The State of Bitcoin Mining — Texas
Unearthing the Power of Bitcoin Mining in the Lone Star State: A Report on Texas’ Growing Industry
The Diversified American Grid
The structure of the US power grid is notably intricate, with significant variations from state to state. The energy market exhibits substantial disparities, depending on whether it operates under a regulated or deregulated framework, as we explored in our previous report.
Texas has a deregulated electricity market, with the Electric Reliability Council of Texas (ERCOT) serving as the Independent System Operator responsible for managing 90% of the electric load. In essence, ERCOT is in charge of balancing the supply and demand in real-time on the Texas electricity market, adhering to the “marginal price setter” principle to set prices.
When the demand for electricity increases, ERCOT selects power plants that have the lowest marginal cost of producing an additional unit of electricity to match the demand. The marginal cost increases as more expensive power plants are brought online to generate additional electricity. The price is set based on the marginal cost of the last power plant that was needed to meet the demand, which means that the more expensive power plants are only needed when demand is high.
This approach encourages power generators to operate more efficiently and to invest in low-cost power generation, which benefits consumers by keeping prices competitive.
Legal History
Given the recent surge of regulatory activity in the Bitcoin mining industry and its potential impact on the hashrate, understanding the regulatory dynamics at both the federal and state levels has become crucial. In this article, we will focus on the most significant legal developments in Texas in recent years.
2019
March — Texas House introduced a bill to establish a Texas blockchain working group known as the Texas Blockchain Council (TBC).
April — The Texas Department of Banking (DOB) issued a revised supervisory publication known as Memorandum 1037 which provides virtual currency a legal definition.
2021
June — The Texas Virtual Currency Act (TVCA) recognizes the legal status of virtual currency, ensures that cryptocurrencies are subject to commercial laws, and supplies legal rights to cryptocurrency holders.
June — The Texas Department of Banking (TDB) published Industry Notice 2021–03 that legally defines cryptocurrency and details the legal obligations of banks providing cryptocurrency services
2022
April — Fort Worth became the first city government in the U.S. officially to mine bitcoin
October — Massachusetts Senator Elizabeth Warren and a group of six other U.S. lawmakers have requested information from the head of ERCOT, on the energy usage and potential environmental impact of crypto miners.
2023
March — Texas lawmaker Cody Harris introduces a resolution to better protect the rights of “bitcoiners’’ in Texas. It states the protection of “individuals who code or develop on the Bitcoin network”, and suggests that “individuals who mine Bitcoin in Texas will never be inhibited by any law or resolution” and finally ascertains “no citizen of Texas shall ever be deprived of their right to own Bitcoin’’.
In parallel, while Bitcoin miners are actively organizing lobbying groups to better educate and contribute to the policy landscape, Texas’ favorable jurisdiction could be an outlier regarding the ongoing Federal regulation. However, at the moment, we cannot predict what the Federal decisions will be, this is just opinion.
In conclusion, the regulatory environment in Texas has been favorable for Bitcoin miners due to the state’s pro-business and pro-growth mindset, low tax burden, strong tradition of property rights, and supportive political leadership. With the introduction of the Texas Blockchain Council, legal definitions of virtual currency, the Texas Virtual Currency Act, and the first city government officially mining bitcoin, Texas has become a hub for cryptocurrency innovation.
Additionally, Texas lawmaker Cody Harris’s resolution to protect the rights of bitcoiners demonstrates the state’s continued commitment to the industry. While there is ongoing federal regulation, Texas remains an ideal location for Bitcoin mining operations due to its friendly regulatory and political climate.
Distribution of Miners
Texas has swiftly emerged as one of the most alluring global destinations for Bitcoin mining. As of Q4 2022, our research reveals that industrial-scale public miners are operating at a capacity of 1.25GW in the region, constituting an impressive 51.38% of the total capacity utilized by public miners across the country.
In total, there are currently 15 active or planned mining sites in the region, with seven located in the renewable energy-rich region of West Texas. Notably, sites labeled as “UC” were still under construction as of the end of 2022. As of the end of March 2023, only the Marathon site in Granbury had successfully powered up its mining equipment, despite being under construction previously.
Interestingly, miners in the state can be categorized into two groups based on their electricity mix distribution: East and West Texas.
The Eastern region has a greater concentration of natural gas plants, with all six miners operating in this area relying on the grid. As a result, these miners have a higher exposure to variable electricity prices, with indirect exposure to natural gas.
Renewables are predominantly concentrated in the West, which is also home to a higher number of behind-the-meter miners. These miners typically co-locate directly with electricity generators and draw power directly from the plant’s meter, bypassing the need for connection to the grid. However, some miners, such as Cipher Mining, rely on other energy sources and have secured a PPA with a natural gas power plant in Odessa. The details of Core Scientific’s infrastructure currently operating in Pecos are still unknown to us.
