Grid stability and advancement

Jesse Peltan, Nick Gates, Marty Bent

People often talk about how bitcoin "wastes" energy. First, they don't understand how much energy is actually wasted, but second, bitcoin actually serves a net benefit in the world of energy. One of those being contributing to grid stability. ((Also, using energy is different than pollution)). Nick Gates is at Priority Power. It's not just grid stability, it's grid stability and advancement. Nick, why don't you come on up? Jesse should be right behind? Nick Gates is senior business development manager at Priority Power. They help procure power in addition to developing solutions for large bitcoin miners maybe even some of those in this room. Jesse is CTO co-founder at Hodl Ranch. They will talk about what bitcoin is doing not only to stabilize the grid but to help advance the grid. Marty Bent is one of the greatest champions against ESG and he will help us understand this better, then ew can take the message to the rest of the world.

MB: We will end ESG. Gentlemen, pleasure to be up here with you. Before we dive into the details of how bitcoin mining can help grids from a security and advancement perspective, let's talk about how grids currently work, where they might be inefficient and what the biggest problems are.

NG: Let's start with problems then. Let's skip to the Q&A part. Isn't Texas kind of a crappy grid and the winter storm proved that? The answer is no. We're the freest market in America. At the end of the day, that has driven business on generation side, load side, renewables. There's a desert in west Texas. There's a giant wind tunnel. Continental renewable zone. There's lots of oil/gas infrastructure. In terms of problems, there's problems from other industries going away. Aluminum smelting went away so now there's no reason to add lines into the switch. Chad is trying to get 700 MW and lines have to be upgraded to get that. Upstream of that, the reliability calculations that the grid does, a lot of stuff has to happen. Lots of areas have lost load for one reason or another. Oil/gas has turned down for a while, and then load dropped over there. New lines are more efficient than old lines. Both sides fight with each other. Some people say electric vehicles aren't efficient, well that's with old line numbers. Lots of people have opposing views on ESG. I don't think ESG should be killed, maybe re-defined. Everyone has a different meaning.

MB: We won't do an ESG discussion.

JP: If you look at it in general the way the grid works, it's a masterpiece in human engineering. You're balancing an elephant on a knife's edge. It's a perfect balance of supply and demand. Your demand is going to be variable because you don't know when people want to run their toaster, but the supply can always ramp up and down to meet that demand. The explosion of renewables have thrown in a wrench. They have produced a lot of valuable for the state, but making use of those renewables without messing up our grid is difficult. Wind production can vary by 4 GW/hour at current levels. We need something that can balance that supply/demand and your traditional peaker plants can't do that. Demand response with large scale bitcoin mining is changing the game for the grid. People have had little participation with... they wanted you to give up air conditioning at the hottest day in summer at the peak of the day, so you need something at industrial scale that can respond at low latency and bitcoin is by far the best thing that can do that. A lot of industries can do demand/response. But not everyone can respond at the same latency. A steel plant can turn offline but they might need hours offline. A Samsung plant that unexpectedly went offline during the storm, they had millions of dollars of damage because of that. But bitcoin miners, you can just turn those off. It's very easy to modulate the demand on the grid. Your traditional industrial demand response were much higher latency and they can't respond as quickly to those changes. They weren't appropriate for this new era of renewable energy in ERCOT.

NG: Texas is a free market. If you have a 1 MW investment for bitcoin, same as 1 MW for a battery. If you need another megawatt of load, you can either put more generation on, or you can take load off. Economics is going to win and the bitcoin mine is going to be a better option.

JP: Bitcoin and batteries are differentiated. Batteries are really good at providing 1 hour peak supply of energy. During the summer there's a high peak for a few hours. It doesn't make sense to make a power plant peaker plant. Batteries are good for that, but not good for soaking up low prices. When renewable energy is being produced all at the same time, that's when the price goes negative or nearly to zero. The vast majority of MW hours produced by solar farms get really little value because there isn't an off-take for that, limiting the additional resources, and financially they aren't being compensated for the energy produced. Having bitcoin miners go off to soak up the off-peak demand, that enables additional capacity to get financed.

