios in which I would think this argument has credibility,

neither of which appear to really be happening. One would be if a bunch of wind projects in West Texas were getting mothballed because the economics becomes so bad and there was not a repowering opportunity and, you know, the operations and maintenance costs were exceeding the revenue. in which case, you know, a new source of load could come in and kind of save them. And importantly, even if you came in and saved them, you would need to be consuming some of their power, not all of their power. And that's one scenario you could imagine, not happening. The second scenario is on, you said, as you said, on new generation, if they were, you know, actually taking additionality seriously, signing BPAs that incentivize new build renewables.

And again, importantly, we're not soaking up all of their production. And specifically were, you know, signing a PPA to underwrite the sort of time during which it was forecasted that the production would have less value. And so they made the economics, you know, cross over the whatever investors, IRA threshold that otherwise would not have. Then they enabled new generation to get built. And that some of that new generation was actually going into the broader network, not just to feed the Bitcoin mine. Those are the two ways I can imagine. But as you said, neither of those are happening. So it doesn't strike me as a particularly credible argument.

No, but I mean, so you pointed, there's really kind of a third way, which is also really not happening or not a counter argument here, but it's worth kind of highlighting. You mentioned how, you know, you can have negative pricing in certain regions, which sometimes corresponds to curtailment of renewables and say, well, listen, if you cite a Bitcoin mine that's living off of that excess energy, yes, you could have, you could consider that completely, you know, there's no, there's benefit to an existing project. which is not, you can't claim additionality because it was going to operate anyway, but you can line the pockets of a renewable asset owner, which is fine, and you're not doing anyone harm because you're not taking power, you're not acting as a net load in a market because you're simply off taking behind the meter generation that was going to get dropped. It was going to get curtailed. So you can absolutely call that no harm done.

The reality, though, is that yes, negative pricing is an important phenomenon. to take one example, there's a mine in Texas, US Bitcoin, which is behind the meter now at the King Mountain Wind facility, which is a really large facility, and they've basically signed to take, I believe, all of the generation

of that project. When you look at the transmission nodes where these project interconnects, you see negative pricing around 12.5% of the time. So that is something, thing. So for that percent of the time or that that offtake of energy, yes, you're doing no harm, but that is a small minority of what this mine is going to ultimately consume. And so either

it's getting it from the project itself, in which case it's not truly sustainable because it is essentially taking power that was going to go into the Austin region and power other homes and businesses, which is kind of just displacing someone who are then forced to go essentially get their power by a new combined cycle plant or an open cycle plant that gets dispatched. or you're getting your power from the grid, which is part of the agreement signed, where if the project is not producing enough power in a given moment,

the mine is able to use the interconnection facility there to import from the grid. So basically the miners are going to mine what they want. They're not going to be limited by the profile of renewable generation, but it's precisely the willingness to completely live off of this sort of excess energy, which would be the route towards real sustainability.

All right, so let's talk about this last case then, which is happening for sure, which is placing Bitcoin mines at otherwise flared natural gas sites. It's a different use case, obviously, but it seems like a stronger argument, potentially, that you have what clearly otherwise would have been. So this is natural gas that is flared, meaning it's turned into CO2 if it's flared. So it's not as bad as natural gas leaking into the atmosphere, but it's still CO2 leaking into the atmosphere.

So if instead you could take that gas and then use it to power a Bitcoin mine, you're avoiding the emission of CO2 that would have occurred otherwise. How do you think about that? I mean, I agree with how you characterized it. I think I don't know enough to really be critical or to give it an official kind of thumbs up,

but my understanding is that flaring is very deeply imperfect in that you do a lot of methane leakage or more than you'd want, and that if you are properly capturing this flared gas, and you can run it through a sort of a gen set to run a Bitcoin mine, you end up with more purely, you know, combusted, and therefore kind of CO2 that comes out of it. And so therefore, it's an improvement,

it's a reduction in the emissions of that gas that had to come out because basically you don't have the natural gas transmission at these sites to economically to route it and to do anything useful with it. So it's got to come out and assuming that the well is operational and it seems like an improvement