Whereas Sphere 3D is also mining in Granbury we put it just below Marathon for data visualization purposes. Furthermore, Cipher Mining is also running two other data centers of 20MW “Bear & Chief”, but they do not appear in the present map.
Hashrate Deployed
Last year lagging mining orders, slowed by logistical bottlenecks, spectacularly increased the hashrate. While the global hashrate rose by 41.40% in 2022, Texas surged by 367.61%. In 2022, Texan public miners plugged in approximately 24.2EH/s of machines, the bulk of this growth took place during the second half of the year when 21.7EH/s were installed.
Since its inception, Riot has been a pioneering public company and a significant player in the mining scene of the region. As of Q4 2022, the miner had a self-mining capacity of 9.7 EH/s, out of which we estimate that at least 4.4 EH/s are allocated to its hosting activities.
Cipher was the second listed miner to unpack its machines in the state. Similar to Riot, it showed a continuous growth of its hashrate and gradually ramped up its bitcoin production energizing 28,0000 ASICs in less than twelve months.
The surge of the Texas trend can largely be attributed to Marathon and Core Scientific. Marathon recently exited its Montana coal power plant and over the last six months, it has energized around 63,500 miners located in a wind farm in McCamey, Texas.
Ultimately, throughout the second half of the year, Argo steadily deployed its fleet consisting of 20,000 S19J Pro22. However, to avoid bankruptcy with the bear market in full swing, the miner was compelled to sell its Helios facility to Galaxy Digital in December. Sphere 3D just mined its first bitcoin in Q4 2022.
Miner Electricity Mix
Famously known for the large amount of stranded energy and renewables, particularly in West Texas with roughly 34GW of power with only 12GW of transmission and 5GW of demand, miners could leverage the benefits of solar and wind energy.
Based on our analysis, the carbon footprint of miners is relatively greener compared to the grid. We estimate that 43.58% of public miners’ electricity comes from sustainable sources, whereas the share of sustainable energy in the state’s mix is closer to a third (34.53%). The use of fossil fuels in the miner’s energy mix (57.54%) is mainly due to the significant use of natural gas.
Currently, natural gas dominates both energy mixes, accounting for almost half of the electricity used by both public miners and the state. Wind power comes in second place for both, but there are noticeable discrepancies in coal and solar consumption.
Although miners use coal, their consumption is only half of that of the region.
On the other hand, the share of miners in solar power is more than three times that of the entire state. However, miners rely less on nuclear power compared to the Texas grid.
Please note that these estimates are conservative as they are based on a set of assumptions.
In reality, the share of wind power in the miner’s mix could be more significant, while the natural gas share is presumably slightly overvalued.
Additionally, our sample does not include private miners’ energy sources, which are also notable in the region.
Electricity Mix
Despite some shifts in the energy mix over time, natural gas continues to reign supreme in Texas’ electricity supply, accounting for a dominant 49.04% share in 2022. This fossil fuel has been a consistent source of power for the state for nearly a decade, meeting about half of its total electricity demand.
Since 2012, the growth of renewable energy in Texas has been largely driven by wind power. According to the latest EIA data, wind energy accounts for 21.83% of the state’s electricity supply in 2022, a significant increase from its 7.55% share a decade ago.
While solar energy used to contribute less than 1% to the mix, recent progress has led to a doubling of its production capacity, resulting in a 4.26% share in 2022.
The total share of renewables (including biomass) in the mix has surpassed a quarter of the state’s electricity supply, reaching 26.31% in 2022 compared to only 7.81% ten years ago.
In Texas, the use of coal-fired power plants is steadily declining as the state moves towards cleaner energy sources. In 2012, coal accounted for a significant portion of the grid, powering one-third of the state’s electricity supply. However, in 2022, its share has dropped to 16.36% of the mix, reflecting the state’s efforts to transition away from fossil fuels.
On the other hand, the contribution of nuclear energy remains relatively stable in Texas, despite experiencing a dip last year with a share of 7.98%.
There are currently two nuclear power plants in Texas, the South Texas Nuclear Generating Station and the Comanche Peak Nuclear Power Plant, with a combined generating capacity of approximately 5.2GW.
The expansion of nuclear power in Texas has faced several challenges, including high capital costs, regulatory hurdles, and public opposition due to safety concerns. Additionally, the low natural gas prices and the growth of renewables have made nuclear power less competitive in the state’s electricity market. Nevertheless, nuclear power continues to play a role in providing reliable baseload power and is expected to remain a part of the state’s energy mix for the foreseeable future.
The evolving energy mix in Texas over the past decade, marked by a growing share of renewable energy, is of great significance to the Bitcoin mining industry. By deploying more renewable energy sources, which have lower marginal costs, miners can potentially reduce their operating costs and drive down wholesale energy prices on the bid curve.