MB: A lot of the additional capacity is wind and solar. Is this a good idea? You can build out gigawatts of capacity... let me finish my question. You can build out gigawatts of capcaity, but you can't make the wind blow or the sun shine?

JP: There's a disanalogy here. Wind, solar are the cheapest sources of energy but they are not a source of capacity. They aren't a replacement for a natgas plant. Not to say they are not valuable, but it's different. The MW hours generated by renewables are always going to be worth less than natgas. Texas is now the number one producer of wind power, and number one installer of solar. It will soon be the number one solar producer. California has tons of subsidies but they don't have the same level of market competition. It's the lack of red tape that makes Texas the number one place for renewables in US, even if you take away solar tax credits today (at 26%), solar has dropped over 40% in price over the last 5 years. If you take away the tax credit, you set things back by maybe 2 years.

NG: Solar also has a unique profile with the sun shining or not shining. Texas still has a large amount of load driven by AC and cooling need. There's a little gap at the end of it. I think the best isn't necessarily going to build out solar and wind, it's a mix, and ERCOT has one of the better mix profiles which makes it so good. He's mentioning tax credits, ... the new administration came in and bumped the tax back in, so ERCOT is now looking at a solar problem. Renewable is great, but if you overbuild where there isn't enough demand, people say hey let's just make batteries but you get negative pricing. Not many projects have come online, because of negative pricing. The ones that locked up in their projects when there was the production tax credit, but all the guys building now are competing with someone who has a government subsidy while they don't. It creates an imbalance, but it drove down power on the grid, and that will bring more to the state. But we don't want to be a one commodity tied power producer, or else in the last year, the power crashed 2.5 times in the past year which nobody wants.

JP: One thing about Texas is that Texas is not like the rest of the US when it comes to renewables. The solar cooridor and the wind cooridor intersect here. It's the only place where you have high capacity wind and high capacity solar in the same geographic area, which is massive when it comes to integrating that it into the grid because they are complementary. Solar produces at the day, and wind produces during the night. Trying to integrate just solar into Southern California or just wind in Wyoming, it would be more expensive. That's a big differentiated value.

JP: Around energy storage and stability is that, obviously, we need a mix of different sources on the grid. Right now it's just wind and solar being built out. We're probably going to have to build other resources as well with the population of the state increasing and more load increasing. It remains to be seen based on economics but it's likely to be gas due to the resources we have in the state. A lot of the problems on the grid that we have are just market structure problems. You mentioned solar is complementary to the grid because a lot of our load is AC load which correlates with weather, on a foggy day you don't need as much AC. Towards the late hours in the afternoon in the evening, your production drops off right when demand is peaking but that's really just a pricing issue. If we priced power according to the cost in each of those hours, then people could shift their consumption and they could run their AC harder earlier in the day so that it doesn't need to run at night. Energy conservation is fundamentally flawed: using fewer kilowatts of energy does not mean you're using fewer resources. A kwh needed on demand at an exact time is way more expensive than using it earlier. Load shifting is one of the big industrial use cases for load shifting, but there's a number of things we could do.

MB: What does bitcoin do to help advance the grid?

NG: Chad has already talked about it, but he's building a 700 MW site in an area. What happens when you do that? A facilities extension agreement, and everything is capital intensive. He has to pay the utilities to go upgrade, or put down a deposit or a letter of credit. So an article gets written saying well it's raising power prices, but the truth is that Chad is securitizing that and he says he will put the load here and if we don't then we will shore up whatever you actually receive from me. A lot of people don't see that part of it. Another thing that does is add a lot more stability. Just think of it as I35 what if it had another 4 lanes? A lot more electrons would be able to get down to Austin where people are using the power. He's taking lines, making them newer, making it more robust, some spots have single circuit.. he's adding more lanes on these electric roads and with that comes a lot more stability for everyone. The wind producers with excess power? They either have to turn off or pay someone else. Negative price power is a huge problem for those guys. He's making them more economic because someone is actually buying the power. On top of it, they have more alternatives to get out there. Ultimately from the grid, not many people live out in west Texas but a lot live in Dallas, San Antonio, Austin, Houston. We have to get power over here. If we want more renewable projects built out there, then we need more transmission lines and that won't happen until we pay for them or other projects come along to pay for it. Those redundancies that Chad is paying for is helping everyone not just him.

