Bitcoin Cowboys Are the Ultimate Stress Test for Texas’ Power Grid

(Bloomberg) -- One scorching hot afternoon, Justin Ballard drives a Nissan Frontier pickup across a stretch of West Texas oil country. For years, Ballard worked these mesquite-covered expanses like any good oil landman, trying to persuade people to let the drill rigs come in and do their work. But he left that search early last year. Now he’s scouring the same barren landscapes for a different sort of fuel: natural gas that’s being burned off and wasted. This lost gas can be harnessed to power huge arrays of computers that create, or mine, Bitcoin and validate transactions on its ledger, the blockchain.

“It’s all about stranded energy—searching for it, finding it, mining it,” says Ballard, 41. “It’s a lot like the oil business.” In other words, instead of using drill rigs to get to oil deep underground, wildcat crypto miners sniff out surplus electricity to run the servers that work around the clock. The prize is a digital currency worth about $19,000. As with a barrel of oil, the consequences for the planet aren’t factored into the cryptocurrency’s price.

Wearing a brown T-shirt, skinny jeans, and lace-up work boots, Ballard pulls up to an orange flame shooting out of a blackened pipe, a few feet from an oil well. These flares are everywhere in West Texas, a byproduct of teasing oil from the Permian Basin, the huge petroleum reserve that lies more than a mile underground. With oil comes natural gas, and there’s not always a pipeline that can take it to market. The gas is instead burned off to make way for crude, sending plumes of sooty smoke into the Texas sky.

Ballard wants to persuade the well’s owner to sell him the wasted gas at a deep discount, so he can use it to power a container full of Bitcoin servers. That’s how he got his start as a miner 16 months ago, running servers off gas wells in Wyoming. “It’s like I can see the Bitcoins coming out of that flare,” he says.

Ballard’s real priority is two hours northwest, where he’s planning the digital equivalent of a big oil gusher: a massive Bitcoin mining complex plugged into a string of substations, fed by some of the cheapest power in the world.

Bitcoin cowboys such as Ballard are leading a push that’s transforming Texas, with its low-cost power and light regulations, into one of the world’s biggest centers for crypto mining. At meetups in Austin, Houston, and Miami, the men—they’re almost all men—gather by the thousands to swap stories about hash rates, PPAs (power purchase agreements), and ASICs, the acronym for computer servers that solve the math puzzles behind Bitcoin. They share dreams of transforming electricity into digital gold and freeing their wealth from government and central bank meddling. Texas is their Xanadu.

“Bitcoin mining is freedom,” says Griffin Haby, holding court at dinner after a long day talking up crypto at a mining conference in Houston, decked out in a brimmed hat and cowboy boots. Haby, a former oil landman like his friend Ballard, scouts out Bitcoin mining sites for his clients. “That’s why we like it so much in Texas.”

Bitcoin miners have been run out of entire countries (most notably China), blamed for shorting out power grids, pushing up electricity prices, and exacerbating global warming. But political leaders in the Lone Star State have embraced them. “I believe in Bitcoin,” Republican Senator Ted Cruz said in late May at a Heritage Foundation symposium on cryptocurrencies in Washington. “I want Texas to be the oasis on planet Earth for Bitcoin and crypto.”

Cruz’s utopia smacked into reality soon after, when the crypto market collapsed. Bitcoin’s price plummeted more than 60% from its peak earlier this year. Some miners went out of business. Others had to delay or scale back expansion plans and liquidate crypto holdings to raise cash. For the miners who’ve held on in Texas, turning a profit comes down to the low cost of electricity. “We’re energy maximalists,” says Ballard, a lawyer by trade. “There’s no better place to be for that.”

The Bitcoin buildup in Texas has been so massive and so fast that it’s like adding entire cities’ worth of electricity consumption in just a couple of years. Texas utilities have gotten proposals for multiple Bitcoin mines that would require an additional 33,000 megawatts of electricity, or enough to power all of New York state.

But the rapid expansion is piling on risk to one of the largest and most unstable power grids in the US. Electricity is a finite commodity, and the humming servers are competing with 30 million Texas residents who need it, too. The state’s Bitcoin miners are already using as much power as 300,000 homes, taxing a grid that has a track record of sometimes failing when temperatures rise or fall significantly.

