On The Brink with Castle Island - James McGinniss (David Energy) on Mining as a Load Resource (EP.262)

Episode Date: November 22, 2021

We sit down with James McGinniss, CEO and Cofounder of David Energy to talk about Bitcoin's role in the energy transition and how Bitcoin mining is a useful source of flexible load for increasingly renewable grids. In this episode:  The fundamental change happening in the US grid today What distributed energy resources are and why they are important Why DERs are catching on in California Why bitcoin allows load to move to supply Why better metering improves the prospects for demand response How demand response works nationwide Why there's a fundamental tradeoff between uptime and power prices Why Bitcoin is the best demand response resource The prospects for other location agnostic load resources Do better batteries obsolete Bitcoin mining as a grid balancer? How David Energy is working with Bitcoin miners Why Bitcoin miners should trade mining uptime for cheaper power Are grid operators designing programs for bitcoin miners? Why there's a longer tail of energy assets that miners should take advantage of Sponsor notes:  This episode supported by Public.com. Start investing with as little as $1 and get a free slice of stock up to $50 when you join Public.com today. Visit public.com/onthebrink to download the app and sign up. This episode is brought to you by Withum, a top 25 accounting firm with a cutting-edge Digital Currency and Blockchain Technology practice. To learn more, visit  withum.com/crypto.

Hello and welcome to On the Brink with Castle Island. I'm Nick Carter. This episode is brought to you by Witham and Public.com. Listen for more about those sponsors later in the episode. Today we sit down with James McGuinness, the CEO and co-founder of David Energy. A few weeks back, we did an episode with Ray Klein and Sean Connell of Lancium. It was a very popular deep dive into how exactly Lanciam and Bitcoin Mine are engaging with the grid, in particular in Texas, and how they're potentially facilitating

grid stabilization and why Bitcoin mining as a load type is actually so suitable for increasingly renewable grids. A lot of you listen gave great feedback, so thank you for that. I wanted to touch on that topic once again with our guests today, James. His company, David Energy, that recognizes that grids today are increasingly decentralized with solar panels and battery storage and electric vehicles. And there's a new optimization, new set of optimization problems that are emerging. Additionally, they help clients get access to so-called demand response programs. And that's where there are significant intersections with Bitcoin miners. James Envision a world where there are huge numbers of small and medium-scale Bitcoin miners that may not desire

to trade in the power markets and directly engage with grid operators, demand response programs. That's where David Energy comes in. James offers a very optimistic vision of Bitcoin mining and its ability to facilitate the renewable energy transition. Let's dive right into the episode. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of quantitative easing.

You print a couple trillion dollars, and all of a sudden, people start to worry. So out of this worry, we have something called the Bitcoin. Welcome back. This is on the brink. We're continuing our mining miniseries. It's been very good so far. Excellent reception. We're going to be covering a lot of the same topics that we hit in the Lancium podcast

from a different perspective. I'm here with James McGuinness. He's a CEO. I'm co-founder of David Energy. Very, very glad to have James on the show. Welcome. Thanks, Nick. Excited to be here.

And I do appreciate the content. It's been great listening to Bitcoiners get smart on energy, the electricity grid. It's been quite the journey. It feels like I'm trying to get graduate or PhD level understanding of these grids, just so I understand how Bitcoin is going to interact with them. It's almost, I would say probably as difficult as it was in terms of information acquisition, in terms of going down and sort of the Bitcoin rabbit hole. in the first place. Yeah, it's definitely, I mean, I've been in the electricity grid rabbit hole for

probably six years and it keeps getting deeper. So you're in for a ride. Yeah. So, well, that's why I got folks like you to educate me. So tell us a little bit about yourself and how you came to start David Energy. Yeah. So my background's in mechanical engineering, actually. So I did a master's in mechanical engineering at UT Austin. And right when I got down there, it was really interesting. There was this, like, massive solar and wind boom going on in Texas, of all places. So I got very into the space at that time and started working in local solar plus storage engineering and design of like local rooftop systems and stuff like that.