JP: If you look at costs on the grid, one of the biggest costs is the underutilized capacity that has to be paid by the MWh that are consumed. When they are all consumed at the same time by residential usage, it pushes up the price of electricity. Right now we run at less than 50% load factor, and if we built out nuclear for th ewhole grid, it would take 2x the cost to run the grid at our current load signature. In terms of lowering the price for average consumers, we need to better utilize the resources we already have. A lot of grids are trying to conserve energy at the same time they are trying to innovate. It's hard to fund projects when you have decreasing demand for energy. You need additional investment in energy to spur it. In natgas, it got so much cheaper than coal that it ate the entire coal market but it wouldn't have happened if you didn't have the financial incentive to innovate. In ERCOT, it opens up a lot of opportunity for innovation with the increasing size of the market.

MB: Bitcoin miners are buyers of last resort, in some cases. But here, they are the buyers of first resort to incentivize the expansion of the grid. Kazakhstani miners are getting kicked out by Kazakhstan for taking up too much energy. How do we prevent that from happening in Texas? Whinstone and forming a narrative in that way is definitely beneficial but there's a lot of friction when people see bitcoin miners coming in, taking 100's of MW's, and they don't understand narratively.

NG: It's a hard thing to do. At the end of the day, if someone doesn't understand the value of why you are using electricity. If you didn't believe you should have an AC in the house, then you would think everyone's AC would be a waste. A lot of people have that problem. Texas is in a good spot. Governor Abott says he wants Texas to be the bitcoin mining capital of the world. He wants the wind producers to make more money. He wants solar producers to make money. He wants natgas guys to stick around and make money because at the end of the day for grid stability we need on-demand power. California has a lot of issues because they drove out the on-demand power. Evne if you overbuild your grid 5x on solar and wind, at night if the wind stops blowing, what do you do? August 2019 we went up to $9000/MHw because the wind died off in Texas. Our current administration, a lot of people in ERCOT understand the intricacies of power. I think there's a doing vs writing about it problem. I've talked to reporters, and then you read it, and the article is just wrong. They are insinuating that we ... but a flat load actually lowers the cost of energy for people. More load helps everyone.

JP: Texas from a cultural perspective is an energy state. A lot of people made money by producing or consuming energy. In general, this state will be a lot more accepting of additional energy projects of any type. There's a lot of people - the people in the grid in Texas that work in power they all understand the value of this. It's massively differentiated in value for the grid versus everything else in a long time. It's stepping in where a lot of other tech hasn't been able to scale fast enough, it provides value to peaker plants, batteries, etc. Bitcoin mining is not just consuming energy, it's paying for the energy. It's funding additional energy development. Bitcoin is a $100 billion funding mechanism for energy development. We would be stupid to not go get that. It's a subsidy for us to build out our grid to make it more robust. The more that we build out the grid, the more the bitcoin network is paying for our grid. That's objectively a great thing for Texas.

NG: So what you're saying is that bitcoin mining subsidizes cheap abundant energy?

JP: There's way more energy on the planet than we can ever harness. Using 2012 technology, based on a study, we could produce more electricity from wind power than all electricity consumed in the US. And more from solar than used around the world. So how do we produce energy in areas that people aren't living, and make it useful? Bitcoin, we just need an interconnect. That's just the start of the catalyst to spur the state of Texas to spur the use of this for other industries like aluminum production. Look at global supply chains. Russia being cut off from the rest of the world, causing massive problems to the rest of the world. If China did that, we would be screwed. We need this in Texas. Coal isn't cheap right now, but natgas, wind and solar are cheap. Texas has the most of those resources in the US. If we really want to, say you want to de-carbonize a specific industry, where are you going to do that? The only place that has this complementary wind/solar situation, it's Texas. Texas can be the leader in a new generation of clean energy globally.

MB: This stuff is right in front of us. For some reason or another, there's an environmentalist movement preventing this from happening. I think you guys are doing incredible work in this area.

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