How can we get the cryptocurrency and electricity industries to engage in more direct, intentional conversations? In this episode, we examine a case study from 2014, when new Bitcoin miners quickly set up shop in Chelan County, Washington. Here to talk with us about the good, bad, and learning potential of this experience is Steve Wright, former head of Chelan’s Public Utility District or PUD.
In our last episode, we dove into the ongoing debate over crypto mining regulation and the types of incentives that could stabilize the grid and catalyze clean power growth.
In this episode, we examine a case study from 2014, when new Bitcoin miners quickly set up shop in Chelan County, Washington. Here to talk with us about the good, bad, and learning potential of this experience is Steve Wright, former head of Chelan’s Public Utility District or PUD.
Like John, Steve was invited to testify at the House Oversight Subcommittee hearing called, “Cleaning up Crypto, the Energy Impacts of Blockchains.” During that hearing, our Members of Congress were seeking information about the sector’s energy use.
Together, John and Steve discuss:
This episode was recorded on February 11, 2022. Since then, President Joe Biden has released an Executive Order on Ensuring Responsible Development of Digital Assets to which John has responded for Blockworks.
If you enjoyed this conversation and want to read more on this subject, check out Bitcoin’s Energy Consumption is a Feature, Not a Bug on our blog!
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(This transcript was originally published on Soluna's blog, Clean Integration. Read here.)
Recently, we’ve taken a deep dive into the ongoing debate over crypto mining regulation, and the types of incentives that would stabilize the grid and catalyze clean power growth on our podcast Clean Integration.
Perhaps the best way to understand the future of crypto mining and the electricity grid would be to put both parties–utility operators and crypto miners–in direct conversation.
We had the opportunity to examine a case study from 2014 when new Bitcoin miners quickly set up shop in Chelan County, Washington.
Steve Wright, the former CEO of the Chelan County Public Utility District (PUD) and of the Bonneville Power Administration, joins Soluna Computing CEO John Belizaire to talk about the good, the bad, and the learning potential of that experience.
With a 40-year career in energy, Steve has witnessed an influx of power customers interested in his state’s abundance of hydropower.
Providing his utility perspective on crypto mining and the grid, Steve walks us through the steps we can take to ensure a compatible future for clean energy and crypto.
(Like John, Steve was invited to testify at the House Oversight Subcommittee hearing on January 20th called Cleaning up Crypto: The Energy Impacts of Blockchains. During that hearing, our members of Congress were seeking information about the sector’s energy use. Read Steve’s testimony here.)
Steve Wright: Let me start by saying it was really fascinating to go through the process of preparing for and then testifying before Congress with you and some others from the industry because I learned a lot. Primarily because our experience with cryptocurrency occurred from 2014 to 2018, when I would say the industry seemed fairly immature.
There is a pretty significant change that I was able to see through conversations with you and other members of the panel, as well as from reading your testimony and hearing what you had to say to the committee. I want to describe our experience from 2014 to 2018, and maybe we can come back later and talk a little bit about how that looks different now as the industry seems to have matured.
What we saw beginning late in 2014 was this influx of folks who were bringing in mining machines in whatever way they could. You mentioned earlier that we saw them show up in shipping containers. Literally, people were bringing their trucks and parking them in empty parking lots and asking where the jumper cables were to our system.
There was no real understanding at first of the impact that adding those loads had on the electric power system. Then, it got a little bit more sophisticated and went into vacant businesses. And then, there was an influx of people who were putting cryptocurrency mining machines into their residences.
People stick a plug in the wall and they don’t understand what’s on the other side of the wall, or at least that’s what we were experiencing. They didn’t understand the way that they were overloading the planned use of the system, creating some pretty significant safety risks. We did have a fire that occurred as a result of an overloaded circuit.
We have the highest fire risk in Washington State in this county. We have lost a lot of homes over the last five years to wildfire. So, something that sparks fires causes a lot of concern.
