In August, the company Riot Platforms Inc. decided to apply the ‘demand response’ strategy to its bitcoin mining operations in light of the severe heat wave that Texas experienced that month.
The result was a double win for both the mining company itself and the Electric Reliability Council of Texas (ERCOT), as the former not only cashed in 333 BTC in August, but also earned 31.7 million energy credits, while the latter avoided severe blackouts in the state.
Incentives such as these are a boon for bitcoin mining companies, especially in light of the upcoming halving of the cryptocurrency, which will cut miners’ rewards in half for every block they solve.
Full details below.
Bitcoin Mining: Riot and ‘demand response’ tactic as energy incentive
In August, bitcoin mining company Riot Platforms agreed to reduce its energy consumption through a “Demand Response” tactic to help the Electric Reliability Council of Texas (ERCOT) maintain grid stability.
Demand response is the willingness of industrial customers to reduce or increase their energy consumption in response to peaks in demand or supply in the electricity market in exchange for financial incentives.
Because Texas experiences very high temperatures, reducing the use of the power grid during peak hours can help avoid severe blackouts and ensure proper 24-hour operation.
Riot published its August results in a press release on 6 September, pointing out that its support of ERCOT resulted in $31.7 million in energy credits.
In practice, by reducing its mining costs, the company managed to earn much more than in previous months while mining fewer bitcoins.
As we can see in the table below, in August 2022, Riot mined 374 BTCs, earning 3.2 million in ‘power credits’ and ‘demand response credits’.
In July 2023, it mined 410 BTC earning 7.8 million in the same type of credits, while in August 2023, despite a drop in production to 333 BTC, there was a fourfold increase in credits compared to the previous month.
The amount of all these incentives, if converted into cryptocurrency according to last month’s average prices, would be worth around 1,136 BTC, a much higher figure than the 77 BTC given up during peak hours and high demand.
This is an example of how a company operating in such a fragile industry can still increase its profits by reducing energy consumption by more than 90% during the hottest and busiest hours.
This is a double incentive: on the one hand, for the mining companies, who see their revenues increase, and on the other, for the electricity grid operators, who can handle the full load of demand, even in alarming situations, without having to interrupt their services.
In July 2022, an analyst at Duke Energy, the second largest energy company in the US, said it was exploring new demand response solutions and had partnered with some bitcoin miners for trials.
Commenting on the ‘demand response’ tactic, Riot CEO Jason Les said in a press release on Wednesday:
“August was a pivotal month for Riot in demonstrating the benefits of our unique energy strategy. Riot set a new monthly record for energy and demand response credits, totalling $31.7 million in August, surpassing the total amount of all credits received in 2022.
Based on the average bitcoin price in August, the Power and Demand Response credits received are equivalent to approximately 1,136 bitcoins. The impact of these credits significantly reduces Riot’s cost to mine bitcoin and is a key element in making Riot one of the lowest cost bitcoin producers in the industry.”
Relief in the face of bitcoin’s next halving: the Texas-based company is nonetheless optimistic about the next market cycle
The energy credits redeemed by Riot are a boon for the company operating in an environment as volatile as bitcoin mining, as they can count on a secure return in FIAT.
The implementation of demand-response systems provides a degree of stability for the major miners, who can face the next cryptocurrency halving with more peace of mind.
Indeed, next April is expected to see the fourth halving of BTCs, which the Bitcoin protocol awards to miners who successfully mine a block.
If the price of the currency itself does not rise between now and April, companies of Riot’s calibre could find themselves in trouble, with mining revenues halved for the same amount of effort.
However, with the ‘demand response’ strategy, it is possible to convert some of the unused energy into credits, which make up a large part of the company’s turnover, while also helping to ensure the stability and efficiency of the grid.
Riot seems undeterred by the impending halving, and sees a bright future for the decentralised currency, which every four years will trigger a new price spike that will make the miners extremely profitable.
In June, the Texas-based company announced that it would expand its bitcoin mining hardware fleet with 33,280 systems from leading manufacturer MicroBT.
The $162.9m ASIC (application-specific integrated circuit) order is expected to boost RIoTìt’s total computing power to 21.1 EH/s by mid-2024, or 5.4 percent of the network’s current “Total Hash Rate” of 390 EH/s.
The machines are scheduled to be delivered by the end of 2023, but will be active in the first quarter of 2024.
Judging by the investment made, Riot’s vision for the next market cycle, energy credits or not, seems decidedly bullish.