Bitcoin is set to reshape the Texas power market

Sam Bankman-Fried, founder of the FTX cryptocurrency exchange, has made a fortune in the industry. At the age of just 30, his net worth was estimated by Forbes magazine at US$24 billion. So he is not really someone you would expect to be casting doubt on the potential for a cryptocurrency to play a larger role in the global economy. But this month he did exactly that, telling the Financial Times that the energy required to mine bitcoin would limit its ability to grow. “It has to be the case that we don’t scale this up to the point where we’re spending 100 times as much eventually as we are today on energy costs for mining,” he said.

In Texas, the warnings about the rapid growth in energy consumption for bitcoin are about to be put to the test. Institutional bitcoin miners in the state are currently using about 1.5 gigawatts across 10 facilities, with a further 500 megawatts for small-scale mining, according to the Texas Blockchain Council. That is a relatively modest share of the state’s total power demand. Wood Mackenzie expects a summer load peak on ERCOT, which serves about 90% of Texas, of 75.7 GW. But electricity demand for bitcoin is expected to grow rapidly.

ERCOT says there is more than 18 GW of cryptocurrency load that is working on interconnecting to the grid, drawn by Texas’s relatively low power prices, tax incentives, and light-touch regulation. Not all of those projects will come online immediately, but Bloomberg reported in April that ERCOT officials expect 5-6 GW of new demand from miners over the next 12 to 15 months, and were working to be ready for an additional 25 GW over the next decade. That would imply an increase of about 30% from the current peak load.

There has been a vigorous debate over whether bitcoin helps or hinders the transition to low-carbon energy. In several states, bitcoin mining operations have given a new lease of life to coal-fired and gas-fired power plants that might otherwise have had to close. But in Texas, the bitcoin industry says it is supporting wind and solar power by creating flexible load that helps maintain the stability of the grid as it becomes increasingly reliant on variable renewable generation.

Lancium, a Houston-based company that provides energy management software and facilities for data centres, is playing a key role in the growth of bitcoin mining in Texas. It is developing two of what it calls its Clean Compute Campuses, at Fort Stockton in west Texas and Abilene, in the centre of the state, to be sites for bitcoin mining and other computing operations. They will have loads when fully developed of up to 325 MW and up to 1.2 GW respectively, and there are other projects that are planned but not yet announced.

The key feature of these sites is that they will use Lancium’s software to meet ERCOT’s specifications for Controllable Load Resources (CLRs), allowing demand to be ramped up and down quickly as needed by the grid. As ERCOT puts it: “This programme is more dynamic and flexible than traditional load management programmes.” In effect, Lancium says, the data centres can function like “negative power plants”, responding to price signals in the market and providing ancillary services to the grid including frequency regulation and synthetic inertia.

In general, data centres have been reluctant to join in demand response programmes that would compel them to curtail their operations when called on by the grid. But Lancium argues that “Bitcoin miners are willing to do so to a) minimise their costs and b) assist ERCOT by returning electricity to the grid during times of scarcity.”

ERCOT is embracing the possibilities of this new industry, and has set up a Large Flexible Load Task Force to address the challenges raised by integrating new data centres that will be very significant sources of demand. When fully built, Lancium’s Abilene site could be the single largest load on the Texas grid, overtaking the current leader, an LNG plant. The task force held one of its regular meetings this week to discuss its longer-term approach for connecting these types of large loads to the grid. More immediately, ERCOT said it was working with transmission owners to review the proposed new connections for 18 GW of bitcoin mining “as quickly as possible”.

A recent study on the consequences of adding new data centres to the Texas grid, commissioned by Lancium, suggested the impact would vary widely depending on whether the load was flexible or inflexible. The authors, Joshua Rhodes of the University of Texas and two other researchers, found that adding 5 GW of flexible load from data centres would mean that by 2030 ERCOT would have slightly more wind and solar power, and slightly less gas-fired generation, compared to a base case with no additional data centres. Adding 5 GW of inflexible load, on the other hand, would mean more wind and solar, and also more gas.

If the additional flexible data centres can shed at least 13-15% of their load over the course of a year, they will lead to lower greenhouse gas emissions than in the base case, the analysis concludes. The economics of bitcoin mining vary according to the price of the currency a

Ben Hertz-Shargel, Wood Mackenzie’s global head of grid edge, makes a compelling case against the idea that “bitcoin mining is good for the grid” on the Blockchain Debate Podcast. It is an excellent discussion, and well worth hearing in full. In a debate where there is not much common ground between the two sides, there is one clear point of agreement: if there are going to be bitcoin mines, it is much better for their power demand to be flexible.

In the longer term, there are many other technologies that can help support the grid as its reliance on variable renewables increases. Battery storage, green hydrogen, increased transmission capacity, and flexible load for other uses such as computing operations that are not particularly time-sensitive, can all play a role. Bitcoin’s great advantage is that the technology is available right now and the business model is proven.

Ultimately, though, the critical factor will be whether bitcoin comes to play an important role in the global economy. If it does not, then all of those other technologies for providing flexibility on the grid are probably going to look more appealing. If it does, then policymakers, businesses and consumers are going to have to work out how to manage bitcoin’s energy consumption and emissions as it grows. The use of variable renewables combined with flexible load data centres will probably look like the most attractive option.