We saw a lot of folks that were putting mining machines in apartments. On top of that, they weren’t living in the apartment; they were operating the machines remotely. So, they’re creating a fire risk for everybody that lives in that apartment building and they’re not even living there. That created a lot of resentment in our community towards cryptocurrency. I don’t think that’s where we’re at today. Clearly, you need so much more machine power today that it would surprise me if there was a lot of that happening anymore. But, at that time, that was the experience.
The part that is more relevant today is that these are large loads, and large loads have a sizable impact in terms of transmission and distribution systems. Do I have adequate infrastructure to serve that load? And if not, where will the money come from to put that infrastructure in place?
And second, it takes a lot of energy; we’re now seeing requests in the hundreds of megawatts. We had some of those back in 2016 and 2017 actually. Hundreds of megawatts is a lot of power. And so the question is: what resource will be dedicated to that? And what are the implications of having that kind of generation tied up?
I would add one more thing that I think makes this whole thing unique from a utility standpoint. We’re utilities, right? We serve a low grid.
So you might think, how is this different? What made this unique was the portability of the machines. The example I would use is Chelan is a very unique utility, we have five times the amount of generation as we have load. We’re a wholesale power marketing entity that has a small retail marketing component. We had an aluminum plant, which is a 250-megawatt load, here for 50 years. It shut down in 2015 actually, but it had been here for a long time.
The difference between the aluminum plant and cryptocurrency mining is that you have very little risk that the aluminum plant is going to pick up and move tomorrow. It’s a pretty fixed asset and it’s not easily portable. The ability for the mining to move at a moment’s notice changes the relationship between the utility and the load in a significant way.
Utilities are partners with their industrial loads. They’re making investments, they’re counting on that load being there for a long period of time because their cost recovery is over decades.
Once we began to see this portability issue, we said “Well, we have to think about a completely different model for the way that we price our product than what we’ve used historically.”
John Belizaire: It’s fascinating to see what things looked like back then. That’s a great comparison between traditional large load industries and industrial load and to hear about this form of enterprise in its early phases.
Steve Wright: Well, I’d actually turn that question around just a bit and say with foresight, given how the industry has evolved, what are the appropriate lessons learned?
Because with the industry, the way it showed up here in its immature form, I actually think we got it about right. We put some pricing in place that reflected what the cost to the utility would be.
If you don’t get the pricing right, what you’re doing is subsidizing the industry. We’re a consumer of utility, not an investor in utility. So, if there is a cost that’s being borne by the utility, it’s actually being borne by all the citizens who live in this area.
What was intriguing to me about the hearing and how I’m seeing the industry mature is the possibility of doing load modulation. I use the word modulation instead of demand response because I think it is in both directions. The ability to both reduce load and potentially increase it depends on how wholesale power market values are changing through time.
I think that’s really fascinating.
There’s an opportunity here for more conversation between the electric industry and the cryptocurrency industry. I don’t feel like we understand each other very well.
That’s probably my biggest takeaway from the hearing. I heard things said and I thought boy, they don’t understand how we operate. And I know that we don’t understand how cryptocurrency operates.
I think we’re still figuring that out, and there are opportunities to figure out how we can jointly create value for our industries. It’s not one seeking subsidy from the other.
John Belizaire: I would share that experience, the testimony experience, which was surreal. Had you ever done anything like that, by the way? Had you ever testified?
Steve Wright: I actually have probably testified more than a dozen times to Congress, so not the first time.
John Belizaire: That’s amazing. You’re a veteran! It was my first time. I did see the same thing, there’s a lot of learning to be had on both sides of the aisle if you will. And lots of learning across industries, etc. I think there’s an intentional conversation that needs to happen.
I wonder from your perspective, how could we get those two worlds, the crypto industry, and the electric utility industry, to engage in direct conversation? I mean, it almost feels like a fireside chat of different representatives having a real conversation at one of these big energy conferences. But what’s your take?