And was actually originally considering doing a PhD in battery storage science to help get storage technology is cheaper as it's obviously a key component of adding more solar and wind onto the grid. So that problem of how are we even going to operate solar and wind heavy grids, which is not an easy problem whatsoever, as we all know, because of their intermittency. So I'd say I've been fairly obsessed with that problem since starting my master's degree. I eventually left with just the masters, did not pursue the PhD. to start David Energy, basically. And I'd say ultimately got more interested in the problem of how to integrate things like battery storage into, or these weirder sort of so-called distributed energy resources that we'll get into.

How do we integrate them into the grid? Because a coal plant 200 miles away from someone's home is so radically different than a battery or a Bitcoin mine in that person's home. So I think it's a really fascinating time where there's a lot of sort of this DER space will probably as we go through it. You'll notice a lot of similarities probably why I'm into Bitcoin as well when you hear where it's like distributed. Awesome. So I mean, some people might be vaguely aware that the grid is changing. But maybe for those that aren't, I mean, what's happening? Like obviously it depends on the state.

But what is changing in the U.S. grid right now? Yeah, so I think, you know, we're really kind of at the dawn of a radical transformation of the grid in that to date we've had big coal, nuclear hydro, natural gas, these kind of centralized analog power plants where you build them far away from demand centers and then build poles and wires to carry that power, say 200 miles down to city centers like New York City or Houston or Dallas or whatever. And that model is kind of breaking down in a lot of ways with the emergence of renewables, which are not, you can't just kind of turn them on whatever you want. And we're kind of underinvesting in our grid at the same time. So you're seeing more

power outages, less resilient grids, more volatility. And I think I've found a big part of the answer in this concept of distributed energy resources. So these are rooftop, solar on homes and businesses, battery storage, electric vehicles. Like if you've seen the Ford F-150, you can charge it, you can run your home off it, the lightning, backup generators, smart thermostats. So all these kind of IoT smart homes and devices is we're kind of starting to build the grid in a much more bottom-up fashion where you actually have local sources of supply right next to demand instead of this, you know, we're moving away from this like big centralized analog architecture to a much more like distributed digital architecture. And we're doing that in the face

of what I see is as sort of the grid as an institution facing a lot of problems and decaying in a lot of ways. So probably again, philosophically sounds a little similar to what, what, originally got me into Bitcoin like around 2016. Right. So, I mean, in terms of the nature of this transition, is it messy? Like, is it going to be an elegant transition or how do you sort of anticipate it going? I think it can be, you know, every transition is going to be bumpy, but it can be rockier in some areas than others.

I mean, there's a way to make it more elegant for sure. I think California is probably an example of what not to do. But ironically, because it's so messed up, it's one of the fastest transforming grids in that the grid operators there are literally shutting people's power off for two to five days at a time so they don't start wildfires. So the adoption of DERs there is just off the charts. Like people are getting solar and batteries and backup generators just paying for it just to have power, to not lose power so frequently. So it's almost like as inelegant, the more ineligent the transition is, the fast. will happen in a way, but then you look at markets like Texas or the Northeast where they're creating market reforms that are driving it and I think in a much more organic and maybe,

you know, more seamless way, hopefully. And so when you look at the renew, like in Texas, for instance, renewable penetration is pretty high and getting getting higher by the year. I mean, it's really accelerating, frankly. It's, you know, we covered some of the issues there with Lansing in our last episode in terms of actually getting that power to market and some of these bottlenecks in terms of high voltage transmission and the fact that, you know, oftentimes the wind in the solar is not near the load center. How do you see that going? I mean, what do you see is sort of the tools to mitigate that as we move to a more renewable grid? Yeah.

