Is cryptocurrency the magical Texas route to resource adequacy? Or just magical thinking?
Of all the proposals to avoid another Texas electricity crisis like February 2021, surely the most outside-the-box is Gov. Abbott’s plan to increase electricity demand from electricity-intensive cryptocurrency mining. The idea is to beef up electricity demand with new crypto mining, which will then attract new supply. And then scale back the crypto demand when the grid is strained and have that supply available for other consumers. Clever, right? Or maybe a bit too clever.
Of course, crypto currencies themselves are controversial: are they a Ponzi scheme or brilliant currency innovation? Does their mining destroy the environment or support a clean energy transition? Is crypto mining an economic boost for surrounding communities or a visual and noise nuisance? I’m going to set those issues aside today and focus on whether the Texas plan for grid reliability through crypto mining will work.
At first, the answer may seem to be obviously no: Adding demand will just make a grid tighter and increase capacity problems.
But promoters of this plan highlight that their economic thinking goes beyond the short-run demand increase to consider the longer-run additional supply that the demand would elicit. Plus, the plan recognizes the heterogeneity among electricity buyers, that crypto mining electricity demand is likely to be highly price-responsive and nimble, so it would quickly disappear when the price shoots up.
Boosting Capacity or Just Picking Up Excess Supply?
But the actual impact of this demand on market equilibrium will be more nuanced, and probably not in a way that is good for the plan. If crypto mining demand goes away during price peaks, then it doesn’t boost profits of electricity sellers at those peak times, profit that is a significant driver of new generation capacity investment.
In fact, if crypto demand is only a factor when low-cost supply is abundant (that is, very elastic supply, in econospeak), then it is unlikely to raise price much in those hours, so it doesn’t make new capacity investment more profitable. More generally, increasing demand at times when capacity is not scarce does not raise long-run investment in capacity (as I demonstrated in a 2005 paper, but I’m sure others had shown previously). Even if it increases price during off-peak times, that just leads to substitution of baseload for peaker capacity, but not more capacity.
Source: Brian Bartholomew
Basically, crypto miners would just pick up the excess supply from existing capacity in off-peak hours, creating little or no need for new capacity. If no new capacity is needed, attracting crypto to an area doesn’t address peak capacity shortfalls.
And, of course, there is also the question of whether the crypto mining industry is the sort of long-term stable demand augmentation that capacity investors would be looking for. The volatility of crypto currency values isn’t the most reassuring signal to generation investors. Nor are plans to drastically reduce energy used in crypto mining.
Whether crypto mining in Texas will significantly increase supply available during grid emergencies is ultimately an empirical question, but it is far from the slamdunk that some advocates suggest. If this is anyone’s idea of a serious response to the February 2021 electricity crisis, they really need to consider alternatives.
Mining Demand Response Payments
My concern about plans to use crypto mining for grid reliability, however, goes beyond whether it will really incentivize new generation capacity investment.
Most of the discussions envision miners cutting back during peak times as part of a demand response program. Demand response programs pay customers to reduce usage of electricity that they would have otherwise consumed. That can make some sense if the customer is buying at an inflexible retail rate and otherwise has no incentive to adjust (though even then such programs are subject to potential waste and abuse).
But, the crypto mining business model is based on buying electricity at wholesale prices or on a real-time variable price tariff. They would already have a strong incentive to cut back during grid emergencies without the additional payments from the demand response program, especially in Texas with its $5000/MWh wholesale price cap. That means the mining companies get paid for taking demand off the grid that they never would have put on the grid at those high prices anyway.
Actually, the interaction of crypto mining and demand response payments is even more concerning, because the payments are based on reductions from a baseline, which is usually determined by the customer’s consumption in certain previous hours. There is an industry of consulting firms set up to teach customers how to “optimize” payments from such programs, what some people would call maximize abuse of the system.
The constraint on such “optimization” is the customer’s limited ability to move around demand to create as high a baseline as possible and then reduce from that baseline when the demand response program is activated. 30% to 40% of crypto mining electricity usage is for fans and other cooling technologies that can suck up power on demand? What a great technology for increasing baseline quantities to “optimize” profits from demand response programs.
Well, actually it’s even worse than that. Just as paying polluters to capture their emissions – such as with the HCFC-22 refrigerant or methane from cattle – can encourage creation of such polluting activities by adding to the polluters’ operating profits, paying crypto mining for demand response is likely to encourage more crypto mining.
Is crypto mining the Ivermectin of grid reliability?
I admit, I’m not a crypto fan. I lean towards the environmentally-damaging, Ponzi-scheme view. But even if it is a brilliant financial innovation, it’s unlikely to be much help in the electrical engineering of a grid. Adding demand that disappears when the grid capacity is strained doesn’t create much incentive to add grid capacity, and that goes double for demand from an industry whose future is far from certain. At the same time, crypto mining is just about perfect for exploiting poorly-designed demand response programs, which would mean paying millions to “reduce demand” that was never going to be there in the first place.
Find me @BorensteinS most days tweeting energy news/research/blogs.
Keep up with Energy Institute blog posts, research, and events on Twitter @energyathaas.Suggested citation: Borenstein, Severin. “Crypto Mining for a More Stable Grid?” Energy Institute Blog, UC Berkeley, March 21, 2022, https://energyathaas.wordpress.com/2022/03/21/crypto-mining-for-a-more-stable-grid/
Severin Borenstein is Professor of the Graduate School in the Economic Analysis and Policy Group at the Haas School of Business and Faculty Director of the Energy Institute at Haas. He received his A.B. from U.C. Berkeley and Ph.D. in Economics from M.I.T. His research focuses on the economics of renewable energy, economic policies for reducing greenhouse gases, and alternative models of retail electricity pricing. Borenstein is also a research associate of the National Bureau of Economic Research in Cambridge, MA. He served on the Board of Governors of the California Power Exchange from 1997 to 2003. During 1999-2000, he was a member of the California Attorney General's Gasoline Price Task Force. In 2012-13, he served on the Emissions Market Assessment Committee, which advised the California Air Resources Board on the operation of California’s Cap and Trade market for greenhouse gases. In 2014, he was appointed to the California Energy Commission’s Petroleum Market Advisory Committee, which he chaired from 2015 until the Committee was dissolved in 2017. From 2015-2020, he served on the Advisory Council of the Bay Area Air Quality Management District. Since 2019, he has been a member of the Governing Board of the California Independent System Operator.