Steve Wright: Well, I’m glad you asked that because I’ve been thinking about it and I don’t have a very well-formulated thought. But I have basic thoughts, let’s say.
There have been some forums created in order to address emerging issues where you get people together who wouldn’t normally get together. I know the Alliance to Save Energy, for example, has put together forums on transportation and electrification to try and get the auto industry and the electric industry, and a variety of other players together.
I don’t think this is just one conversation. I think it’s probably something that would take a little bit of time. I actually have this dream that I’ve been thinking about since the hearing.
What I haven’t seen is something that would compare to a cryptocurrency miner the cost of reducing its output on the system against the rate benefit that it would get. Because if you’re reducing output, you’re reducing revenue, right? There’s only so much that you do. You get free power, but if you’re not producing anything…
Steve Wright: There’s a crossover point between, here is the rate and here’s the value to the power system. On the power system side, there were a variety of different things that were described at the hearing all the way from what we would call frequency response.
Although, I don’t think that those words were used at the hearing, which is a four-second reaction to things that are going on in the system to things that could go on for weeks or months.
Each of those time sequences has a different value to the power system. So, you could actually begin to analytically work through: here is the value of four seconds, five minutes, one hour, all the way up to months to the power system. The loss and value to a cryptocurrency miner are based on their time sequence and how frequently it was used.
It’s not an impossible analysis to do. It just would take a little bit of work and understanding communication between the two bodies to be able to figure that out. I think that would be really interesting to work through.
John Belizaire: I agree. I think that would be a fascinating piece of study to read and review because it would probably influence some approaches to bringing the two worlds together. When you and I talked before the testimony, I was sort of sharing our vision for the space and what we’re working on. And you said something during the call that stuck with me. You’re referring to our model being the holy grail. What did you mean by that?
I mean, I want to explore this concept of flexible load, seeing these types of data centers as a resource, essentially. And you put that in the context of the sheer magnitude of amounts of green power we want to put on the grid and so forth, and renewable energy goals that certain states have.
Steve Wright: I have to say I was so glad that we talked before the hearing because it helped to open my eyes to some of the things that you and others may be working on in the cryptocurrency industry, where I could begin to see the benefits of collaboration between our industries.
There are similarities between the way hydropower operates and the way solar and wind operate that I think will make this applicable to what is likely to be a large-scale expansion of solar and wind not only in the U.S. but in the international power system as well.
As hydropower owners, we have a certain amount of water that we count on. During the worst water year in history, we call that firm energy, and anything above that is variable streamflow. You don’t count on variable streamflow to be there for planning purposes. Remember from a utility standpoint, you are supposed to ensure that you have enough generation to meet your forecasted loads.
It’s mother nature controlling the output of your generation. Because of that, you are going to have a certain amount of energy you’re going to put on the grid as it becomes available and not sold as a firm resource. In the Northwest, we have spent a lot of time trying to figure out how to create maximum value out of that variable resource.
Generally, what has been done is that it is used to displace a generating resource that has a low fixed cost and high variable cost. You’re then reducing the variable cost which has a lot of value. Economically, it makes sense. Usually, that’s a natural gas-powered plant. We’ve had lots of exchanges, billions and billions of dollars worth of exchanges, like that over the last 40 years.
As wind and solar come into the market, that’s a lot of what they do too. They come in as “displacement resources,” i.e. they displace the marginal cost generation on the system, usually natural gas-powered. In the Northwest, we’ve sought a load that could do something similar, and we’ve had very little success.
This is my one worry about the conversation with the cryptocurrency industry, because like I say, we’ve been down this path with other industries and not had much success. What we did was we would say, “Hey, look in good water years, we’d like to sell you more. And in bad water years, we’d like to sell you less. And if we can do that, we could offer you a lower rate than what the standard rate would be.”
So you’re modulating your load to reflect the output of the system. We did find one industry that could do that; the aluminum industry actually offered contracts like that. They were very difficult to implement because you get to this point and the aluminum industry says, “I’ve got all this capital invested in this plant, I need to produce as much aluminum as I can. And now you’re telling me I can’t because it’s a low water year.”
