WBD619 Audio Transcription

Bitcoin Mining & the Energy Grid Transition with Troy Cross & Shaun Connell

Release date: Wednesday 15th February

Note: the following is a transcription of my interview with Troy Cross & Shaun Connell. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.

Troy Cross is a Professor of Philosopher and Fellow at BPI, & Shaun Connell is Executive VP of Power at Lancium & energy trading expert. In this interview, we discuss the evolution of the Bitcoin mining and energy debate: how Bitcoin mining has weathered the storm of FUD over its energy usage to become a tool that fixes an ever-increasing number of energy-related issues.

“Bitcoin’s an intelligence test, but it’s also an epistemic humility test. You don’t have to know everything about Bitcoin, nobody knows everything about Bitcoin. The question is, do you pretend you know when you don’t? And if you do you’ll be exposed.”

— Troy Cross

Interview Transcription

Peter McCormack: Troy, how are you?

Troy Cross: I'm good, how are you, Peter?

Peter McCormack: Good.  You sound a bit croaky.

Troy Cross: I have just been through the illness.

Peter McCormack: The sickness bug?

Troy Cross: The sickness.

Peter McCormack: Yeah, I had the sickness bug.  Shaun, how are you?

Shaun Connell: Fabulous.  Also experienced the sickness bug over the holidays, but I'm glad we're filming now because I'm good.

Peter McCormack: We've got a lot of good stuff to talk about as well.  Troy, I see you a lot these days, not just on the podcast.  I literally bumped into you in Amsterdam; I didn't even know you were there!

Troy Cross: Yeah, it's great.  I think this is my fourth time on your show in a year.

Peter McCormack: Fourth time.  Well, you're one of those people now who kind of has an open invite.  If you've got shit to talk about, we want you on.

Troy Cross: Thanks, we'll see if that invite stays open after today!

Peter McCormack: Well, what is it, about a year ago you first came on?

Troy Cross: Yeah.

Peter McCormack: A hell of a year you've had.

Troy Cross: Amazing year, amazing journey.

Peter McCormack: We've met all your friends, we're going to organise the philosophers' retreat, make that shit happen.  Shaun, it's been what, six months since I saw you last?

Shaun Connell: I think so, about that.

Peter McCormack: It was here in Austin, wasn't it?

Shaun Connell: It was in Austin, and I think it was around summertime, yeah.

Peter McCormack: Well, good to see you again.  What's new with you; what have you been working on?

Shaun Connell: Been busy with family.  My kids are 7 and 9, so whenever I leave home, I usually make my trips very concise and efficient so that I spend time with my kids, and then really keeping busy with Lancium, the company which I'm EVP of Power for them and as we know, there's been lots of stuff happening in the Bitcoin energy space, which has been a tremendous opportunity for many folks.  But yeah, real busy.

Peter McCormack: The energy side of Bitcoin is super-interesting and how it's become such a big part of the conversation because I doubt, Danny, the first three years we even talked about it?

Danny Knowles: Barely.  It's been really the last two years it's all changed.

Peter McCormack: Yeah, we barely spoke about it.  And then, because of the energy FUD, it came up a bit more and more, and now it's a central part of what we talk about.  We made two shows last week just on nuclear alone.  I think it's also this evolution of the topic of Bitcoin, because it permeates all these other topics.  As a show, we make many shows now where we don't actually talk about Bitcoin, we talk about other things.  I've found it super-interesting learning about it and my understanding of energy is growing, I've constantly got more questions, I'm going to have more questions for you. 

Troy, you've been obviously pushing the talk a lot about the interesting things that can be done with mining and we're going to lean on you with that; and, Shaun, last time we spoke a lot about grid stability and I'm going to lean on that for you.  But I really just, for both of you, I'll start with you, Troy, as somebody who's been heavily in the Bitcoin scene, not just buying socks, but heavily in the Bitcoin scene for this last year, what's your perspective; how have you read the evolution of these conversations?

Shaun Connell: Do you have the socks on today?