In February 2021, a fierce storm caused extensive blackouts that killed hundreds of people. This past May, a heat wave knocked out six power plants in Texas, pushing utilities into crisis again and prompting pleas to conserve energy as a record number of hot days slammed the state. These incidents highlight the potential difficulty of diverting so much electricity to crypto mining.

There are planetary costs as well. Worldwide, Bitcoin mining consumes more electricity than the Philippines, a nation of 110 million people, and much of that is currently generated with fossil fuels that produce greenhouse gases. Estimates of Bitcoin’s use of carbon-free power vary significantly. The Bitcoin Mining Council, an industry group, says it’s 58%. An academic study found that as of August 2021, renewable energy accounted for only about 25% of worldwide Bitcoin mining electricity use.

The industry “has a massive carbon footprint, no matter how you look at it,” says Alex de Vries, a specialist in the energy use of Bitcoin at Vrije Universiteit Amsterdam, who led the study. In September the White House released its own report warning that Bitcoin mining was jeopardizing US climate goals, singling out the energy-sucking process behind it known as proof of work.

But increasingly, the miners are trotting out a counterintuitive argument in their defense: that their power use is actually good for the climate and good for Texas’ power grid. By consuming voracious amounts of power, Bitcoin mining can help balance the grid and provide a market for underused solar and wind resources. And when blackouts loom, they simply switch off, helping avert disaster.

Bitcoin miners can play a role in stabilizing the electricity grid, says Adam Back, founder and chief executive officer of Bitcoin miner Blockstream Corp. in British Columbia, from his home in Malta. Miners, he says, can help green energy take root in the nation’s heartland, which will help protect power grids in Texas and beyond from blackouts.

Earlier this year, Back decided to test this theory in the field. Blockstream and Block Inc., co-founded and run by former Twitter Inc. CEO Jack Dorsey, began building a $12 million Bitcoin mining pilot project in West Texas, powered directly by solar panels. The plant has big Tesla batteries to store electricity, which would enable the mine to run at night, when there’s no sun. For now, the batteries’ cost makes a Bitcoin mine unprofitable, but Back says his pilot project will prove that can change.

Miners want their computers to run continuously, not to stop when the sky clouds over or the wind dies down. For now, those who want to turn a profit—that is, all of them—plug into the grid, even in locations where renewable energy is abundant.

For Bitcoin cowboys such as Ballard, the real money isn’t in hooking up servers to gas flares. The big payoff comes from the cheap electricity in West Texas, one of the world’s biggest centers of renewable energy, where there’s more wind and solar power than the sparsely populated region can ever consume. It’s stranded energy on a massive scale, Ballard says, steering his Frontier pickup toward a spot on the Texas-New Mexico line where he’s made his biggest Bitcoin mining strike ever.

He’s reached an agreement with miner Mawson Infrastructure Group Inc. in Sydney to plug 30,000 computers into underused electricity substations sprinkled across remote tracts owned by Texas Pacific Land Corp. to mint Bitcoins by the hundreds. The potential payoff in Bitcoins is immense: The mines stand to create 3,700 Bitcoins a year worth $72 million at today’s prices. 

West Texas has a surfeit of renewable energy, because federal price guarantees and tax breaks led to the construction of scores of solar and wind farms. Problem is, the subsidies didn’t fund a similar construction of transmission lines. As a result, there’s no way to get all that power hundreds of miles to cities that need it. The Texas grid operator estimates that by 2023, there will be at least 6,700 gigawatt-hours more wind and solar power generated in West Texas than the power lines can handle. That’s enough to power 500,000 Texas homes for about a year. 

What Ballard is doing is “just another way for the renewable power producers to continue to create a return on investment, which leads to further expansion and stabilization of the grid through renewable projects,” he says. “So, it’s like, this is actually helping to green up the grid, more than, ‘Oh, we’re creating a burden on the grid.’ ”

Republican state leaders from Cruz and Governor Greg Abbott on down have adopted this argument. Abbott likes to repeat industry assertions that Bitcoin miners stabilize the power grid by faithfully using vast amounts of power that others don’t need.