That trade-off got very hard. This is that curve that I was talking about before–the value of production versus the value of curtailment– that needs to be developed. If the cryptocurrency industry could provide that, we really can modulate our load. Then the electric power industry is going to have more and more variable energy resources operating on the system. It’s going to be looking for ways to be able to use it.
That becomes particularly difficult because we appear to be heading towards shutting down the natural gas-powered plants. Our natural market is going away. So, we need to find another way to be able to use those variable energy resources. It either is on the generation side or on the demand side.
So it is the holy grail: how do you find ways to create value out of a generating resource that you can’t count on being there and yet you have to have firm resources to meet load?
John Belizaire: And your concern, I think you had mentioned to me during our conversation, was that the crypto mining firms have the same challenge as the aluminum smelting plants. They also have a significant amount of capital that they’ve invested and they need to return that capital and generate as much revenue as they can.
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Steve Wright: I’m sure that it does because as far as I can tell these are large capital investments. I mean, you do save the variable cost of the electricity but that’s about it as far as I can tell. If you took it to the extreme, the extreme would be well, I don’t want you to operate at all. Then you’re generating no revenue. There’s no way that would make sense for the business to operate.
We know there is a crossover point there. I can do some amount of modulation to get a lower rate. I can’t do 100% all the time where I won’t be able to make my debt service payments. So we’d have to figure that out. And again, I think smart people could do that.
Now, here’s the other thing, it’s not like you figure it out once and then you’re done, because the power value markets are constantly changing. We’ve seen a near doubling of wholesale power market values in the west in the last 18 months.
John Belizaire: Why is there a doubling taking place? Is it because there’s a lot of load coming on?
Steve Wright: It’s more a function of the generation coming offline than it is load growing in the last couple of years. The fact that the states in the west have been putting in place very aggressive clean energy standards is sending signals that coal plants are going to have to be shut down. It’s more of a reduction in supply than it is an increase in demand that’s driving things at the moment.
There’s a lot of concern in the utility industry right now in the west in particular as to whether we will have adequate generation to be able to serve load over the course of the next few years. So, you have those kinds of things going on. You have a greater premium being placed on carbon-free resources, which means you get a higher price for carbon-free resources than you used to be able to get. It’s driving prices up.
Electricity markets are not unlike other markets; they’re volatile. In fact, before we ran into cryptocurrency, we used to say electricity is the most volatile commodity in the country. You have to anticipate that the prices are going to be rapidly changing all the time. Very difficult to forecast. Might be a different story a couple of years from now.
Similarly, you’re dealing with very volatile prices in the cryptocurrency industry. So you can’t just do an analysis and say, “Here’s how it works.” It’ll have to take into account that these values are going to be changing on each side at a pretty rapid pace. And you’re going to want to modulate the relationship between the two industries based on how those commodity price values are changing.
Sometimes we’ll also have to be pretty flexible in order to be able to work.
John Belizaire: Right. In other words, it’s not an optimization equation that you’re running once and done. It’s almost continuous depending on what’s happening when both sides are changing very quickly, right? Very rapidly.
Steve Wright: Yep, exactly.
John Belizaire: That’s fantastic. Could we talk a little bit about regulation? In last week’s Clean Integration podcast episode, I had two guests on, Sanjeev Kumar, who’s an advisor with us, and Kathryn Carpenter. We discussed potential regulations that could strike the balance between encouraging innovation and ensuring responsible growth.
For example, extending the investment tax credit to include mining assets, because they’re large, pretty significant investments. That could be a way to sort of offset and make that equation balance.
Maybe the DOE provides some funding or loan guarantees that reduce the cost of capital, and carbon taxes on non-renewables as a way to discourage sourcing power from legacy fuels.
