Bitcoin Comes to Washington

What’s invisible but has managed to entangle several Washington cities, counties, and utility districts? The answer is Bitcoin, the largest cryptocurrency and peer-to-peer payment system in the world. It’s also an energy hog whose growing computational requirements threaten to overwhelm the rural energy grid that powers Bitcoin transactions.

Bitcoin payments and blockchain technology

Bitcoin payments occur between users and the transactions are recorded using cryptography and verified using blockchain technology.  Rather than using a single intermediary to manage payments and prevent fraud — such as a bank — blockchain technology creates a public ledger that contains every single transaction ever made using Bitcoins. The blockchain is maintained by nodes (servers) running specialized software that keeps the growing chain updated and accurate — a process referred to as mining. As a reward for mining, node owners are paid in Bitcoins.

After starting as a small network of servers, the blockchain infrastructure has become industrialized and is now used in other, non-Bitcoin applications. Huge mining operations have emerged, hardware has been developed to speed computing, and a new breed of computing facilities — hashing centers — were created. Hashing centers, like server farms, house hundreds of servers along with the cooling units needed to keep them from overheating. These, along with informal mining operations, consume vast amounts of electricity. The process to record and verify just one Bitcoin transaction devours 215 kilowatt-hours of electricity, enough to power a single-family home for a week.

Central Washington: A cheap source of energy

Central Washington, particularly the mid-Columbia Plateau, is especially attractive to cryptocurrency mining firms. Using hydroelectric dams located along the Columbia River, the Plateau’s public utility districts (PUD) often generate an excess of electricity, resulting in a cost, on average, of $.04 per kilowatt hour.

Since mining firms began flocking to the Plateau, PUDs in Chelan, Douglas, Grant, and Benton have been struggling to keep pace with the ever-increasing demand for power without jeopardizing service for residential and commercial customers.

Chelan County: Emergency zoning controls and moratoriums

Chelan County PUD received its first 220 megawatts (MW) power request in 2014. Alarmed, it placed a moratorium on power requests of 1 MW or more and created a working group to review the issue. Eighteen months later, it set higher rates for users wanting up to 5 MW (termed a High Density Load, or HDL, at the PUD’s website) included a one-time charge to cover infrastructure upgrades, and charged an upfront fee. It began taking applications in early 2017.

Throughout 2017 the price of Bitcoins continued to rise, climbing as high as $19,000 per Bitcoin in December. In response, even more HDLs applications came into the PUD; only this time, power requests were in the 5+ MW range.

In March of this year, the PUD issued a moratorium on businesses requesting electric service over 5 MW. At the time, it already had 22 approved HDL customers (using a total of about 13.5 MW) and almost 20 pending applications requesting more than 16 MW total. PUD staff were also concerned that unauthorized mining operations were leading to outages and fires.

Just a month later, after PUD staff reported discovering an average of two to three small rogue mining operations per day, the PUD adopted fines for unauthorized electrical use: $6,150 per violation in residential areas and $11,400 in commercial or light industrial areas. PUD staff were also authorized to shut off power immediately to any site that posed a safety hazard.

In mid-May, the Chelan County PUD announced, via news release, extension of the March 2018 moratorium until August 6. 

The PUD has also educated staff and elected officials in Chelan County cities about the challenges cryptocurrency mining, both authorized and unauthorized, pose to the local power grid. In response, Wenatchee, Leavenworth, Entiat, Waterville, and Chelan have all passed emergency zoning controls or outright 6- or 12-month moratoriums on processing applications from cryptocurrency operations. Additionally, Chelan County added language to existing codes that allows county staff to take legal action against rogue mining operations.

Douglas County: Payment structures based on consumption

Douglas County PUD also began seeing applications from data mining operations as early as 2014. It imposed a 3-month moratorium and eventually adopted a tiered payment structure with a lower rate for residential customers and a higher rate for consumers needing more than 1.5 MW. Futher, any application requesting 1.5 MW or more required a special contract with stricter requirements and an upfront fee.

Despite this, the PUD still struggles to balance competing demands. A new, 84-MW substation that should have been adequate for the next 30—50 years of normal growth was fully subscribed in less than a year.

The Douglas County cities of East Wenatchee and Waterville have recently imposed moratoriums on accepting applications for mining operations, while this April, the county issued a moratorium on the use of cargo containers for cryptocurrency mining in unincorporated areas.

Grant County: An “Evolving Industry” rate class

In November 2017, the Grant County PUD began shelving all new requests for local service after discovering that significant infrastructure system improvements were required in order to meet predicted demand.

In May, the PUD's blog announced an ‘Evolving Industry’ rate class for businesses that met the following criteria:

• Their primary revenue stream is evolving/unproven.
• Their ability to pay power rates long term is uncertain/at risk
• They are vulnerable to extreme value fluctuations of the primary output.
• They are at risk for detrimental changes in regulation.
• They could become part of a large concentration of power demand.

In addition to paying higher rates, Evolving Industry customers will also pay an upfront application fee and a fee to cover infrastructure upgrades. Further, applications from traditional commercial and industrial customers will be processed first and those from Evolving Industry customers will be processed second.

Benton County: Identifying customers based on electricity load

The Benton County PUD announced a new policy in March for customers seeking electricity intensive loads (EIL), primarily server farms and cryptocurrency mining. EIL customers are characterized as those where “electricity is the predominant input to the business production,” and whose energy requirements may be “appreciably higher than…other customers operating in a similarly-sized and type of facility.”

The PUD is requiring new and existing customers to self-identify as an EIL customer, and the PUD will follow up with a special assessment.

Outside the Plateau

Out on the Olympic Peninsula, Mason County PUD No. 3, which produces an annual average power load of 80 MW and already services one cryptocurrency mine, put a moratorium on service to new cryptocurrency operations in April after receiving an application seeking 10 MW of power.

To be continued?

Despite their geographic difference, all the PUDs are struggling similar questions. If cryptocurrency mining requires more power than what’s available, this could force the PUDs to buy more expensive power on the open market, driving up rates for residents and longtime commercial customers.

PUDs have considerable discretion when it comes to granting power requests but by law must consider any legitimate request.  With regards to cryptocurrency mining, this has meant doing costly studies and holding hearings, often sparking a public debate over the industry’s outsized impact on the local economy.

A recent news release from the Grant County PUD sums up the conundrum:

Since summer 2017, Grant PUD has received an unprecedented 125 new service requests that total above 2,000 MW of electricity. This is more than three times the electricity needed to power all Grant County homes, farms, businesses, and industry…Approximately 75% of these requests are from cryptocurrency firms.

Time will tell whether cryptocurrency or the blockchain technology required to validate it becomes a central foundation of the modern economy, as backers insist will happen. Until then, Washington’s rural areas will likely continue to attract cryptocurrency miners and its PUDs will have to debate tough questions about capacity, service, and risk.

Questions? Comments?

If you have thoughts about this blog post, please comment below or email me. If you have questions about this or other local government issues, please use our Ask MRSC form or call us at (206) 625-1300 or (800) 933-6772.