I mean, there's a lot of tools. I mean, I think one which is interesting that you see in with Bitcoin miners is that because power is now geographically determined, meaning in the Panhandle in West Texas, we have lots of wind and lots of solar. So I think we'll see load move to supply, actually, instead of the other way around. We don't always have to build wires out. So Bitcoin mines are co-locating with big solar and wind because it's cheap out there. and you may see more industrial loads come in behind them. I think a second one is, you know, Texas did build a ton of transmission lines to Dallas and Houston,

which is a lot of what kickstarted the renewable industry there. And we will see kind of big storage and wholesale market storage and big Bitcoin mines help sort of smooth out the volatility at the wholesale level as another really important tool in the tool bag. But what we focus on at David Energy is really on the demand side of the market. So where people are consuming power. And I think the internet has enabled this sort of really drastic transformation where in the past, you literally had an analog meter, like move around like a clock. Like a guy with a clipboard had to walk up to your home and read once every one to three months, how much power you're consuming.

So we never thought of demand response as a tool in the toolkit. because how are you going to get people, you don't even know what they're consuming, right? And so, but now when you have smart thermostats, you have electric vehicle charges, you have smart meters, you're not only seeing all this data in real time, you can actually control that demand as well. So really a lot of the impetus of starting David Energy

is we saw even in years back, you know, in 2015 people were talking about volatility coming to Texas because of renewables. And so if you can get, if you can pass these price signals down to customers in real time, like we do in any other commodity, like electricity is a very weird commodity. We're not, demand actually goes up as price goes up because we don't have any price signal to us. Whereas, you know, if gas gets expensive, maybe you fill your car up less or something like that. So, um, demand response is this tremendous

resource where we can get people charging their cars or, or, you know, we can lower HVAC, we can discharge batteries, we can flip on their backup generators when electricity market prices are high, which now in Texas happens to coincide a lot of the time with when solar and wind are not producing. So I think there's this very interesting coupling of the economic incentive. You know, this saves people money. And also, you know, it does help integrate more renewables. And that's kind of a space that I like sitting in because I think, you know, we want to integrate renewables into the grid, but we also want it to be a better grid. Yeah, it's nice when economic incentives actually map to, you know, positive externalities.

In terms of David Energy specifically, I mean, what, how would you describe yourselves? Are you guys a utility or, you know, how did you describe the offering? So we're actually what's called a retail electricity provider, a rep. That's a maybe, be a new acronym for your listeners on top of controllable load resource and stuff like that on the last episode. We're a retail electricity provider. So we actually purchase power from wholesale markets and then resell it retail to end customers. So what we've done on top of that is we've built a software platform that integrates with customers' DERs.

So if you have a smart thermostat, a battery, an EV charger, all these things that we've discussed, or a Bitcoin mine, which we'll get into, we combine our ability to control that demand with how we go out and purchase supply. So we get customers cheaper electricity supply contracts by being able to adjust their demand in real time based on the price of power. So we basically combined demand response with the purchasing of power itself. And happy to get into like the difference between a rap and a utility and all that stuff too. So regular households, actually some of them, it kind of depends. Like some utilities do offer demand response, I think, through two regular old households. So it's something that some people would be familiar with, I guess, right?

But so is your view that there's kind of an under deployment of demand response and it's not really retail phenomenon at present? Yeah. So most of the demand response, like in the Northeast and Midwest and Texas has been at the commercial industrial level, like more sophisticated customers, largely because it hasn't been easy until like Nest came out to control someone's thermostat in the way you can and like a big commercial building. So in utility demand response programs, which they can offer, usually they were offering like a free smart thermostat, but then for future participation, you're not getting paid again every time you reduce. You already got your free thermostat and you're enrolled. So those

are probably the articles you may have seen out of Texas. Like, you know, my utilities started to mess with my thermostat. I had no idea was even in this program. So, you know, I don't look at utilities as innovators. I don't think they're designing a very good customer experience around demand response. That's not at all what we want to be associated with at David Energy. But for a variety of reasons, like the access to data essentially, small commercial and residential customers haven't had as much access to demand response programs. So I think more third parties are focusing on it, moving away from the utility model and stuff like that. And so, you know, it's kind of a generic term, I guess. This is what I learned in my first explorations is it's not that specific. There's a lot

of different interpretations and variations on the theme. So I mean, give us a bit of a view of like how demand response programs are implemented, you know, on a state to state basis. You know, I think we covered a lot of the very specific programs in Texas in our last podcast, but maybe you'd tell us a bit more about what it looks like nationwide. Yeah. So in California and the Northeast, there are both wholesale market programs and utility level programs. So the wholesale market will pay, you know, you can bid in your demand response resource.

that could be HVAC load that you can control. It could be a battery. It could be any of these things or a generator. So they'll pay you when you show up. There can also be that's to make sure there's always enough supply of power, essentially. So if we reduce demand when supply is constrained, the grid will pay you for that. There's also utility level programs, which typically focus on when the poles and wires, the infrastructure is stressed. So you need, the grid is interesting because you need like wide enough pipes to carry all the water.