Troy Cross: I didn't wear the socks.  Maybe I should have, they are a good-luck charm.

Peter McCormack: Remind me, how much are those socks worth now?

Troy Cross: Well, 5 Bitcoin, so I don't know what the price of Bitcoin is; $17,000?

Peter McCormack: So, $100,000 socks!

Troy Cross: Yeah, but you have to understand I have two dozen of them in a drawer!

Peter McCormack: At one point, they were worth $350,000!

Troy Cross: Exactly.  It's getting easier and easier to replace the loss from the socks as the price drops!  Yeah, in terms of what I've seen, I'll just speak for myself, I think I was telling Shaun this, I think the energy rabbit hole itself is just as deep and interesting as Bitcoin's, and I kind of think it's the defining issue of our time actually, how humans relate to energy.  And I actually wouldn't have gone anywhere near this deep had it not been for Bitcoin and the FUD; so, thank you, FUDsters, for really bringing me to an issue that I still barely understand and most people don't understand at all, and yet it's a defining issue of our day.

Yeah, of course we'll get into this, I think Bitcoin has a huge role to play in our energy future, what that future looks like and taking advantage of it, whatever it does look like.  But energy itself, quite apart from Bitcoin, is absolutely fascinating and counterintuitive, and that has been -- Shaun was asking me what's been the high points of my experience since being in Bitcoin, and the first thing that jumped to mind was just learning, and learning about what?  Well, you learn about everything in Bitcoin as you know.  But maybe the most rewarding and surprising thing that I'm learning about is energy.

Peter McCormack: Danny, what was that Brandon Quittem quote?

Danny Knowles: He said, "Bitcoin mining is everything you don't know about energy combined with everything you don't know about Bitcoin".  It's pretty perfect.

Peter McCormack: And just to add to that, I remember clearly when Peter Van Valkenburgh was called in front of the Senate Testimony, he had a Senate Testimony hearing with regards to Bitcoin, and he has this brilliant quote and I will get it wrong.  But what he said is that, "For every illicit transaction [or] use of Bitcoin for illicit purposes, there's somebody in Nigeria or Belarus who's using Bitcoin to fight against authoritarianism", you know, "For every illicit use, there is somebody using Bitcoin for good", and he said, "Technology's mutual, it can be used for good and bad".

A lot of the energy FUD really came to a fore for us two days ago.  We interviewed Erik from Gridless down in Africa, and he was explaining to us, 40% of people there do not have electricity.  Once it goes dark, they go to bed because it's pitch black.  Kids, maybe they can do some work via paraffin light, but that is also dangerous.  And he talked to me about that and it just made me think of the privileged fucks who just sit in well-developed western cities criticising Bitcoin without really considering the positive impact it brings to communities and places like this.  So, I feel like the Bitcoin mining thing is now extending that point from Peter Van Valkenburgh.

Troy Cross: It's amazing that you have to learn about energy poverty, energy scarcity, from Bitcoin FUD and then actually finding out how Bitcoin is addressing it.  That's not how we should learn about energy scarcity.  It's a huge headline that a billion people don't have reliable access to power and that their lives are measurably and substantially worse in all sorts of ways because of that, and their economy's worse.  But that is indeed how I learned about it.

Peter McCormack: I think that's what forced me to reconsider and not just ignore someone like Alex Epstein, who I've said before, I don't 100% agree with him, but he's at least made me reconsider other people around the world and their economic situation.  How about yourself, Shaun.  Over the last year or so, what's really stood out for you?

Shaun Connell: Sure, it's an alternative kind of energy rabbit hole.  So for me, I started that journey about four years ago on the Bitcoin rabbit hole and for energy, I spent about 15 or 20 years in the energy trading space, had done an executive energy MBA and I knew a bit about the space.  And so, I'd say that with my combined experience before, I was about a third of the day down that energy rabbit hole.  And just the past two years, you start learning about all these different applications, and my experience I've had in the past couple of years in the Bitcoin mining space, I've gone deeper.  But I recognise there's still an infinite amount that's still undiscovered along that journey.