To address these challenges, a comprehensive “energy risk management model” should be developed to evaluate the dynamics of the electricity mix and to measure the impact of different scenarios on OPEX.
This model would help miners to make informed decisions about their energy consumption and optimize their operations cost-effectively and sustainably. As the energy landscape in Texas continues to evolve, proactive management of energy risks will be essential for the long-term success of the Bitcoin mining industry.
Dealing With The Natural Gas Exposure
After the major shock endured by energy markets, particularly for gas and coal, the energy crisis had also rippled effects on Bitcoin miners. Bankruptcies and the rise in hosting rates accurately illustrate the upward pressure exerted by these disruptions on the industry.
Zooming into the Henry Hub — Henry Hub serves as the official delivery location for futures contracts on the NYMEX— and ERCOT prices per zone, we notice an important correlation between the two, especially during the rise in prices experienced in 2022. Often, spikes in Henry Hub are followed by upward pressure on electricity rates.
The winter storm that hit Texas in February 2021 exposed the vulnerabilities of the state’s power supply and caused electricity prices to skyrocket. However, the recent surge in natural gas prices is driven by tighter market fundamentals and geopolitical factors, which may pose a major challenge for miners who are exposed to variable rates.
If the volatile environment in the gas market persists, it could lead to a significant increase in electricity prices in Texas, which could be detrimental to the profitability of miners. As the price setter of the state’s electricity market, ERCOT plays a critical role in managing these risks and ensuring a stable and affordable supply of electricity.
If there is a prolonged upward movement in gas rates, it could mark the end of the era of cheap electricity prices in Texas, which could have far-reaching implications for the state’s economy and its competitiveness in attracting energy-intensive industries like Bitcoin mining. Therefore, it is imperative for miners to closely monitor the gas market and develop effective energy risk management strategies to mitigate the impact of potential price fluctuations.
To offset the volatility of electricity many forms of hedges have emerged: PPA, behind-the-meter, forwards contracts, Block Green streaming agreements, and other kinds of derivatives.
In particular, miners with a favorable PPA and part of the ERCOT demand response program could leverage the volatility in electricity prices. Miners can sell power to the grid when breakeven costs are reached and benefit from peaks in prices as Riot did last summer during a heat wave. In Texas, both Riot at Rockdale and Cipher at Odessa have secured PPAs.
Behind-the-meter installations provide a great opportunity for Bitcoin miners to significantly reduce their exposure to volatile grids. In this type of installation, the power produced is consumed on-site, resulting in a lower proportion of electricity coming from the grid and hedging a greater share of variable costs.
Texas has already seen the emergence of behind-the-meter wind farms such as the one operated by Cipher in Randall County. However, as wind energy is intermittent, miners still rely on the grid for a portion of their consumption. To our knowledge, Marathon and Cipher Mining are the only publicly known companies that have implemented behind-the-meter infrastructure in Texas.
Footnotes
1 — ERCOT, (2023) Fact Sheet.
2 — Bratcher, L., (2021), TBC Board of Directors Bitcoin Resolution, Texas Blockchain Council (TBC).
3 — Kohen, M E., (2019), State Regulations on Virtual Currency and Blockchain Technologies & FreeMan Law, Texas Blockchain Legislation Status.
4 — Texas Government, (2021), House Bill N°4474 & N°1576.
5 — Texas Department of Banking, (2021), INDUSTRY NOTICE 2021–03.
6 — Sigalos, M., (2022), Fort Worth is the first city in the U.S. to mine bitcoin, and will run mining rigs out of city hall, CNBC. & Eliza, G., (2022) US Sen ator Warren Leads Congressional Group’s Probe Into Bitcoin Mining Energy Use in Texas, CoinDesk.
7 — Anderson, A., (2023), 88(R) HCR 89 — Introduced version.
8 — Harper, C., Mellerud, J., Investor, B., Harper, B., Vera, E., Conley, J., Hanse, N., (2022), Hashrate Index 2022 Year In Review, Luxor.
9 — Riot Platforms, (2022), RIOT ANNOUNCES DECEMBER 2022 PRODUCTION AND OPERATIONS UPDATES.
10 — Cipher Mining, (2022), Cipher Mining Announces December 2022 Operational Update.
11 — Marathon Digital Holdings, (2022), Investor Presentation.
12 — Argo Blockchain, (2023), December 2022 Operational Update.
13 — Moura, C., (2022), Bitcoin miner Argo slashes hash rate growth estimate by 42%, The Block.
14 — Sphere 3D, (2023), Investor Presentation.
15 — Sigalos, M., (2021) This Houston tech company wants to build renewable energy-run bitcoin mines across Texas, CNBC.
16 — Chen, J., (2022), What Is Henry Hub? Definition, Location, Owner, and Connections, Investopedia.
17 — ERCOT, Maps, ERCOT Load Zone Map Map.