The Texas grid already has been pushed to the limit by a decade of economic and population growth. Then came this summer’s scorching heat. Texas has broken electricity consumption records 37 times since May as temperatures stayed above 100F day after day, according to the Electric Reliability Council of Texas, or Ercot, which operates the grid. Ercot said its 1,000 power plants have enough capacity to exceed summer demand by 23%. But that calculation doesn’t fully take into account the extreme heat that Texas endures every summer, according to a recent assessment by the North American Electric Reliability Corp., which monitors power systems nationwide. Demand for electricity has been growing fast in Texas for the past decade. One culprit in jacking up demand: Bitcoin mining, the independent agency warned in the assessment.

Miners have a different take: They can head off blackouts by simply switching off their servers, conserving power for families, schools, and hospitals. That’s what happened this summer as the temperature in Houston reached a record-breaking 105F. Ercot warned of a possible shortage and appealed to residents and businesses to conserve energy the following afternoon. That day, July 11, every major Bitcoin miner in the state shut down, reducing electricity consumption by an astounding 1,000 megawatts and helping avert any blackouts.

The crypto world took a victory lap. “Texas #bitcoin miners are not only good corporate citizens, but they are also good ‘grid citizens,’ ” tweeted Lee Bratcher, president of the Texas Blockchain Council. The scenario played out at least 12 other times throughout the summer.

But the families who kept their lights on will end up paying miners for the privilege of doing so. Ercot has so-called curtailment programs, where Bitcoin miners and other industrial power users, such as factories, are paid not to use electricity they’re entitled to receive under power contracts. Riot Blockchain Inc., one of the biggest Bitcoin miners in the world, earned an estimated $9.5 million in power credits through July by shutting down its huge mining complex near Rockdale, north of Austin. In the end, such costs are passed along to just about anyone who has to pay an electricity bill.

“Bitcoin miners are helping to create an electricity shortage,” says De Vries, the specialist in Bitcoin’s environmental impact. “And then they get paid a ridiculous amount of money to help solve the shortage that they helped to create in the first place.”

Doug Lewin, an energy consultant in Austin, says he thinks crypto miners could help the grid by shutting down when demand peaks. But it can’t be voluntary, as it is now. “At a certain point you need some regulation,” Lewin says. “You can’t get to a point where people are mining Bitcoin when human life is in jeopardy.”

Sherbino I is the name of a wind farm in remote Pecos County, where the oil giant BP Plc put up 50 300-foot-high turbines in 2008. They turned for a decade, boosted by federal programs that guaranteed wind plants a price of $27 per megawatt hour for electricity as long as they sent their power somewhere. But those guarantees ended 10 years after a project was built, and it was cheaper for Sherbino I to shut down than to generate power no one would buy. Today the high mesa is empty, the turbines long gone. In a clearing at the base of the site sits an underused electricity substation, connected to the local power grid.

County Judge Joe Shuster, the top local elected official in Pecos County, knew little about Bitcoin until early 2021, when the demolition crew was still cutting up Sherbino I’s sleek turbine blades and carting them off. Then, multiple miners started coming at Shuster, lobbying for county tax breaks to invest hundreds of millions of dollars in huge facilities in the middle of the desert.

Shuster, who sports a graying handlebar mustache, knows miners are a gamble. They’re mobile; they can pick up and leave quickly if prices crash. But he’s confident Bitcoin isn’t going away as long as there’s power to spare. “For now, they’ve come through with jobs, which is what we need,” he says.

Jamie McAvity, 37, CEO and founder of Cormint Data Systems, was one of the people wooing Shuster. A former oil trader, he seems like a true believer, Shuster says—young, full of energy, and convincing in his argument that Bitcoin is here to stay. In exchange for the promise of at least 50 full-time jobs, the county agreed to waive Cormint’s property taxes for 22 years, documents filed with the county show. The company moved its headquarters to Fort Stockton and pledged to invest at least $100 million in a mine nearby that will consume 200 megawatts of power.