and therefore that would be a net benefit. Okay, so I guess just to wrap up kind of stepping back, it sounds like absent this natural gas flaring example, you know, clearly your take is sort of overall on net. Bitcoin mining does not appear to be a benefit to the grid, to electricity consumers,

to emissions. It has, it seems to have a cost that is not insubstantial on each of those three things. So I guess then the important question is how big a problem might it become, right? You said we have whatever it was, three point something gigawatts of Bitcoin mines operating in the U.S. today. Do we have a sense of how much is coming? Is it going to become a significant portion of overall load in the U.S. or portions of the U.S. as it slowed down since Bitcoin prices came somewhat down or how much should we care about this? So, I mean, it's certainly, it's never going to be comparable with the overall load of the U.S., but it will, you know, it's hard sometimes to separate the claims of a size of developments

from what will actually happen. I think, roughly speaking, it's certainly set to double or triple in the next few years. I don't have a precise number, but it's certainly large enough that it's going to have an outsized impact. the number that I gave, the $1.8 billion per year in Texas, it's conservative because that's really only trying to count what is really clearly known to be operational. So I think it is a significant impact. We are trying to achieve something with the energy transition that is an extreme reach goal. And we are trying to reduce emissions in a very highly constrained economy, a very highly

constrained grid. And so we need to basically be laser focused on every way that we spend our resources. And the question is, can we afford to throw, you know, to have many gigawatts of load that is essentially spinning wheels kind of playing the lottery to win Bitcoin, which is what Bitcoin miners are doing? There's not only that, but it's literally gets down to the, you know, the interconnection, that the T&D kind of equipment that are used for miners. It's the interconnection that the utilities have to do. It's both time, money, resources. It's the you know, the semiconductor

material in the servers. It's any sort of incremental even if they were to invest in more renewables, let's say, on site and say this is 100% mine, I'm having zero impact on the grid. You know, listen, we live in a solar and wind-constrained world

where the supply chains are real and getting access to that material is costing some other company or homeowner access to the same material to decarbonize, you know, their home, or their business. So there's real opportunity costs. So I just think we need to be focused on what we're spending it on. And it is very hard to see this as a priority compared to all the other ones that we are struggling to satisfy. Right. And not to get too deep into the world of

crypto, but the other point people make is, well, you have to weigh whatever cost it has against the benefits of society of Bitcoin. And I think one counterpoint to that is, I mean, And maybe you think Bitcoin is the cryptocurrency above all others, but there are others. And those others do not all consume electricity in the same sort of fundamental way that Bitcoin does because they use a different process for production. So, you know, there's a world with lots of crypto and not the same grid impact. It's a critical point because even for those who want to push back and say, yes, we need it, you look at Ethereum, which is what you're alluding to.

Ethereum is the second largest cryptocurrency. It has far more functionality, in fact, than Bitcoin, because it can do smart contracts. So there's all kinds of applications that it can do. They moved last year to this other methodology called proof of stake, which doesn't have any of this sort of environmental impact. And so if you believe in cryptocurrencies, you have to believe in, you can migrate to that kind of consensus mechanism is what it's referred to. And so this is not about having or not having cryptocurrency. It's about using this honestly brilliant method, which is the one that Bitcoin is based on, it's just not a sustainable one.

And so it's moving, using cryptocurrencies on a sustainable consensus method is the really obvious sort of solution to this problem here. All right, Ben, this was super illuminating and really interesting. Thank you so much for coming on. Yeah, my pleasure. Thanks for having me. Ben Hertz-Shargel is the global head of Grid Edge at Wood McKenzie. This show is a co-production of PostScript Media and Canary Media. You can head over to canarymedia.com for links to today's topics. PostScript is supported by Prelude Ventures, a venture capital firm that partners with entrepreneurs

to address climate change across a range of sectors, including advanced energy, food and ag, transportation and logistics, advanced materials and manufacturing and advanced computing. This episode was produced by Daniel Waldorf, mixing by Roy Campanella and Sean Marquand, theme song by Sean Marquand. I'm Shail Khan, and this is Catalyst.