And then you also need the water flowing through it. So in the Northeast and California, there's both types of programs. And so utilities will also call demand response events when the physical infrastructure is stressed and they're at risk of blacking out. So those, most of the programs at this point, especially the ones that we interact with, are they design the program. they design the price incentive, you know, this many dollars per kilowatt. And then they just let third parties called aggregators, which David, David Energy also is, enroll the customer devices in these programs and manage all of when the signals come in, when they tell the customers, we get paid the money, and then we remit that payment to our customers for performing.

And what would kind of the terms of a typical demand response program look like? So you're effectively accepting lower-upy-earned- time in exchange for cheaper power generally. That's like the typical trade, right? Yeah. So, well, demand response in the Northeast, you know, this is another, I guess, nuance is demand response can be responding to the real time price of power. That's just demand responding, which we'll get into with Bitcoin mines. But then these are the like these external market programs where they literally just send you money. They say, For example, Con Edison in New York City, they have time windows based on where you are in the grid.

So if you're in like a residential neighborhood, your demand response window will be 6 to 10 p.m. Because that's when those networks are stressed. If you're in an office building, it may be 2 to 6 p.m. And so on the really hot days of the year, they'll pay a certain dollar per KW for the five summer months for four-hour dispatches. There's other programs that are two hours. there's other ones that are more amorphous. It's just how many hours you can show up. But the way it's structured, a lot of them are sort of external to the market.

Like, it's not the real-time price of power. They're actually paying you to show up in certain time intervals under certain conditions. And I guess the reason it's interesting because, like, as a household, you actually probably want access to your electricity during the hottest. hours of the year. So it's not actually suitable for everyone. You have to be kind of a load type that is able to sort of curtail. Right. But it is an interesting sort of question. And we think a lot about this at David Energy. It's almost like what's your strike price for AC? So if I paid you $20 to go from 72 to 76 for an hour, would you do that or would it be $200? Or could I do it for

four hours if you got $200. So there's one, this behavioral element. How much are you willing to accept from us to let us control your thermostat? That's a strike price, right, to us on the real-time price of power, whatever these programs are. The second piece is if it's a battery or backup generator or you have an EV that can power your home, these are resources that you're not going to notice when we're playing around with them. Right. So you notice when we mess with your HVAC, but not when we're discharging your battery.

So this bigger bucket of DERs, they all have different conditions and it's sort of endlessly complex. But I do think there's going to just be a massive theme going forward of users getting paid for letting third parties like us control. their energy resources for them. Right. You know, and another one, or, you know, you mess with their AC for an hour and there's enough thermal mass in your home that you don't notice a change in temperature.

And so it's a four-hour event. We cycle one hour each across four homes. So there's tons of stuff that you can do that's beyond like, oh, the popular narrative out there that's like, you guys want to do energy rationing. I don't want anything to do with this. It's just a simple, how much can we pay you to do certain things? And I think, you know, in most cases, it makes a lot of sense for most people. I'm kind of a savage and I keep my thermosat at 76 anyway.

So, you know, I'm the best client ever for this. Nice. Yeah. Yeah, I don't understand people that keep it below 70. That makes no sense to me. I would get so cold. But yeah, so basically your point is that because devices are internet connected and you can strike up relationships with these devices and start to program them in creative ways. We don't need to have dumb load anymore. We can configure the load to the

conditions on the grid and potentially literally pay households for the privilege of that configuration. Exactly. And what's interesting about that is I think of it as there's just this tremendous amount of latent capacity on the grid. So meaning when you can start adjusting demand down, it's equivalent to building a new power plant. And, you know, sounds probably familiar in terms of Bitcoin mines. But this is sort of the first time in, you know, the electricity grades history where we can do this on a very consistent, dependable, discrete basis, where we're getting demand to respond to price signals.

