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Utilities see risks, rewards in cryptocurrency power demand


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Utilities see risks, rewards in cryptocurrency power demand

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A 2017 photo of HyperBlock's 240,000-square-foot data center.
Source: HyperBlock

With huge power demands and a highly competitive industry, miners of cryptocurrencies such as Bitcoin are constantly searching for cheap electricity.

In 2018, Canadian utility Hydro-Québec, with a surplus of low-cost hydroelectric power, found itself an attractive target for those cryptocurrency miners worldwide as dozens of companies looked to it for power. But when inquiries surged to more than 40% of the utility's generating capacity, Hydro-Québec quickly realized that it needed a more deliberate approach. The demand threatened to overwhelm its system and could have potentially forced it to build expensive, new capacity and raise rates on its existing customers.

The utility soon halted processing new applications to evaluate impacts to rates and started a review to determine how to protect itself and its ratepayers. Only after more than a year of delay is the utility opening back up to the market with a carefully controlled plan to accept new cryptocurrency miners under strict rules.

Across the U.S. and Canada, utilities large and small have found themselves in a similar situation. Public Utility District No. 1 of Chelan County, which owns about 2,000 MW of hydro capacity, had enough requests in early 2018 to have doubled the peak load on its system, prompting it to stop accepting new applications.

Now as moratoriums like those imposed by Hydro-Québec and Chelan County have come to an end, utilities — often those with access to cheap hydroelectricity — say they are ready to consider this new class of customers at the right price and under the right conditions. Their success at tamping down this surge, however, has opened a new question: Will demand still be there?

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S&P Global Market Intelligence followed the trends of how utilities adapted to cryptocurrency miners and digital currency price swings in recent years.
Credit: Cat Weeks

New demand under Hydro-Québec's fingertips

Montreal-based Hydro-Québec has been at the heart of the boom in interest. An influx of prospective cryptocurrency miners and blockchain companies — largely from Asia — expressed interest in relocating to Quebec, a region with low power prices and a cool climate that cuts down on the cooling needed for servers. The province-owned utility has been looking to take advantage of this new customer class with careful rules that put it strongly in control.

A crackdown by China, including a proposal this year by Beijing's National Development and Reform Commission for an immediate ban on cryptocurrency mining, is helping to fuel further interest in the Canadian province.

Hydro-Québec's roughly 46,000 MW of capacity, much of it from plentiful cheap hydropower, makes the utility an attractive partner for bitcoin miners looking to set up new operations. But the scale of the demand from cryptocurrency miners, more than 18,000 MW based on Hydro-Québec's last count, could swamp its system, forcing it to build new supplies and hike prices on its ratepayers.

"Over 300 [crypto] companies … have contacted us and expressed their interest in setting shop here," Hydro-Québec spokesperson Jonathan Côté said. "That's a lot. 18,000 MW is maybe 40% of our total capacity."

Fearing that the cryptocurrency demand could challenge its supply and consume too much of the low-cost power, the Quebec province in June 2018 suspended processing electric service applications from blockchain companies including miners, ultimately deciding to cap cryptocurrency mining load at 668 MW, including 368 MW of already-existing load. With the moratorium lifted, on June 5, Hydro-Québec launched a request for proposals on the allocation of a 300-MW block of power.

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The conditions of Hydro-Québec's request for proposals also seek to position cryptocurrency miners to serve as demand response resources. It requires that cryptocurrency companies be ready to cut their electricity usage by 95%, for up to 300 hours per year, especially during the winter peak period when the province often has to import costlier electricity. The change helps ensure that cryptocurrency load is beneficial to its system and that it can better manage winter peak issues.

Hydro-Québec said the digital currency demand for its hydroelectricity remains large, even though bitcoin prices significantly fell in late 2018 and early 2019. The utility said it found that 93% of potential blockchain customers were still interested in interconnecting based on a third-party survey done in summer 2018 that amounted to a sample size of about 5,200 MW of load. That survey sample included two projects, each requesting 1,000 MW, and a third asking for about 755 MW of capacity.

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Though bitcoin price swings can slow interest among miners, cryptocurrency miners see themselves as a stable source of load.

"I don't think there's a more stable load that's ever existed for the power grid than what crypto mining offers it," said Sean Walsh, founder of Redwood City Ventures, a cryptocurrency investment firm and head of Toronto-based cryptocurrency company HyperBlock Inc.

Cryptocurrency mining unfairly gets a bad rap, Walsh said in an April 2018 interview. HyperBlock runs Project Northwest, a facility in Montana with 13,000 servers that mine bitcoins, along with other cryptocurrencies such as Ethereum, Zcash and Litecoin. Project Northwest gets power directly from a hydroelectric dam, electricity that would otherwise not get purchased and used, Walsh said. Further, the center's flat demand, as it essentially run 24/7, is good for the grid because of its predictability.

