Wildcat Bitcoin Mining Centers Cause Problems For Utility District

By Darren Smith, Weekend Contributor

Bitcoin_logo.svgAn interesting situation has developed in an Eastern Washington county where the public utility district is facing challenges to its electric system caused by the arrival of Bitcoin mining operations attracted to the area due to the low cost of power. The strain from these electricity data centers poses risks to both the cost of power to residents and might if left unabated pose a strategic cost to the credit rating of the utility itself, which will negatively affect the utility’s municipal bond rates for future expansions or debt retirements.

The allure of cheap power is leading to wildcat bitcoin mining that if unchecked could load the county’s power system at a greater level than that utilized by all the county’s electric users.

The cryptocurrency Bitcoin as it is known is an electronic currency market having worldwide adoption and is seen by many as an alternative to national currencies. Bitcoin began operation in 2009. Processing of transactions for the system involves a complex system of a distributed database and uses strong encryptions and locks to provide both security and liquidity of Bitcoins.

A short primer of the Bitcoin payment system may be read HERE.

Bitcoins may be used for payment of products or services between customers and businesses accepting these as payment. Holders of Bitcoins can store these in wallets and exchange them with others. The coins may also be exchanged for standard currency. The value of bitcoins to a particular national currency varies by market conditions, sometimes greatly.

In an overly simplified model, entities known as Bitcoin Miners process Bitcoin transactions, known as Block-Chains, a distributed database holding a ledger of transactions that is distributed among nodes in the system. Since it is distributed, there is no central repository or system for transaction settling. Therefore, it is necessary for the recruitment of entities to process Block-Chains to provide liquidity and security in the market. As an incentive to facilitate Block-Chain processing, new Bitcoins and transaction fees are provided to miners for their services. The right to process these Block Chains is awarded based upon the cracking of numeric codes. The complexity of this code requires a mountain of processing power to accomplish the extraction of new Bitcoins. Miners then hold or sell the Bitcoins as revenue for their operations.

Retrieval of new Bitcoins is an extremely processor intensive endeavor as it requires the use of complex mathematical operations. As such with the higher level of processing cycles, the more electrical power required to facilitate these transactions. Ordinary home computer based CPUs are not architected to efficiently compute these algorithms, GPUs (those found in graphics cards) are more suitable and parallel processing is key. This means that a Bitcoin mining operation will be best accomplished by extraordinarily large numbers of GPUs running in parallel to make bitcoin mining economical on a large scale. In essence, a room crammed with, for lack of better words, a large number of small computers instead of one large one is needed.

Another factor that is driving up the computational requirement is that the Bitcoin system grows in complexity for processing block chains at logarithmic proportions, thus creating a strong need for more hardware and energy costs to mine each Bitcoin. This in time reduces the number of Bitcoins mined for a mining operation of a static production level.

This graph represents relative mining difficulty from 2009 until 2014.

bitcoin-mining-difficulty

As with any business endeavor, costs and revenue is key. With Bitcoin mining it is truly a numbers game.

Since hardware costs and predictable revenue streams based on raw computational power are generally fixed, warehousing costs and power are important with electrical power per KwH being paramount.

Now that the background is established, we now look into how this situation is affecting some Eastern Washington Public Utilities.

The energy intensity of these mining operations can exceed those of a large supermarket or hospital. Chelan County Public Utility District (PUD) estimates that energy consumption may be between ten to one hundred times greater per square foot in area.

The PUD offers very cheap power in comparison with nearly all other public and private electric utilities in the United States. This municipal corporation generates surplus power from its primary sources: Rocky Reach and Rock Island Dams on the Columbia. Costs to county users are offset by the sale of surplus electricity on the open market.

But with Bitcoin Miners attracted by cheap power and low temperatures during winter a small minority of operations can disrupt the power system.

In one example of how a Bitcoin miner strained the system a miner set up shop at the site of Nancekivell’s Cleaners, a former dry cleaning store in Wenatchee. The site had internal electrical infrastructure to handle a high electrical demand but the connection to the PUD lines were substandard for the load. The setup drained so much power that it overloaded the lines, causing the insulation on part of the wire to melt. Fortunately crews recognized the spike before a fire resulted. Eventually the miner ceased operation after it could not afford the power bill.

An operation in Ellensburg caused a fire that damaged an adjacent property.

In Cashmere one miner from Florida brought six hundred mining machines but was denied power due to the inability to service that high of load on the local system.