That’s enough to power 40,000 Texas homes on a hot day, but McAvity isn’t worried about making the state’s electricity problem worse. “Adding Bitcoin miners to your grid is like adding a market maker to a market,” he says. “It increases liquidity, and it reduces volatility.” His Bitcoin mine sits on a patch of desert hemmed in by the towering rock mesas that once hosted the windmills, roughly between Midland and El Paso. Once its 24 mining units are up and running, the plant will create 24 Bitcoins a day, valued at a total of almost $500,000 at today’s prices.

Texas is building out renewable energy faster than anywhere else in the US. But like its existing clean power, much of the new supply risks getting stuck. Although President Joe Biden’s Inflation Reduction Act has almost $3 billion to facilitate the siting and building of transmission lines, that infrastructure won’t appear overnight. Transmission projects take years to build.

If the new climate law works as it’s supposed to—spurring the addition of wind and solar capacity around the country—places outside of Texas could find themselves with a similar bounty of clean energy they can’t tap where and when they most need it. But Texas is in a particular bind, because its massive power grid isn’t connected to the national networks, so it can’t import power from other states to avert blackouts when demand exceeds supply. (Unlike most other states, Texas opted to wall off its grid a century ago to avoid federal oversight of its electricity system.)

“I don’t know how they got taught to think that this is a good deal for the Texas grid,” De Vries says of the miners. “I mean, if you want to fix the grid, what you need is flexible additional supply, but flexible additional demand? It’s a really weird way of thinking.”

A few weeks after the deadly blackouts of 2021, the dearth of emergency power in Texas—flexible supply—led billionaire Warren Buffett to lobby the state to invest $8.3 billion in multiple so-called peaker power plants. The natural gas-fired generators, which would be built by Buffett’s companies, would be switched on only to avert blackouts. The state has yet to take Buffett up on his offer.

In the absence of flexible power plants or more creative solutions, grid operators are left to rely on miners and other mega power users to keep the lights on.

For fragile power grids during the nation’s slow, clumsy transition to clean energy, crypto mining is like the contrast dye doctors inject before a diagnostic scan. It highlights the paradoxes, such as a simultaneous glut and shortage of clean power, and the perverse incentives that reward an industry for being an energy hog.

There’s little sign Texas leaders will stop wooing Bitcoin miners. In April, Ercot’s former interim CEO, Brad Jones, said he was working with miners to prepare the grid to handle a lot more crypto demand and aimed to make Texas the world’s largest mining center.

The network for Ethereum, the No. 2 cryptocurrency, just shifted from a “proof of work” approach to a far less energy-intensive model called proof of stake. So far there are no signs Bitcoin will do the same. The Bitcoin Mining Council in May called proof of work and proof of stake “qualitatively different” and said it was “imperative” that Bitcoin remain on proof of work. The council was responding to a letter from Democratic members of Congress to the US Environmental Protection Agency raising concerns about mining facilities’ climate emissions.

Meanwhile, the Bitcoin world is in a race against what’s known as “the halving.” In 2024 the algorithm is set to become twice as difficult. That means it will require twice the computing power to create a coin—and twice as much energy, taxing the Texas grid even further.

Zach Pless, a 35-year-old former street musician from California who manages the Cormint site for McAvity, is convinced Bitcoin mining can help with Texas’ electricity problem. Like a lot of crypto converts, Pless speaks with an almost religious fervor. “Bitcoin is freedom, a way to keep my wealth away from the banks, away from the government,” he says. “It’s libertarian. I guess it’s who I am.”

In early 2021, Pless began setting up the mine, and he’s been sleeping in a camper, a few feet away from the humming servers, ever since. One recent afternoon, he walks inside a container where servers lie in a row immersed in vats of coolant to allow them to run better as temperatures outside reach triple digits. It’s a tiny pilot mine of sorts that will be expanded one hundredfold. The servers are silent—a testament, Pless says, to how Bitcoin miners can do their part to help Texas avert blackouts that leave people in the dark, heat, or cold, or even kill.

“Just today, the boss called and told me to shut it down, heeding a call from the utility,” Pless says, pointing to the idled servers. It’s not much; the pilot mine uses only 166 kilowatts of power. “Imagine what would happen when we’re at full capacity and we get that call?” he says. “Maybe that would make a difference.”—

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