Steve Wright: Well, I have two thoughts about that. John, I appreciated your testimony and the way you described it as a battery. I would say that makes a lot of sense to me. That in fact, you could think about it like a battery.
Although, the way that battery operates is not just a function of the chemistry inside the battery. In this case, it’s an economic optimization going back to that valuation of the commodity price curve that I was describing earlier. So it’s a bit different in that regard.
But clearly, if you had a tax credit of some kind, then it reduces your cost of capital, which is going to be one of the drivers of how often you would be able to use the modulation characteristic if you’re a utility. So it makes the modulation of cryptocurrency more attractive because it has lowered the cost of capital.
Fundamentally, that makes sense. I want to come back to why there really should be some analytical work done to try to figure out this optimization model between the two industries. I think there’s a lot of potential there, more good conversation to be had between the two industries.
Take somebody from the crypto industry and somebody from the electric industry and put them in a room and give them a month and tell them to come out with something. I think you probably could make that happen.
John Belizaire: I like that idea a lot. I think that’s a fantastic idea.
Steve Wright: There’s another piece to this, though. I know that sometimes the crypto industry doesn’t like us to talk about this, but I have to tell you, I think it’s relevant.
I described at the hearing, that in our community there was a whole list of reasons for concern. We were offered the chance to be the cryptocurrency capital of the world and people were evaluating, is that what we want to be or not? Is that a good thing? And one of the reasons that people were concerned is that there have been these nefarious uses of cryptocurrency that seem to create a pathway to successfully committing crimes that bother people.
People were saying “Wait a second, is that something that we want to be a part of?” And I’m told at least that it’s a very small fraction of the number of cryptocurrency transactions that take place. That may well be true, but I will also tell you as an electric utility, we spend a huge amount of money trying to protect against cybersecurity risks.
That cybersecurity risk does seem to be increased as a result of the availability of Bitcoin and other cryptocurrencies that make it difficult to track. This would be my advice, you can take it or leave it. I think it would be good to try to figure out a way to address the cybersecurity risk because there are some fairly significant costs to the economy as a whole.
I can just speak from my piece of that. I see our industry having to deal with issues that will be important to resolve in order to create comfort. We see the potential value, and there’s lots of value there, but there are some downsides. How do we mitigate the downside risk?
John Belizaire: To some extent, Professor Ari Juels’ perspective on the technology, said these side effects and one of them is that it seems to generate bad behavior in the fairest behavior because of the nature of the technology. How do we create things to mitigate that type of behavior, especially if these are going to become resources? Having exposure to cyber risk is the last thing you want as part of your grid infrastructure.
Steve Wright: Yeah. I mean, it’s hard to describe for you just how much time in the electric utility industry we now spend on cybersecurity risk and the comparison against even like five, six years ago. We’ve got entire groups now, pretty much every utility in the country.
We’re not a large utility at all, yet we still have a very large cybersecurity group that has to constantly monitor because there just are a lot of bad actors out there seeking to infiltrate the system on a minute-by-minute basis. Even a small system like ours is getting pinged all the time. So it has become a significant issue for us.
John Belizaire: Well, this has been very enlightening, Steve. I’d like to shift to the lightning round section of our conversation here. I know that you’ve just left your long-standing role. How do you keep yourself busy these days?
Steve Wright: Well, I had planned to honestly do a lot of skiing and just enjoy the outdoor life here in Central Washington, which is one of the big reasons why we live here.
I was a little surprised to get this invitation to testify with you before the House Energy and Commerce Committee on the cryptocurrency impacts on the electric power industry. So that ended up taking a fair amount of time just to prepare for that hearing and then the follow-up associated with it as well.
I got some really good advice from a guy that had been in very senior positions in the government and utility industry for a long time.
He said, “You know what’s going to happen is you’re going to leave. You’re used to going at a hundred miles an hour and you’re going to go to zero and it’s going to be really uncomfortable. And what you’re going to want to do is just jump at the first thing that comes along. Don’t do that. Just take some time and figure out what it is you really want to do because you are talking about the rest of your life. And what are you going to do with it?”