Wildcatting began to be seen in other areas of the county where miners would buildout an air-conditioned freight container or other form of transportable space and hook into the grid. Some move as soon as they find a lower lease or the opportunity for lower electrical cost. They can at times install insufficient systems to handle the load or they will request expensive electrical upgrades only to leave. Unlike other large users of electricity in the county, there is not the same incentive to lower utility costs like the more conventional data centers in the vicinity that work with the PUD to buildout electrical infrastructure and provide employment, property taxes and other returns to the community that align with the PUD’s mission. Some argue that the wildcatters take and do not give.

Andrew Wendell, the PUD’s customer service director described the wildcatting:

“The problem is that the mining operations are using as much energy as they can get. They’re going into facilities that were not originally designed for that load… Anywhere there’s a vacant building. They’ll go anyplace.”

The gold rush for electrical power for mining began mostly last year. The PUD received thirty four inquiries requesting one megawatt or higher allocations that in all totaled 220 average megawatts. The PUD ordinarily experiences increases of one to three megawatt averages annually. The PUD powers the entire county for 180 average megawatts. Succinctly if left to open requests, thirty entities would have taken half the power of the county.

Last December the PUD’s commissioners established a moratorium on requests for one megawatt or greater. They re-established a new moratorium last month when nine miners requested .95 megawatts to skirt the restriction.

Some believe that with proper rulemaking, the miners could provide a benefit to the area in the form of new leases and other opportunities. But with a concentration of a large segment of the total power sold being held by relatively few enterprises, it can lead to risks to the system. As shown with the miner renting the Nancekivell’s space, a default in payment by a large player could result in a measurable economic loss to the PUD which would then cause issues with the Utilities and Transportation Commission or ratepayers.

The situation could also show a downside to Bitcoin with its negative contribution toward increasing electrical demand and the furtherance of fossil fuel consumption by utilities that depend on such fuels.

By Darren Smith

Sources:

The Wenatchee World
Blockchain.info

The views expressed in this posting are the author’s alone and not those of the blog, the host, or other weekend bloggers. As an open forum, weekend bloggers post independently without pre-approval or review. Content and any displays or art are solely their decision and responsibility.

11 thoughts on “Wildcat Bitcoin Mining Centers Cause Problems For Utility District”

  1. Lynette,

    A girl for whom “spending” is “over her head?” Epic fail. Does not compute.

    For your edification:

    1 Bitcoin equals

    276.20 US Dollar

    *****

    Here is 10% of a list of the biggest companies that accept the bitcoin as a currency.

    http://www.bitcoinvalues.net/who-accepts-bitcoins-payment-companies-stores-take-bitcoins.html

    WordPress.com – An online company that allows user to create free blogs
    Overstock.com – A company that sells big ticket items at lower prices due to overstocking
    Amazon – An online company that sells almost anything.
    Target – An American retailing company
    CVS – A pharmacy shop
    Subway – Eat fresh
    Victoria’s Secret – A lingerie outlet
    Namecheap – Domain name registrar
    Bitcoin.Travel
    Sears
    Apple App Store
    Kmart

    P.S. Let us know if you successfully negotiate some bitcoins at Victoria’s Secret. That could be further illustrative and edifying.

  2. This is over my head. I look on this like I look on Online Poker. I ain’t playing cards with a dealer who can see my hands, and deal himself whatever card he wants to.

    Squeeky Fromm
    Girl Reporter

  3. Surely there is a way to have them move into an area without becoming an undue burden to the rest of the community. Isn’t this what City Managers are supposed to figure out? I don’t have any bitcoins but I have to agree with Nick Spinelli on this one. 🙂

  4. Was meta-fracking involved in Bitcoin mining? How many terabytes of of lost strings from algorithmic processing are littering the computational paths? Any piles of tailings composed of corrupted files? This has all the earmarks of an environmental disaster!

  5. I have never decided whether I like bitcoins or not, so I do not have any. I did not realize they were sucking up that much power though.

  6. Capping consumption per capita is a communist plot. Business creates jobs and consumer spending. If these bitcoin ops were smart, they’d divert a few to these Maoist commissioners, who must have been captured in Vietnam. I wanna know the guys who weren’t captured.

  7. We should outlaw mining which is algorithmic. Let the freedmen into town but not the mics. Blazing Saddles had a cure for Bitcoins and it was known as stage coach robbery. Who back up the Bitcoin by the way? Especially in Greece? I heard that the grocery stores in Greece are abundant in Bitcoins. Every bit matters when the banks are closed. Every coin should have its show.

  8. An amazing article Darren, worthy of re-publication Wired, Reason or Forbes.
    Thank you for this overview of events I had not even known about.
    A truly quality piece.

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