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Cryptocurrency mining loads causing disputes around the globe

image credit: © Greenidge Generation

The secure and detailed record-keeping ability that blockchain makes possible has many enthusiasts of the technology claiming that its use is key to power grids of the future, where distributed energy resources predominate and consumers of all sizes generate, store, buy and sell electricity.

At the same time, the cryptocurrencies that blockchain makes possible are posing problems on the grids of the present.

The reason is the load drawn by cryptocurrency mining, which is causing disputes over power allocation in regions across the globe.

Basically, cryptocurrency miners perform the tasks of verifying cryptocurrency transactions and noting them in the distributed ledgers in which all transactions involving cryptocurrencies are tracked. They perform these tasks not because they are altruistic but because the first miner to verify a transaction, note it in a ledger and solve a mathematical problem associated with it is rewarded by being given a new cryptocurrency unit.

Because the process is complex and involves a competition among miners, cryptocurrency mining requires a lot of computing power, and therefore, a lot of electric power. That has led miners to set up shop in locations with cheap electricity where they aren’t always welcome.

Three reporters recently did a story for Radio Free Europe about one such location — Abkhazia, a state in the South Caucasus that is recognized as an independent country by Russia and some other countries but is considered part of Georgia by the Georgian government.

Abkhazia’s disputed status has hurt its efforts to attract outside investment to do such things as modernize its power grid. At the same time, however, it has become attractive to cryptocurrency miners because it has cheap power due to an abundance of hydroelectricity; inexpensive real estate; and loose regulation, stemming from its shaky government.

The combination of the load-heavy server farms operated by the cryptocurrency miners and Abkhazia’s ramshackle electrical infrastructure led its grid operator to impose rolling blackouts earlier this month and has produced calls for the state to shut down the miners’ operations until it can improve the condition of its grid.

Cryptocurrency miners are causing disputes in the US, too, albeit less dramatic ones.

For example, after some cryptocurrency miners located in upstate New York due to the cheap hydropower available there, they wound up using so much electricity that the local utilities that served them had to purchase additional, more expensive power, driving up the rates for all their customers. That might have been less of a problem had the miners provided some economic benefits to the communities in which they established operations, but they didn’t. They neither employed many people nor invested much money in the buildings they occupied. That led the New York Municipal Power Agency, which represents 36 municipal power authorities in the state, to ask the New York State Public Service Commission to let its members create a new tariff for such high-density load customers as cryptocurrency miners and in March 2018, the PSC acquiesced, according to an article by Paul Ciampoli for the American Public Power Association.

Nearly four months later, the PSC approved new rates for the Massena Electric Department that, it said in a press release, allow high-density load customers such as cryptocurrency miners to qualify for service from the utility under an individual service agreement. The tariff for such agreements, the PSC said, includes provisions that will protect the Massena Electric Department’s other customers from any increased power supply costs caused by the customers who buy electricity through the agreements.

While cryptocurrency mining can create problems for grid operators and utilities that serve them, it also can create opportunities for power producers.

One such power producer is Greenidge Generation, which earlier this year opened a cryptocurrency mining operation and server farm (pictured above) in its gas-fired power plant in Dresden, N.Y. The plant, which was converted from coal in 2017, is connected to the Empire Pipeline System, enabling it to produce cheap power. The mining operation had 7,000 units consuming more than 14 megawatts of power up and running when Greenidge announced its opening in March. At the time, that was enough to mine an average of 5.5 bitcoins, then worth around $50,000, per day, according to an article by Paddy Baker for CoinDesk. A month later, Greenidge said it had sold up to 30 percent of the mining operation’s computing capacity to undisclosed buyers consisting of hedge funds and family offices, according to a CoinDesk article by Wolfie Zhao.

Upstate New York is not the only region of the country attracting cryptocurrency miners due to its cheap power rates. Washington, which like upstate New York, has abundant hydropower, and Texas, with its abundant wind power, also are attracting them and seeing some disputes as a result.

The latest dispute involving Washington concerned an attempt by a Canadian bitcoin mining company to get a license from the Department of Energy to export power from the state for its use.

DMG Blockchain Solutions Inc., which is based in Vancouver, British Columbia, applied in January for an export license. In May, Public Citizen, a consumer advocacy nonprofit based in Washington, D.C., filed a motion with the DOE to intervene in and comment on DMG’s application request.

“Cryptocurrency mining is extraordinarily energy-intensive and can lead to major strains on local U.S. power supplies. At the same time, the process of mining is designed in a manner that wastes the overwhelming majority of the energy it consumes. U.S. cryptocurrency miners are struggling to meet their own power demands. This appears to be the first-ever application to export power by a cryptocurrency miner, and approval may result in a rush of similar applications. For these reasons and more, DMG’s application raises serious, potentially fatal concerns under section 202(e) [of the Federal Power Act]. The Department should proceed with extreme caution. It likely should deny the application or, if granting it, place conditions on it,” Public Citizen wrote in its motion.

Public Citizen’s effort was unsuccessful and DMG said in a September press release that it had been granted a license.

In Texas, Jakov Dolic, a German citizen who lives in Switzerland and says he’s the co-founder of Bitcoin miner Layer1 Technologies, is suing over the ownership of a substation that he says he bought for $16.24 million and paid $3.5 million to expand, according to a story by Daniel Palmer on Coindesk.

Dolic, who says he developed a liquid cooling system that would enable Layer1 to take advantage of Texas’ cheap wind power despite the state’s summer heat, alleges that he bought and expanded the substation after Layer1 CEO and co-founder Alexander Liegl failed to raise $50 million from investors for a large bitcoin mining operation and that Liegl agreed to refund him the money he spent on the substation but never did.

Liegl said the lawsuit “is completely meritless and contains numerous allegations that are demonstrably and categorically false.”

Layer1, which is based in San Francisco, opened a Texas mining facility this year.

 

 

Discussions

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Christopher Neely's picture
Christopher Neely on Nov 29, 2020

This is going to be something to watch, for sure. Blockchain may be a crucial part of the future for the safe operation of electricity grids, but it sounds like cryptocurrency mining may also end up shaping its future, for better or worse. That these lawsuits later in your article represent international interests on U.S. power is truly fascinating. Crypto miners will need to begin enhancing their pitch on why the massive amount of wasted energy used on mining is worth it. 

Peter Key's picture
Peter Key on Nov 30, 2020

Cryptocurrency is the wild west in a lot of ways. I knew crypto miners were a source of dispute in Washington and upstate New York, but I didn't realize they'd set up shop in a disputed region of Georgia.

Peter Key's picture

Thank Peter for the Post!

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