As relates to what you're talking about within, did you say it was in Africa, the use case?

Peter McCormack: Yeah, Kenya.

Shaun Connell: Yeah, and Troy brought this up I think on your last show that Bitcoin is a tool, right.  And so, I think what we're learning is, I had a conversation with Troy about this afterwards, kind of envisaging Bitcoin mining is like this Swiss army knife and there are several different tools and several different benefactors for using this tool.  I might use the screwdriver most in my house, Troy might use the corkscrew most at his house, but that tool can be used differently in different applications and different markets.

So for example, the Bitcoin mining Swiss army knife in West Texas is absorbing a lot of excess renewables, helping you accelerate the renewables, build out to create this customer that can purchase what nobody else wants, but also turn down when there are scarce events.  And you talked about now in Africa, that tool, as I was saying, now we need to use that Swiss army knife to bootstrap a community, to create some type of economic benefit to having some kind of mining that's in some place that was tapping this resource that might not be able to be tapped into, unless you had this really mobile application that can be used to create that; so, helping build these communities in remote places.

So, it really is a kind of Swiss army knife that has many benefactors of like a policymaker, right, so what does it do to policymakers?  We're in this energy transition where you need to go from fossil fuels to renewables, and so this is now something that policymakers can have as a flexible resource that kind of helps them bridge that gap to get to that, which is like a flexible resource for having more renewables come to the grid.

For grid operators, they're most concerned about reliability of the grid.  So, that means that they don't want to be doing load-shedding, so they want to be able to have capacity available for them in case there's a plant that trips offline and they've got something that can turn up; but they also want to have resources that can real-time manage supply and demand.  So, that's now a tool for the grid operators.

Then you think about the benefactor of a renewables developer, who has this perpetual deposit of wind and/or sun and they've got this renewable asset, but they can't get good value out of it because there's no powerlines to take that power to the locations.  And so, this tool to that developer now is saying these other miners are now going to come to them.  So, it's this ability to create a new customer that doesn't need to have these wires to be sent.  So now, he can start accelerating more renewables because they're getting more value for the power.

Then lastly, the Bitcoin miners, which is the economic value that they're getting by having low-cost power and locating in these unique places.  So, it really is a kind of fascinating tool that's different in every single market and not the same use case, but a special tool.

Peter McCormack: I really like that Swiss army knife analogy.

Troy Cross: Shaun has one more, which I also like and have to mention, which is duct tape!

Peter McCormack: We'll come back to duct tape; Swiss army knife.  But I don't think it's the Bitcoin mining is the Swiss army knife, I think Bitcoin itself is a Swiss army knife, and anyone who comes to Bitcoin finds out how it helps them, what use is it for them, whether you're a company or an individual.  I know what use it is for me.  The most prominent, or the most obvious use, is the times where I have to pay or get paid and we don't have a way to transfer from bank to bank.  I can talk about savings, investments, but really that is an actual tool, that is a tool that I've used for the purpose of running a business.

Bitcoin mining has almost developed as this unknown unknown, it came out of nowhere, and is now offering all these new and exciting things with regards to grids and landfill sites, as I spoke with Adam Wright.  I'm intrigued to see what the unknown unknowns are that come out in the future, because I expect there will be more.  I don't know what it will be, but I expect people will figure out how to use this technology for other things.  We've spoken about unknown unknowns.

Troy Cross: Yeah, I'm with you.  And some kind of switch flipped for me at some point as I kept seeing new applications that surprised me about Bitcoin mining.  Mining on landfill gas was one of those, but I didn't know about grid balancing for one, I didn't know the role that the Bitcoin mine could play in providing ancillary services to the grids, I didn't really understand the problems that renewable developers had, the financial problems they had that Bitcoin solves; and I didn't foresee the extent and variety of uses of waste heat from Bitcoin mining, which I think we're only beginning to understand.  I was telling Shaun last night, when I looked at the percentage of energy worldwide that goes to heat, it's just extraordinary; it dwarfs the Bitcoin Network by orders of magnitude, and it contributes to peak demand from the grid.  So, heating and cooling are especially powerful sources of load.