And going back to just your earlier question of like around solar and wind and how do you attack this problem, That's just a massive tool in the toolkit that we didn't use to have is just shifting consumption around based on when power is expensive or least available. Let's take a quick break to talk about our sponsors. Now, on this show, we only really like to work with sponsors that we actually know and can recommend. And both sponsors today are great examples of that. So our first sponsor for this episode is Witham. They're a top 25 accounting firm with a cutting edge digital technology and blockchain practice. So wherever your company is, from pre-seed to IPO, they have tailored solutions just for you.

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See public.com slash disclosures, not investment advice. So let's get into Bitcoin. I mean, obviously there's a lot of intersections with your business and Bitcoin. it's not exclusively a Bitcoin business, but, you know, we'll get into how Bitcoin relates to all this. Maybe first of all, just in your own words, like, what kind of a load resource is Bitcoin mining? I mean, what are its characteristics and why does that make it suitable for this sort of thing? Yeah, so I actually think that Bitcoin is probably the best load resource, just from a purely technical standpoint, you know, best demand response resource. So if you think about a battery, it's only four hours per day.

If you think about load, it's like you're messing with people's thermostats. But if you think about Bitcoin, typically miners will trade a certain number of hours for how much money they're getting paid. And oftentimes it's up to a thousand hours. And you can just turn it on based on whatever the, or turn it off based on whatever the prices are. So, you know, it's not like an aluminum smelter. it's not like any of these under other industrial loads. It is truly unique in how sort of, I think you made the point on the, on the Lancium episode, sort of, it's just statistically, it doesn't matter when you're mining,

right? So you can turn it off whenever. And that's a very interesting property that we can get into why that's so valuable to the grid in my mind. Yeah. And the incredible thing to me, and I think I said this before, is but I'm still not over it, is the statistical properties of SHA-256 are what inform all the way down the road

why Bitcoin is a suitable energy buyer. And that just blows my frickin mind right off. That Shaw-256 is a, the hashing function is a progress-free algorithm. It's memory-less. So each hash is independent of the last hash. And that means that there's no path dependence in Bitcoin mining.

You can turn it off. and that unit of hash rate you've done or your future unit is no more or less valid based on the timeline of the mining. So there's just no issue really with interruptability. It's only a linear decrease in your economics. And think about a hospital or something, you can't tolerate an interruption. Or think about, as they said in the Lancium pod, thinking about an aluminum smelting plant, an arc welding,

you know, arc furnace. If you turn off the electricity, the steel ingot is going to harden in the crucible, you know. So other industrial processes are not interruptible the way Bitcoin mining is. And I think that's just such an underappreciated thing. Yeah, no, you hit the nail on the head there. I think the other one may be coming. I'm not super familiar with it, but as like ammonia, like electrolyzers, like green hydrogen production. Right. I'm not. super familiar with that space, but it seems as long as you can turn those up and down fairly easily, a similar, you know, you don't have to like send your workforce home or whatever either potentially. So if you're like running a paper mill or something like that. So yeah, it's just a

super interesting property of Bitcoin. Yeah. And I think our thinking is going to be informed by Bitcoin in terms of like the way energy consumption works. Like people at first were scandalized by that it's like, oh, these big data centers are eating up all the, you know, electricity. But then I think people are going to realize Bitcoin was the first of this class of load resources that are consuming energy on a location agnostic basis that are going to the supply centers and are consuming it in a kind of a pretty favorable way in terms of being very flexible in their consumption. So I think you're going to see all kinds of computation, you know, other data center models, this hydrogen production is one that people talk about.

