Bitcoin mining presents a threat to the American power grid, warns credit rating agency
As if the steep drop in Bitcoin, Ethereum, and other cryptocurrencies prices that followed the Federal Reserve's intentions to raise interest rates wasn't enough to spook crypto investors, now the credit ratings agency Fitch chimes in with the warning that Bitcoin mining presents a danger to the American power grid. Surprisingly, Fitch isn't only focusing on the big energy expenditure needed to mine bitcoins, but adds long-term electricity contracts in the mix of warnings.
According to Fitch, crypto mining operations are a fickle business that can quickly become unprofitable and be shut down in the current risk-off climate that saw the Bitcoin price plunge 50% from its November top. Crypto mining farms' exodus or default on long-term contracts with public utilities could then present a real threat to the stability of the power supply system in both highly and lightly regulated markets, claims Fitch:
A utility with excess capacity must evaluate the opportunity costs and benefits of a new large crypto load versus retaining capacity for other economic development opportunities. Crypto mining operations typically bring in very little additional economic benefits in the form of jobs or ancillary business to a local economy. Crypto mining operations vary greatly in size, but in some instances these entities can become the largest customer in a rural service territory. The volatile and unregulated nature of crypto mining and the large influx of load requests led a number of Washington utilities to adopt new practices beginning in 2014 to mitigate exposure to crypto mining entities, including crypto-currency load moratoriums, evolving rate structures to capture the departure risk of a high-risk industry, and defined customer concentration limits.
The credit rating agency gives the crypto mining approval process of Washington's utilities as a good example, because the state has both excess power generation capacity and rules to maintain load balance. The Texan power grid, however, which is now the Eldorado of Bitcoin mining operations that moved from places with crypto mining bans like China or political upheaval like Kazakhstan, could be on the hook on account of its lightly regulated nature:
Unlike Washington, Texas utilities generally do not have excess generation capacity, but the structure of the regional energy market offers other perceived business advantages. For utilities with a supply and demand imbalance, utilities may need to invest in new generation facilities, sign new long-term power purchase agreements or procure power via real-time market purchases in order to serve additional crypto mining load. The first two of these three options pose the greatest risk to the utility should the crypto mining operation shut down, as utilities could be left with stranded assets and costs that then must be recovered, typically by customers in the form of rate hikes, although the utility may utilize reserves to recover costs if there is little rate flexibility. Increased costs or a reduction in reserves could lead to negative credit pressure if operating margins are compressed; similarly, lower liquidity could lead to a weaker overall financial profile.
Fitch has been on the record with warnings about the danger of overreliance on crypto for a while now, issuing statements about activities as varied as El Salvador making Bitcoin its legal tender, or now about the American public utilities becoming too invested in crypto mining farms. It's a credit agency's job to warn those it is rating about potential financial risks, after all, and in this climate of plunging crypto prices its advice may turn out to be rather credible.