So, yeah, I didn't foresee any of this in Bitcoin, and I wonder what we're not seeing, having missed all of these things to begin with, I wonder what we're not seeing, and that's the most exciting thought to me about mining, is what little parts of that Swiss army knife tools have we not even unlocked yet; and also, which ones are going to be used the most and in what applications, and that's where I have a huge question mark?  It's not even the tools we don't know about but what's the distribution; how much Bitcoin mining is going to be distributed in capturing waste methane around the world; how much of it's going to be centralised in large data centres; and how much of it is going to make use of, I guess what we're looking at here is alternate revenue streams, other than the Bitcoin that come out of mining?  And the question is, what's the volume of the alternate revenue streams and the distribution of those streams; and then what are the second-order effects of that distribution on energy systems in the economy?  Those are big, open questions for me.

Peter McCormack: So, as you know, I'm making a film next week and the thing I'm most excited for, we're going to see a guy who heats his swimming pool with ASICs; I mean, how fucking cool is that!  He is heating his pool and mining Bitcoin at the same time.  I just think that's incredible.  But those unknown unknowns are the exciting part.  But Bitcoin's evolving into this thing that none of us really know what its final form will be, but it does feel like it's becoming this backbone of human coordination and where incentives matter. 

It is kind of this perfect free market where incentives are driving these new forms of activity and the great thing about these incentives is it makes it harder for the FUDsters to argue against them, and it's making it more difficult for regulators to argue against the benefit it brings to everyone.

Troy Cross: It's really hard to ban heaters if they happen to do some computation along the way.

Peter McCormack: Heaters and bank code and…

Troy Cross: Yeah.  It's a real luddite move to say, "Here's a technology, it does a lot of different things, some of them we don't even know about yet, but let's ban it now just in case".  That's a real luddite move.

Shaun Connell: I usually don't like overlapping analogies, but the duct tape actually kind of comes into play here, which is like it is a Swiss army knife and we're discovering that the one tool that we thought was there was hashing to produce Bitcoin.  It turns out there's a tool for grid balancing, ancillary services, communities, all these things that are on there.  And overlaid onto that is, and you talked about the unknown unknowns, what's going to come out of it, and I was looking at some other comparisons to Bitcoin.  One of them that came up was duct tape.

So, duct tape was invented in World War II, and the reason for the invention was, it was originally a green tape and it was called "duck" tape, not with a T, and it was for the ammunition cases, keeping the water out.  And so then it was green, it kind of looked like a duck and so they called it duck tape.  But during the war, they discovered it had all these benefits and uses that they could use for weapons and fixing things and what we use duct tape for.

The war ended and then there started to become a housing boom and they started using the duct tape on ducts in the houses and using this tape for those ducts, and it changed from green tape to silver tape, and then it just exploded.  And now, every house, I've got four roles of duct tape in my house and I use it for many different things.  So, there were a lot of unknown unknowns that came out of this initial, keep the ammunition cases dry, and now it's widespread everywhere.  So, it's kind of discovering like the Bitcoin; the duct tape was originally just hashing, but then we're figuring all these other use cases, we're plugging holes in different areas and different communities.  And there's still a lot of unknown unknowns that are still coming out.

Peter McCormack: I taught Danny a use case for duct tape yesterday, didn't I?

Danny Knowles: What was that?

Peter McCormack: When we needed the folder.

Danny Knowles: Oh, yeah!

Peter McCormack: Had to go down to FedEx to go and get something FedExd to the UK, a one-page signed document, but it had to be a physical document.  So I was like, "Have we got a folder?" and he was like, "No".  So, we got two other pieces of A4 and then I used duct tape round the edge to just create a little folder.  Danny was impressed.  