So, I dabble in things. I love to think about things and gosh, with the internet, now you can explore anything. So dabbling in a whole bunch of things, thinking about resource adequacy for how much generation do we need in this brave new world. And thinking about cryptocurrency and its impacts on the industry. And I’m writing a book on how to manage in the public sector. I just have a bunch of things that I kind of dabble with.
John Belizaire: That’s great. That sounds fantastic. Give us a prediction for this year. We’re taping in 2022, in the early part of the year.
Steve Wright: Well, I’ll stick to the thing that I know a lot about, which is the electric utility industry. We have a very large challenge in front of us to make this clean energy transition and people care a lot about electricity. Most of the time, they don’t think about it, but if something goes wrong, they care about it a lot.
I was put in charge of the Bonneville Power Administration in November 2000. And if you look back at when the West Coast energy crisis started, when the prices went crazy, it was November 2000. So my first experience as a leader in this industry was trying to manage through extraordinary prices. Power goes for 30 to 50 bucks megawatt-hour normally, and we had a $1000 to $5,000 price for a five-month period.
John Belizaire: Wow. And what caused that, Steve?
Steve Wright: There are many investigations that have been done of that and there are a lot of reasons. People point to many different things. Fundamentally, I believe it was a supply and demand problem that was exacerbated by some bad actors who took advantage of the supply and demand problem.
People did go to jail and there was a fair amount of criminal and civil litigation that went on for 15 years after the energy crisis. My worry for our industry is there are some eerie similarities between what we see today and what we saw in the period leading up to that 2000 and 2001 period.
We held conferences in 98, 99 on the fact that we were at risk of having a resource adequacy problem, whether we’d have enough generation to meet the load. And we’re holding similar conferences now. I think we’re actually being more proactive today to solve the problem, but there are two things that need to happen.
One is we actually have to have really clear standards in our industry that require people to make sure that they have enough generation to meet the load. Either under severe circumstances like extreme temperature excursions that occurred in Texas. Or even under the types of situations that happened in California two years ago when they were unable to serve load because of the sun setting, the shoulder ramp problem that occurs.
We have to have standards. But we also have to have a technological revolution. Today, we do not have a capacity resource that will serve to meet the needs of a system that is dominated by variable energy resources. This is one of the reasons I’m on with you today because demand response and load modulation is a possibility for that.
Batteries will need a huge movement in terms of their technical capability to be able to make sure that we can serve load. So we have to make that change. And if we don’t make it quickly, we are shutting down the fossil fire resources without a clear plan for how to replace them. Let me finish with this thought for you.
The head of Bonneville Power Administration is, in many ways, the face of the electric power industry in the Northwest. It’s 75% of the high voltage transmission, a third of the generation. I spent a lot of time in public at that point, a lot of town hall meetings. And the hardest meetings were not the ones where you had people who knew a lot in the industry.
The hardest meetings were the average Joe sitting up in front of us saying, “I was just living my life and it was your job to run the electric system. And now my life is turned upside down. I’m losing my job, and my rates have gone up. My disposable income has been severely harmed. My family is harmed.”
We knew that, for example, if somebody loses a job that you get more alcohol abuse, more domestic abuse. The consequences are really severe. And to say, “Well there’s nothing I can do about it now” was not very helpful to them. So the challenge that we have and the thing that I hope will happen in 2022 and 2023 is that we’re going to do a better job of figuring out this transition.
We’re going to find a way to make supply and demand match. People will continue to not care about electricity because it’s not impacting their lives. And I think there’s a chance that the cryptocurrency industry could be a part of that.
John Belizaire: Well, that’s a fantastic place to end our second, surely not last, conversation, Steve. Thank you so much for your time.
Steve Wright: John, thank you for the opportunity. And again, thank you for the vision that you described at that hearing. I think it’s something that is a really important public policy issue.
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