The US financial regulator steps up scrutiny of ESG claims

As interest in using Economic, Social and Governance (ESG) factors in investment has soared, financial regulators have become increasingly concerned about the scope for misleading claims and “greenwashing” by companies and asset managers. The US Securities and Exchange Commission this week moved to crack down on those problems, publishing proposed regulations that would impose new requirements on asset managers that want to market funds as using ESG criteria.

The proposed new rules include a stronger requirement for funds “to adopt a policy to invest at least 80% of their assets in accordance with the investment focus that the fund’s name suggests.” In other words, if you have a fund that has “ESG” in its name, no more than 20% of the assets in that fund can be chosen without any regard for ESG principles.

The proposals are aligned with another announcement made by the SEC this week: it charged BNY Mellon Investment Adviser for “misstatements and omissions about Environmental, Social, and Governance (ESG) considerations in making investment decisions for certain mutual funds that it managed”. BNY Mellon Investment Adviser agreed to pay a $1.5 million penalty to settle the charges.

The SEC order found that for three years 2018-21, the firm had “represented or implied… that all investments in the funds had undergone an ESG quality review, even though that was not always the case.” In fact, numerous investments held by some of the funds did not have an ESG quality review score when the investment was made. Adam Aderton, co-chief of the SEC Enforcement Division’s Asset Management Unit, said in a statement: “Investors are increasingly focused on ESG considerations when making investment decisions… As this action illustrates, the Commission will hold investment advisers accountable when they do not accurately describe their incorporation of ESG factors into their investment selection process.”

Aderton is a member of the SEC’s Climate and ESG Task Force, set up in March 2021. The regulator’s moves to enforce some standards for ESG investing may help improve its reputation, which has taken something of a battering in recent weeks, under attack from Elon Musk and Stuart Kirk, head of responsible investment at HSBC AM, among others.

In brief

Shareholder votes at leading oil and gas companies have provided a snapshot of investors’ views on climate issues following the energy crisis. At ExxonMobil’s annual meeting, 52% of votes cast supported a shareholder proposal calling for the board to “seek an audited report assessing how applying the assumptions of the International Energy Agency’s Net Zero by 2050 pathway would affect the assumptions, costs, estimates, and valuations underlying its financial statements.” However a proposal requesting the company to set targets to reduce its Scope 1, 2 and 3 greenhouse gas emissions that are consistent with the goal of the Paris Climate Agreement was backed by only 28.1% of the vote.

The outcomes are consistent with the principles for climate-related shareholder proposals set out by BlackRock recently. The asset manager said it was more likely to support proposals “that are consistent with our request to companies to deliver information that helps us to understand the material risks and opportunities they face,” and less likely to back moves that “implicitly are intended to micromanage companies.”

US demand for gasoline is beginning to show signs of weakness following the steep rise in prices. Over the past four weeks, gasoline sales have been running about 6.5% below their level in the same period of 2019.

The British government has announced a windfall tax on oil and gas companies, intended to raise about £5 billion. The new tax, formally known as the Energy Profits Levy, adds an additional 25% tax on UK oil and gas profits on top of the existing 40% headline rate, taking the combined rate of tax on profits to 65%. The government said it would be phased out in the future, “if oil and gas prices return to historically more normal levels”.

Last week, Wood Mackenzie’s chief analyst Simon Flowers assessed the pros and cons of a windfall tax, concluding that the best way forward might be a review of the entire energy fiscal system, to put in place a comprehensive integrated policy that sets the right incentives both for oil and gas production and new renewable energy supplies.

Two of President Joe Biden’s senior advisers have been on a “secret visit” to Saudi Arabia, for talks on issues including a deal to increase oil production, Axios reported.

Other views

Julian Kettle — Could Big Energy and miners join forces to deliver a faster transition?

Kelsey Goss — Bright outlook for global solar, but regional challenges will affect the supply chain

Coal: how the Russia-Ukraine war is changing the global outlook

Steel alloys: a defining moment

Roger Pielke Jr — Why investors need not worry about climate risk?

Alexander Kaufman — The lithium war next door

Jonathan Pickering — Laggard to leader? Labor could repair Australia’s tattered reputation on climate change, if it gets these things right

Quote of the week

“The crisis is just indicating to us [that] you are running the whole world with not enough spare capacity… Instead of really working on a transition that will help the world by 2050, we are pushing the world to more coal because we are not taking seriously the issue of energy security, affordability and availability.” — Amin Nasser, chief executive of Saudi Aramco, told the Financial Times that underinvestment in hydrocarbons was a threat to global energy security and affordability.

Chart of the week

This comes from a recent online briefing by Wood Mackenzie analysts about prospects for Australia’s LNG exports and the pressure on operators to cut greenhouse gas emissions. It shows one of the most radical changes that we expect to emerge in the wake of Russia’s invasion of Ukraine: a lasting shift in the sources of European gas imports. The EU’s REPowerEU plan for curbing imports of Russian gas includes proposals for increasing supplies of alternatives, including low-carbon hydrogen and renewable natural gas, and for cutting gas consumption overall. Scaling up those technologies to the point that they can make a material difference will be challenging, however, and for at least the next 15 years or so the most readily available alternative to Russian gas will be increased imports of LNG.