I think there's another thing that's also been interesting, especially in the last week, is Bitcoin shines a light on reputation and credibility.  I specifically want to talk about Peter Zeihan on Joe Rogan, somebody who people have said, "You've got to get him on the show".  The guy understands geopolitics, hugely credible and knowledgeable guy; and the first thing I see of him, going round on Twitter, is him explaining Bitcoin.  And the amount of things he got wrong was actually crazy.  I mean, have you seen the video?

Shaun Connell: A snippet.

Peter McCormack: Yeah, I mean, look, he got so much wrong, but he explained it with such confidence that he is now disseminating that to millions of listeners of Rogan's show.  And you can't hold Rogan back for that, you can't hold that too much against Rogan, but that was a situation and I was like, "Oh, you're instantly not credible for me".  I think that's happened all through media as we've constantly had to battle the people who've failed to do the research, or at least give an intellectually honest answer.  I don't mind if you don't like Bitcoin, but give me an intellectually honest answer, give me an answer regarding money why you think it will break the money system, why it can't perform as money, something like Jeff Snider's done.  But just to spout absolutely bullshit, confuse Bitcoin with crypto, that to me was a real dent in his credibility.

Troy Cross: He got stuff wrong about nuclear in that interview as well.

Peter McCormack: I heard.  You see, that's come round now, hasn't it?

Troy Cross: He was taken to task by the nuclear advocates and experts, and the same cocksure attitude.  And, yeah, Bitcoin's an intelligence test, but it's also an epistemic humility test.  You don't have to know everything about Bitcoin, nobody knows everything about Bitcoin.  The question is, do you pretend you know when you don't; and if you do, you'll be exposed?  I was talking to Shaun about this last night.

Peter McCormack: Or you just make a podcast about not knowing about Bitcoin, and then you get away with it!

Troy Cross: I was telling Shaun, we're in a moral panic right now about Bitcoin itself and about mining, and that seems to be ramping up and we talked about this last time.  The FTX debacle just poured fuel on that moral panic, the fires of that moral panic.  And if you just look at the social side, you think Bitcoin is getting hammered in the media and in the popular mind because the FUD has never been more intense, it's never been more intense around energy and it's never been more intense on the political front.  I mean, it's the same old FUD but it's just somehow now, we've reached some threshold of freakout where it's become normalised to freak out about it.  It's like the Overton window is excluding bitcoiners, and that's the social side.

If you look at what Bitcoin is actually doing and what Bitcoin mining is actually doing, it's just the opposite.  We're starting to see these applications of Bitcoin that are pro-social explode.  We're starting to see Bitcoin's power usage get more flexible and we're starting to see it benefit grids more than it did at the height of the bull market.  So, these things are radically out of sync.  You get the confidence of Peter Zeihan and it's reflected in a popular confidence in, "Yeah, Bitcoin's bad and it's a scam, it's bad for environment, etc".  And at the same time, the reality is trending in the opposite direction for anybody who knows about it, and it's just like what's going to happen when this unstoppable force meets this immovable object?

At some point, the reality and the narrative have to match and it's like, will it go the way of let's say  other moral panics, like the marijuana moral panic, where it's decades of legislation that's built on ignorance; or the nuclear panic which is 50 years on from its origin, and which has delayed the transition to the decarbonised grid?  Or, will it go the way of the Satanic worship, the moral panic that happened in the 1980s, where it was fairly short-lived and really looked ridiculous?  That remains to be seen.  We see it as a test but that's because we actually know something about it.

Peter McCormack: Yeah, but those moral panics are breaking down again, and again because of incentives.  I mean, the marijuana side of things here in the US, I don't know how many states now, but the majority now is either legal or decriminalised.  Most cities I go to now, all I can do is smell weed.  Did society collapse?  No.  Did it remove a certain part of criminality from the system?  Yeah.  Did it stop criminalising people who should not have been criminalised?  Yes.  Did it add tax revenue to the state?  Yes.  I mean, is it the state or the city, I wouldn't know but either way, it added tax revenue and that's now expanding into consideration for hallucinogenics, MDMA considered as a PTSD drug, because of the incentives. 

