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Texas turbines.
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It is everyone’s dream to get paid for doing nothing. Bitcoin miner Layer1 is making that dream a reality, having figured out how to make money even when his machines are off.
Layer1 is a cryptocurrency startup backed by billionaire Peter Thiel. In recent months, in the tough land of West Texas, the company has been busy assembling steel boxes (think shipping containers) wedges stuffed with high-end processors immersed in mineral oil cooling baths. Why West Texas? Thanks to an excess of natural gas and a forest of wind turbines, energy is among the cheapest in the world, which is what you need for cryptocurrencies.
“Bitcoin mining is about converting electricity into money,” says Alex Liegl, CEO and co-founder. By this fall, Layer1 will have dozens of these boxes shaking all day to turn 100 megawatts into a stream of Bitcoin. Liegl says their average cost of manufacturing is around $ 1,000 per coin, which is a 90% profit margin at the current BTC price of $ 9,100.
So it’s odd how excited Liegl is at the prospect of having to shut down his Bitcoin miners this summer.
West Texas saw a streak of 100-degree days this year. But real heat and humidity don’t reach until August, when the Texas power grid takes on the load of every air-conditioning unit in the state going full blast. During a busy week in 2019, wholesale electricity prices in the Electricity Reliability Council of Texas (ERCOT) network region increased from about $ 120 per megawatt hour to a peak of $ 9,000 per mwh. It was only the third time in history that Texas power reached that level. And although the price spike only lasted about an hour, that’s enough to generate big profits. SSR research group analyst Hugh Wynne calculates that Texas power generators make about 15% of annual revenues during the peak of 1% of hours (while in more temperate California grid generators only get 3% of the revolutions from the highest 1%).
It turns out that managing a phalanx of Bitcoin miners is a great way to arbitrate those spikes. Layer1 has entered into so-called “demand response” contracts under which with one minute’s notice they will shut down all their machines and instead let their 100 mw load flow over the network. “We act as insurance underwriters for the energy grid,” says Liegl, 27. “If the supply is insufficient, we can close.” The best part, they get paid regardless of whether there is an emergency on the network. For their willingness to shut down Bitcoin production alone, Layer1 collects an annual premium of $ 19 per megawatt-hour of their projected energy demand, or around $ 17 million. Given the long-term contract costs of about $ 25 per mwh of Layer1, the total energy price drops by 75% to less than 1 cent per kWh (just 10% of what residential customers pay).
Alex Liegl.
Courtesy level 1
It may seem like grid operators are paying a lot of Layer1 for something that might not even happen, especially with the coronavirus reducing electricity demand, but it makes perfect sense, says Ed Hirs, a professor of energy economics at the University of Houston and Researcher at BDO Consulting: “It’s a much cheaper option than building a new power plant or battery system just to keep it on standby.”
And while this may be a new concept for cryptocurrency miners, it has been done before. Two decades ago, industrialist Charles Hurwitz bought energy-consuming aluminum smelters in the Pacific Northwest and made more money selling electricity than producing metal. “It was called load management,” says Wedgemere Group consultant Dan Delurey. “In older commercial buildings you might still find telephone cables connected to air conditioning systems so that network operators can send a signal to shut down.” More recently we have seen companies install radio devices to control hot water heaters and lighting systems. Indeed, grid management is a hot enough area that in 2017 Italian energy giant Enel bought Boston-based Enernoc for $ 250 million and Itron
ITRI
As for Layer1, Liegl says his next step is vertical integration into financial products, including Bitcoin derivatives and more. “We are building an internal energy exchange division to exploit all of this in a virtual power plant.”
His message to all the pikers who are still trying to mine cryptocurrencies from their bedroom PC or even via cloud services: “I can’t think of anything more irrational at this point. It’s like I want to dig a hole in mine. courtyard and try to get the oil out of the ground “.
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