Malachi Salcido, founder and CEO of Salcido Enterprises LLC, a bitcoin miner in Washington, expects that the relationship between utilities and cryptocurrency miners will evolve in the use of demand response or interruptible contracts, where a miner can cut back consumption when demand for electricity is highest. This frees up capacity on the electric grid but also shrinks costs for a miner.

As a vertically integrated miner that manages all aspects of the mining process except for the energy supply, Salcido Enterprises can control its load. Salcido has been trying to negotiate these types of agreements with utilities, but they are still a concept in Washington. "Most crypto operators don't have that option because they are providing services to consumers," Salcido said.

Planning challenges for smaller US utilities

In 2018, Chelan Public Utility District, or PUD, received requests for power, some of which were for 100 MW or more, when its average retail load at the time was about 200 MW.

Chelan PUD responded with a moratorium on new applicants until it designed a new rate class for cryptocurrency and blockchain companies. The new rates that took effect April 1, 2019, include fees and charges to ensure the companies incur the costs and risks of potential system upgrades. Under the rate design, miners located in their residential service territories would be charged electric rates that start at 9 cents/kWh and rise to 10.5 cents/kWh in April 2020. Miners located in Chelan's commercial and industrial service territories could apply for rates at slightly over 6 cents/kWh.

"I think probably the biggest difference is that we are assuming that we would make purchases from the market to serve cryptocurrency miner load as opposed to using our own generation resources. The biggest reason is miner loads are potentially quite large relative to our local retail load and we don't have enough [generation] available to provide to the cryptocurrency miners," Steve Wright, general manager of Chelan PUD, said in an Aug 3, 2018, interview ahead of the cryptocurrency rate's approval by the PUD's board in December of that year. Since the new rates took effect, the PUD received one new application, a spokesperson told S&P Global Market Intelligence on May 2.

Prior to the new rates, Chelan PUD's retail electric rates averaged 2.2 cents/kWh in 2017, below a state average of 4.6 cents/kWh and the national average of 7.1 cents/kWh. Other districts in Washington, PUD No 3 of Mason County, Grant County Public Utility District and PUD No 1 of Franklin County, were also tapped by miners given their retail prices were at or below the national average.

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Shifting costs for system upgrades

Utilities said they are willing to work with cryptocurrency companies provided they pay for network upgrades.

A challenge for Midwest provider Heartland Consumers Power District, which serves a number of rural communities with less than 2,000 people, is that they have limited room to increase electric rates even though they have enough power to accommodate additional load.

"Our goal for the kind of short term … is to stay relatively flat and have a 0% increase for the next three [or] maybe even five years," Casey Crabtree, Heartland's director of economic development and governmental affairs, said in a Feb. 12 interview. To prevent rate increases, the company has marketed an energy-only rate, called Energy One incentive, to new businesses including blockchain companies and cryptocurrency miners with at least a megawatt or more of load to their service territory. The incentive can be attractive to cryptocurrency miners given there is no demand charge and the rate can be locked in for three years, Crabtree explained, but it includes an upfront facilities charge if new load requires unique infrastructure upgrades.

Flathead Electric Cooperative Inc., a supplier serving about 50,000 customers in northwestern Montana, issued a moratorium for much of 2018 following an influx of requests and concern that demands from cryptocurrency miners could essentially swallow capacity on the system.

Since 2018, the cooperative has new requirements and fees for high-density load customers such as cryptocurrency miners, Don Newton, supervisor of energy services at Flathead, said in an interview in February. Cryptocurrency miners' interest in Flathead since then has "dropped off considerably" compared to early 2018, Newton said. Existing customers with mining interests are maintaining, rather than expanding, their systems. "It's quite a bit fewer calls," he said.

Still, the new requirements and fees for high-density load customers extend beyond cryptocurrency miners. A data center or a marijuana grower, for example, could fall under the category.

While some providers can issue moratoriums, South Dakota–based NorthWestern Corp. spokesperson Butch Larcombe said, "We are a regulated utility and we have an obligation to serve people as part of the regulatory arrangement, and so we don't think we have the ability to say we can put a moratorium out there."

Northwestern, which serves about 725,000 gas and electric customers across South Dakota, Montana and Nebraska, has had a number of inquiries in 2018 from cryptocurrency mining companies looking for spare transmission and substation capacity on NorthWestern's system, whose transmission wires cover the western two-thirds of Montana and the eastern South Dakota.

"We don't have issue with crypto operations as long as they work with us reasonably and we feel good that we can protect our other customers and that we can meet their needs and that we're not taking any undue financial risk," Larcombe told S&P Global Market Intelligence in a summer 2018 interview.

Crucially, the utility requires new customers to bear the cost of any upgrades needed to bring them onto the system. "We look at what upgrades might be needed and we essentially get them to pay for it significantly upfront, so that avoids us shifting any of those costs onto our other customers," Larcombe said.