Same with nuclear.  I mean, the nuclear moral panic is starting to break down now because of the incentives.  The last few reactors they wanted to close down in Germany have still now been extended, I believe the facility in California has been extended.

Troy Cross: Diablo Canyon.

Peter McCormack: Yeah, Diablo Canyon has been extended.  And we interviewed somebody who works on small modular reactors the other day, and he said that there was a bipartisan bill now to promote nuclear, again because of the incentives, because everything this moral panic has tried to do to crush the nuclear sector has failed and it's just led to people not being able to get this carbon-free energy.  And so, I think the same will happen with Bitcoin, because it usually comes down to money and Bitcoin is money itself.  So, as long as we get it in the hands of enough people, a bit like Cory said, as long as we can get it into enough hands of enough people, then I think the incentives work for Bitcoin more than anything else.  You keep looking at Shaun!

Troy Cross: Well, I think Shaun is on the same, exact page.

Shaun Connell: I think that tying back into the mining space and the FUD space about, "This is bad and this is going to destroy grids", I think what's happening is what trumps FUD is enough evidence of the opposite.  So, we've gone from a time of 2017 where the state of Bitcoin mining, the advanced setup was a 2 MW container in an industrial park.  That was the setup and it's running baseload.  You go to 2020 and you've got facilities like Rockdale with Riot that they might have a couple of hundred megawatts.  It's a very big facility, oh my goodness, it went from this 2 MW container to this 200 MW.  And now we're getting to these facilities that are 600 MW, 700 MW sites.

As you see these coming on, it looks big and scary because it's like, "Oh my goodness, this is just going to suck the energy, it's going to compete with me".  But what I was really excited about coming through summer was just the Bitcoin breakevens in the summertime were about $75, $80 -- sorry, they're about $125 in the summertime, and the peak power prices in Texas, they were trading up to $200 coming into the summer.  So, what I was really excited was, we're going to get to go through summer and we're going to have evidence that says these are miners that are going to be behaving to the signal that's happening on the power grid and turning down.  So, we're going to get all these stories of things that are happening and those are starting to tease out and we're starting to hear what happened in different winter storms and different areas.  So, the evidence trumps that.

But when the facility's just being built and you kind of have to make up a narrative, it's really easy to paint the picture that this is bad.  But now we're starting to hear these other stories in different locations, you talk about Africa, we can talk about different grids, and so that's going to really start to push on and I think that kind of mutes the FUD in those areas.  So, the more this industry expands, we're going to get more and more evidence of that, and there are no new stories of Bitcoin miners hooking up to coal facilities to restore those plants in the United States; those are not happening.  So the storyline is all these things are positive outcomes that are happening.

Peter McCormack: You know what's quite interesting; off the back of this, you talk about the moral panic about things there shouldn't be a moral panic about, marijuana, Bitcoin and nuclear energy, but there are things I think there should be a moral panic about that there haven't been.  But as the moral panic breaks down on these and people realise the incentives, I think there's starting to build a moral panic around certain things like media and media incentives; government institution incentives; politician incentives themselves.  Especially here in the US, we're increasingly seeing how much money the politicians are making and we're questioning how they're making it and we're questioning their share trades.  We've had it in the UK over this last week with the question about donations towards politicians.

So conversely, the people who are causing the problems, which you can pretty much put it all down to politicians and media, their incentives are being exposed and their negative incentives are being exposed.  So, my hope is we're going through this transitionary flip, which is painful and there's polarisation and people are falling out, but what we're doing is I feel like we're trending towards the right incentives for both business, media, governance and I don't know how this will play out, but at least it's happening in the right way with this full transparency of everything we're seeing.