There's other possible things like desalination, fertilizer production that are energy intensive and largely location agnostic, not perfectly so. But I think that's kind of going to be the new era a little bit of load resources, is these location agnostic sources that go to the energy supply directly, which makes for a very different grid than the one we sort of have. Totally. I wonder even to the extent that, again, the space I know not too much about, but like advanced manufacturing and automation or another interesting one is vertical farming, you know, indoor farming essentially. There's a lot of focus on like these DERs and demand response

in that category. Just as we shift all these industrial processes to be electricity heavy, they're going to want to lower that input cost as much as they can. And how much are we going to kind of reform industrial processes around that. And so I think wherever you see the Bitcoin miners going, there's probably some industrial processes not far behind. Right. Like we've been saying since 2015, we think there's going to be a huge industrial renaissance in Texas because you have cheap wind, cheap solar, cheap gas. So anything that's energy intensive, you're going to want to see, you know, you'll probably see moving to where power is cheapest. And, you know, Bitcoin is creating this, this very interesting, like, stabilizing property

and price incentive for those generators to be there and stick around. So it's going to be interesting to see how Bitcoin plays into, like, it's creating currency, obviously, but then you need actual economic, like industrial processes as well. And watching those two things intersect, I think we'll probably first see it in places like Texas. It'd be really interesting to watch how that plays out. Yeah, I mean, we're seeing a boom in electrical infrastructure buildout in Texas attributable to Bitcoin mining, which is so interesting because even if Bitcoin fades away, the legacy of it will be this enormous infrastructure, which is suitable for energy-intensive industrial processes, which are just ready to go. And so, you know, it's doing, people I think

don't understand how significant it is. The Bitcoin miners are trying to build, you know, whatever it is, two to five gigawatts of new sort of power capacity in, in West Texas, where electricity is basically stranded and curtailed. The legacy of that will be an enormous industrial capacity for these energy intensive industries, which might be location agnostic for whatever reason. Totally. I mean, Lancium is, they're building industrial parks. They've got all the infrastructure there that could always 10 years from now switch to some other purpose. But that is, you know, the property of being able to adjust Bitcoin. I know you've gone over this, but definitely want to reaffirm it does create the ability to create net new capacity on the grid.

And then when there's these tail events, when prices are super high, it can ramp down. So that's sort of how that property of being able to mine whenever you want is so valid. valuable to the grid is it does get more capacity built economically, that we then have available for other stuff too, especially when power scares. So one question I get a lot of the time, and you know, you seem really bullish on battery storage, so definitely wanted to ask you this is, you know, so there's the good point to be made about Bitcoin, you know, helping to balance out the intermency of increasingly renewable grids.

However, in theory, if batteries become very cheap and competitive at the utility scale, maybe you don't need flexible load type and you could just go to battery model. So what are your thoughts on that? I mean, is it a matter of just waiting until batteries become competitive or how do you think about that? No, I mean, I think it's a totally different resource. So, you know, I think one thing, I may be getting this wrong. I haven't read it in a while. but in the square crypto white paper, you know, Bitcoin's key to a renewable future or whatever.

One thing they talk about at the duck curve, which I think the paper was quite good on all the nitty, gritty of the grid. Like for, you know, bitcoins that did very well with that. But it was kind of a miss there because I don't see Bitcoin as a daily grid resource. But I do see batteries as a daily grid resource, meaning like, when, When solar and wind come offline, that's usually a daily phenomenon, especially with solar around 5 p.m. It's not always – the price incentive is not always going to be there for Bitcoin to turn off, but it may be sufficient for batteries to, you know, charge during the day and discharge at night because it's arbitrage, right? It's all – the spread just needs to be wide enough.

It doesn't need to be uneconomical for a Bitcoin mine to mine. So Bitcoin mines are fantastic for our managing our tail risk in a renewables grid. So when you see winter storm Yuri happen in Texas and prices were like $9,000 a megawatt hour for three days with this massive supply shortage, Bitcoin will be off those entire three days. But batteries can only charge at night and discharge during the day for four hours and take advantage of the spread. And there was a small spread between nighttime and daytime. So basically, long way of saying batteries are a daily dispatch resource and Bitcoin is more of a, you want to dispatch it in the tails. So I view Bitcoin as an inverse backup generator, which is a very different resource than a battery. So there's room for both. We need both,

but used for different purposes. That's very well stated. So basically they're both performing performing this sort of intertemporal arbitrage, but the duration is very different, and they just have different key characteristics there. Right, and so they'll be deployed for different needs on the grid. So in terms of your engagements with Bitcoin miners, how do you anticipate working with them? I mean, will you be a supplier to them and manage their ultimate relationships with the grid? how do you expect that to go? Yeah.

