The negative news stories from this past year involving the cryptocurrency industry were so numerous and devastating, it’s easy to forget the euphoria with which the year commenced. Bitcoin closed 2021 trading at nearly $48,000 per coin, off its November all-time high but still carrying a lot of momentum. CNBC aired its “Crypto Night in America” program Dec. 29, 2021, tapping into the enthusiasm, and nearly a month later no fewer than four advertisements were placed—at $6.5 million per 30 seconds—during Super Bowl LVI by cryptocurrency firms.
Fast forward to December 2022 and the world looks very different. The value of cryptocurrency has plummeted—including Bitcoin. Punctuating the decline in value are the numerous stories of fraud and bankruptcy, the most notorious of which involve Sam Bankman-Fried, whose company FTX—one of those Super Bowl advertisers—mismanaged and possibly stole billions of dollars from customer accounts.
Cryptocurrency failures are not new or even very rare. Indeed, there have been literally thousands of failures since the introduction of the asset class. What made 2022 remarkable was the scope of the failures, the size of the entities involved and the speed with which it all happened, and crypto miners have not escaped the pain experienced by funds and exchanges. As the value of crypto plummeted throughout 2022, many miners went out of business and others have scaled back their operations amid declining margins.
As the so-called crypto winter chases weaker and less committed participants from the market, the remaining players will likely see a vastly changed landscape once the snow melts. From the dot-com bust of the early century to the fallout of the global financial crisis of 2007-2009, market trauma has ultimately led to a heightened regulatory response, and one would expect the effort to regulate the cryptocurrency industry—something that was well underway even prior to 2022—will gain significant momentum in the coming year, not just in terms of crypto’s intersection with securities law but also its relevance to the ongoing energy transition.
A Texas Framework for Crypto Miners
Even as the crypto winter descended, Texas energy policymakers were hard at work to determine how best to regulate crypto mining, especially given the large quantities of electricity required by mining. In March 2022, the Electric Reliability Council of Texas established an interim process whereby large loads such as bitcoin miners could initiate the process of connecting to the Texas electric grid. This process led to the establishment of the Large Flexible Load Task Force, which until recently had met monthly since March to establish a framework for miners and other large loads to connect to the ERCOT grid with the initial draft of the framework to be issued for public review in early 2023. In addition, federal lawmakers have inquired of ERCOT how mining impacts the grid, expressing concerns about its energy demand. In a press release, the lawmakers claimed that “crypto mining is adding significant demand to an already unreliable grid [and] contributing to the global climate crisis.”
The question raised by the lawmakers’ inquiry is still an open one and far more complex than perhaps they realize. Additionally, there is a significant openness from Texas policymakers and grid operators concerning crypto mining and its potential to facilitate grid flexibility. Much, then, depends on the framework under development by the LFLTF. While the rules and requirements for miners in Texas have not yet been implemented, their contours are becoming clearer and will be known in early 2023 once the LFLTF makes its final recommendations.
ERCOT’s Notice of Interim Voluntary Curtailment Program for Large Flexible Loads
As the LFLTF works toward its final recommendations, ERCOT has launched a temporary program to enhance grid reliability during times of high system demand. On Dec. 6, ERCOT issued a Market Notice establishing its Interim Voluntary Curtailment Program for large flexible loads (or any customer connected to a transmission service provider). In order to participate in the program, crypto miners must be able to communicate with ERCOT’s telemetry system so that ERCOT may call on miners to shut down or curtail their electricity consumption during periods of high system demand. Notably, miners will not receive payment for participating in this program. Furthermore, ongoing participation in the program is voluntary—ERCOT will not refer any customer to the Public Utility Commission of Texas for failure to comply with any ERCOT curtailment request under this program.
The voluntary nature of the program is worth noting. Throughout 2022, crypto miners have demonstrated a high degree of compliance with ERCOT’s demand-response programs; for example, during this past summer’s extreme heatwave, ERCOT warned of a possible shortage and appealed to consumers to conserve energy the following afternoon. That same day—July 11—nearly every major bitcoin miner in the state shut down, reducing electricity consumption by an astounding 1,000 megawatts. Having said that, 2022 has been an unusual time for miners as the underlying economics of their operations have been challenged. Shutting down a mine was a very different proposition when Bitcoin traded at $60,000 or when the margins of mining were on the upswing.
Industry compliance with such voluntary programs is encouraging; however, given the direction of recent regulatory efforts at both the state and federal level, it is unlikely to form the basis of a future regulatory regime, where grid flexibility is going to be crucial. Voluntary compliance might be considered too uncertain a variable.
Still, the crypto industry’s potential to consume large loads of electricity in a more or less scalable manner—and at the regulators’ discretion—could lead to a mutually satisfactory solution. This past year presented renewable energy project developers with significant hurdles. It is estimated that the utility-scale solar market will experience a 40 percent drop from 2021 buildouts.
Supply chain disruptions have altered the underlying economics of solar projects, reversing a long-term trend toward lower cost per MWdc. Since the Covid pandemic, the industry has grappled with a constellation of worries, ranging from increased freight costs and longer lead times to inflated commodity prices and labor scarcity. As a result, projects have taken longer to deliver and are more expensive. As the risk profile for projects has evolved, it makes the demand side of the equation that much more important, and the presence of crypto miners could improve the viability of renewable energy projects during this period of uncertainty. Crypto miners are location-agnostic, and many recognize that they can locate in proximity to renewable power plants, purchasing power from those facilities when it is available and curtailing consumption when electricity is needed elsewhere or is too expensive for mining.
In any event, more regulation is a virtual certainty, and we anticipate the regulatory framework in Texas for crypto miners will be formalized in the coming year. How Texas chooses to proceed will be closely watched across the country, as will the data that results from the state’s grid management.