Crypto mining opportunities

Crypto mining opportunities

February 28, 2022 | By Keith Martin in Washington, DC

Cryptocurrency miners are becoming a potentially lucrative outlet for some power suppliers.

Electricity is a large percentage of the cost of mining bitcoin and ether, two currencies that rely on “proof of work” using power-hungry banks of computer servers to solve complicated equations to earn coins and validate transactions. Bitcoin mined at a price of $50,000 per bitcoin is equivalent to selling electricity for more than $400 a megawatt hour. (For more detail, see “Cryptocurrency Mining for Power Suppliers” in the December 2021 NewsWire.)

There are three main business models. The simplest is a power contract by a renewable energy generator to supply electricity. The typical power purchase agreement is for five years of electricity at the local spot price, plus an adder. The miner enters into a hedge to cap the amount it will have to pay for electricity. A more complicated model is a joint venture between the renewable energy generator and the crypto company to own the data centers and split the profit. In some cases, the crypto company owns its own solar array inside the fence in an effort to find cheap power.

Cryptocurrency companies are being wooed by some states, while other states are concerned about the amount of electricity consumed.

China cracked down on cryptocurrency transactions and mining in September 2021, citing national security and economic policy concerns. This has led to a large migration of crypto operations to the US, increasing electricity demand in places where crypto data centers are relocating and, in some cases, contributing to delayed retirements of some fossil-fuel power plants.

The US share of bitcoin mining increased from 4% in August 2019 to 35% in July 2021.

Bitcoin electricity consumption increased threefold from early 2019 through May 2021 and is now equivalent to the electricity usage of a country like Sweden with 10 million people.

One of the states wooing data centers, Kentucky, exempted electricity purchased for crypto mining from the 6% state sales and use tax and 3% utility gross receipts tax in March 2021. There is also a sales and use tax exemption for material and equipment purchased to retrofit existing industrial facilities, including for crypto mining.

Texas exempts electricity, servers and software purchased for use in data centers from its 6.25% sales tax for 15 years.

In all, 17 US states enacted laws in 2021 that help cryptocurrency infrastructure. Examples are Arkansas, which amended its Uniform Commercial Code to address cryptocurrency, and Nebraska, which created a regulatory framework for digital depositary institutions.

Wyoming is studying whether to allow use of bitcoin to pay sales and use taxes. The main backer of the proposal in the state legislature withdrew the proposal for now, but said he plans to reintroduce an updated proposal next year.

A strong Trump and “stop the steal” backer in the Arizona Senate is promoting a bill to make bitcoin legal tender in Arizona. The proposal raises issues under article 1, section 10 of the US constitution, which restricts states from issuing their own currencies.

Senator Elizabeth Warren (D-Massachusetts) and seven other Democrats sent letters to six cryptocurrency mining companies in late January asking for information about their electricity usage. The six are Riot Blockchain, Inc., Marathon Digital Holdings, Stronghold Digital Mining, Bitdeer, Bitfury Group and Bit Digita. Warren sent a similar letter in December to Greenidge Generation Holdings.

The letters ask for information on the effect of digital mining on climate change, the local environment and the cost of electricity for retail customers.

A US House subcommittee held a hearing on January 20 about the same issues. A Democratic staff memo prepared for subcommittee members in advance of the hearing called the competition to be the first to solve increasingly complicated math puzzles over time to win the 6.25 new bitcoins that are issued every 10 minutes a “vicious circle” that encourages mining companies continuously to increase the computing power of their facilities to compete.

It said the estimated annual energy usage of the bitcoin network grew from 77.78 terawatt hours on January 2, 2021 to more than 198 terawatt hours by November 26, 2021. Electricity usage by the Ethereum network grew from 14.81 terawatt hours to more than 92 terawatt hours during the same period.

The economics of increasing electricity usage do not work unless the price of the cryptocurrencies increases in tandem. Bitcoin increased in value by 60% and ether by 200% over the same period.

The memo said the annual CO2 emissions of the mining operations for the two currencies are equivalent to the tailpipe emissions of 15.5 million gasoline-powered cars.

The computer servers used for mining last three to five years before becoming obsolete. Mining operations produce about 30,000 tons a year of electronic waste that cannot be repurposed and that create a disposal problem at landfills, according to the staff memo.

One witness at the hearing suggested that energy usage for crypto mining should be compared to other stores of value like gold mining, which is not only energy intensive but also dirtier. Another said that bitcoin mining still accounts for only 0.1% of global electricity use and, in the US, uses 58% clean energy compared to 31% for the US energy grid as a whole.

Spikes in electricity use are creating challenges for some communities. Plattburgh, New York saw crypto mining spike to 20% of total electricity consumption in the winter 2018, forcing the city to buy more expensive power on the market beyond its allotment of more affordable hydroelectricity.

Ethereum is moving to a “proof of stake” process for validating transactions that may use 99.99% less energy than the current “proof of work” process.