So I think when you look at companies like Lansium or Layer 1 or a lot of these others really big Bitcoin mining companies, they may have the sophistication to basically like open up their own energy trading desk or take their own wholesale market exposure, do all sorts of things with managing risk. But where we see ourselves fitting in is in this longer tail of Bitcoin mines that I think is coming, say 10 to 20 megawatts or below. In that, they may just want to focus on buying mines or buying machines, citing them properly, operating them well. They're not going to get super sophisticated on power markets or whatever. So what David Energy does is we're launching a very sort of

bundled package that just makes it very easy for miners. So we'll sell you the power. We're also going to manage you in the demand response programs and, you know, even to an extent like the software solutions that will help you kind of navigate this and bundling all that together. And so all you get at the end of the day is a cheaper power contract that you trade uptime on your mind to us. So if you're like, I need 95% uptime on your on my mind, you get one price of power. If you want 100% uptime on your mine, it's obviously going to be more expensive because you're going to you're going to run that mine through the priciest times on the line. the grid. So I think it's just there's going to be a lot of smaller miners out there, more distributed

miners. And we want to build a product that takes all this sophistication, kind of dumps it down. It just helps them run mines as economically as possible. And so this isn't a very important point, I think. There's an inherent tradeoff between your price of power and your uptime requirements. And for Bitcoin miners, you want to be online much of the time or certainly most of the time, but you don't strictly need to be online 100% of the time. And so you're saying it's actually worth it in many cases to accept a lower up time

to get just overall reduced power cost. Yeah, and that's a pretty easy kind of optimization function to run, right? So if we offer you a power contract at $40 per megawatt hour for zero demand response capabilities, And we offer you $30 for 95% uptime. So we get, say, three to 500 hours of curtailment. And then you get $15 if you're willing to push that to a thousand hours. You can just run based on what those numbers actually net out to be.

And they will vary based on the characteristics of the grid that you're mining. You know, you can run, hey, here's the percent uptime and here's the price of power. And that's pretty easy to see what your profitability will be as a result of that. So that's very different than wholesale Bitcoin miners who are taking, maybe they're buying some hedges, some blocks of power, which we could get into. But they know what their strike price is. And they're saying, okay, when I'm at, when it's $500 per megawatt hour, I can, that's when my cutoff point for mining based on wherever the price of Bitcoin is.

And that strike is always moving around based on the price of Bitcoin and how much hash rate there is and everything. So that's a lot more complex of a function than the one we just kind of described where it's like, give us a certain number of hours and we'll give you cheaper power as a result. But in both cases, the Bitcoin miners are being transformed into smart load, whether you're doing it on a primary basis by trading and effective the options market directly or by doing it through an intermediary such as yourself. Exactly. And in terms of the ISOs themselves, the grid operators, their willingness to put together these programs. I've seen an ERCOT now, they're aware of Bitcoin mining.

And Bitcoin mining is satisfying the criteria for controllable load resource, which no other industry did before. So they've clearly become aware of this specific load resource and its unique properties. Is that something you've noticed in other grids across the nation? I have not to such an extent. And I think for a couple reasons. One is that in the Northeast and the Mid-Atlantic and Midwest, we actually have pretty much everywhere outside of Texas, actually. We have what's called capacity markets,

which means the market pays generators to just be available. So that's sort of a fixed return for these generators. And then there's also a real-time price of power that, you know, they get when they actually sell power into the market. But most of these markets are capped at that price cannot go above $1,000 per megawatt hour. Where in Texas, it's $9,000 currently. And there's no capacity payment. It's sort of all just very dynamic. The way they recover those costs is they call it a capacity tag day.

So in New York, it's one day of the year when the system is out, it's a capacity tag day. overall peak in the state of New York. They look at your demand during that day and they assign you a pro rata portion called your capacity tag of how much money you pay into the capacity market for the rest of the entire next year. So all we do is we predict that day and we shut your mind down and your price of power is going to go down by like 20% for shutting down for five hours. So it's a I think because of the way the markets are structured, it's not this like dynamic evolving environment in the way that it is in Texas. And that's maybe also why you're seeing less mining activity. And the second reason would be in the Northeast, a lot of the mining that we've

seen done is like in, you know, offtake agreements with actual utilities who have like stranded power plants or with direct behind the meter deals with power plants. So it's less wholesale activity. Although, although we do see that changing as Bitcoin miners are getting smarter about demand response, you can go from $50 a megawatt hour all in to 30, 35 using tactics like I said, like adjusting your capacity tag down to zero. So I guess it's a long way of saying it's not booming in the same way that it is in Texas, although we are starting to see in areas like Ohio, Pennsylvania, New York, that's starting to change. And I think grid operators will get aware of this property as that happens more and more.

Yeah, the thing that surprised me from the foundry data, which I'm sure you've seen, is how few states Bitcoin mining is actually concentrated in. And, of course, the data set may not be fully complete. But from recollection, the big states with Bitcoin mining are New York, Texas, Nebraska, Kentucky, and Georgia, I think. And just not a big footprint in other states, even though Bitcoin mining U.S. is now 35% of the global network. And so you're looking at around maybe four gigawatts of power. So very material amounts. But it's actually concentrated in a relatively small set of states that have proven suitable for mining, which kind of surprised me

the fact that it's not really that distributed at present. Yeah, and I mean, I think that'll change because I think we're still, I view it as very early. People who've been in Bitcoin for a decade, maybe don't feel that way. But so people have gone to like Texas is just so obvious. Like that's where it's cheapest. That's where people are going. But as a lot of the, you know, favorable sites get cobbled up on the grid, people will have to start looking for one smaller sites and two sites that are outside of the

markets that have been sort of people have been paying attention to to date I guess so I do I do think that'll change over time because there's plenty of pockets on the grid where prices aren't super high or you know it's cheap enough for mining and it's just you know it that longer tail takes longer for the market to find identify those those areas but they will find them if they will find if the power is cheap enough. And so from a decentralization perspective, the fact that energy is so pocketed and so heterogeneous in terms of the pricing is actually very creative to the decentralization of Bitcoin in the U.S.

because you will have this long tail, which in the aggregate could constitute a significant amount of mining capacity. Absolutely. I mean, I could see more independent 10 to 20 megawatt mines making up a significant portion, not like 80%, maybe 20, 30 or something of the mining pool because there are a lot of these smaller pockets on the grid that are favorable. But it's just tougher to find. And that's something we want to kind of start helping out with as well. It's actually where to cite these mines. Well, James, it seems like you're really on the vanguard of this transformation. It excites me

a huge amount. And it's been my motivation to dive into energy policy. in this country, which is endlessly fascinating. I see this transition happening in both the energy grid and, of course, Bitcoin mining landscape. I think it's one of the most underrated sort of phenomena trends that's happening in the entire crypto market. Anything you wanted to say in terms of summarizing or how people can work with your, where to find you? Yeah. I mean, I think, you know, just I guess our website's just Davidenergy.com and could just fill out a forum there or whatever if you're a minor and interested in finding like a power contract

as you get as you get set up we're in a bunch of different markets across the US so we can help in a variety of places I would also if you know interested in the whole DER conversation this decentralizing of the electricity grid itself I run like a community help run a community called the DER Task Force. It's DERTaskforce.com. And we have our own podcast where we've done deep dives on like the square width crypto paper and stuff like that as well. So kind of if you want to go deeper down the rabbit hole, I'd say that's a good that's a good resource as well. Awesome. Love to find intersecting rabbit holes. James, thanks again. It's been great. Thanks so much, Nick.