Troy Cross: That's a great thought that the FUD is coming from a group whose incentives are themselves being scrutinised, and you get a kind of perfect storm when it's FTX and Sam Bankman-Fried, who's the distorter of incentives.  So, you get a perfect combination of crypto FUD and politician-funding media FUD in one.  Yeah, I have no confidence about where it goes, but in the long run I think it has to go in the direction you're saying.  In the short run, anything could happen because people are irrational and panics are real, they happen.  So, I have no prediction in the short term.

But the nice thing about Bitcoin is it's global and the moral panics are not going to be global.  People are not going to be wrapped up in this same moral panic in Nigeria, in Kenya, in El Salvador, in Paraguay as they are in Massachusetts or as they are in Brussels.  This is the great thing about Bitcoin; it's just a question of who takes advantage of these incentives, not whether they will be taken advantage of.  One of the basic misunderstandings people have of Bitcoin is that some policymaker can do something about it, in terms of the global incentive to mine, let's say.  Can't do anything about it; the issuance is algorithmic and no tax policy, no incentive structure the government offers can change that one bit.

Peter McCormack: Any policy created sits out of Bitcoin and is really a coercive layer on top of Bitcoin.  It's a coercive layer on the users of Bitcoin, but there's no policy on Bitcoin.

Troy Cross: Right, yeah, good luck with that one!

Peter McCormack: Yeah.  Shaun, you talked there about the grid, I do want to get into a bit more detail on that now.  I think it was back in 2021 there was a big freeze here in Texas, well noted.  Can you remind everyone as best as possible what happened then, and then let's use that as a lens of what's happened recently; I know there's been another extreme weather event here, I don't know how similar they were.  But what I do know is that there was a response and that Bitcoin mining played a role.  Can you just give us the background to that?

Shaun Connell: Sure.  So, in 2021, I believe the time was in February, there was Winter Storm Uri came through and it was a prolonged period of Arctic air had moved down through Texas.  What made it very special and unique was that it wasn't a special one-day transitionary pass through Texas, it was a long, drawn-out cold.  So, during that time, in the way that the Texas grid was set up was that for the days that came through, there was not a lot of wind and solar that were being produced at that time.  There was also not a lot of power plants that had been winterised that could actually be prepared for the cold weather.  And from Alberta, our power plants are built to be run in very cold weather; in Texas, not so much. 

So, what happened in Winter Storm Uri was a combination of a whole bunch of things.  Another one on top of that was that heating for -- in Texas, it's very rare in the south part of Texas that you're going to need to put your heat on, so the heaters they have are very inefficient, because you don't need to turn them on that often.  But during that event, when the cold stuck in the area, this incurred a big boom in this actual demand for electricity, and there were massive failures on the ability to deliver gas, and also power plants were tripping offline, coal plants, nuclear power plants; everything was tripping offline and they needed to do rolling blackouts.

In a power market, I think we mentioned the last time we spoke that there's the heart rate of the grid and it's 60 Hz, so 60 beats per second type thing.  The way the grid operator manages the grid is they've got to make sure that the frequency's always 60 Hz.  So, if there are loads going out, they bring generation on because it will change the frequency, so they're always balancing around that frequency.  Then in the winter storm event, essentially what happened is that load kept going up and there wasn't enough generation to meet that.  So, what a grid operator needs to do is they need to start load shutting.

So, during that event, there were several days of blackouts that were in Texas, and there was a prolonged event, for context of what it looked like for Bitcoin mining, there was approximately about 600 MW of Bitcoin mining connected in ERCOT at that time.  We have a high degree of certainty that the majority of those megawatts did actually turn offline for that event, so 600 MW turned offline, but Winter Storm Uri was very complex and you can't just point the finger at just one thing that happened.  Does that make sense?

Peter McCormack: Well, it sounds like what you're saying to me is that the grid and Texas isn't ready for a rare, freak cold spell?

Shaun Connell: Yes.  And if you think about power plants, the coal plants and natural gas plants, there's a big build-up that happened in the 1970s and the 1980s, and those plants have a life expectancy of about 50 years.  So, that takes us up to where we are now.  So, it's this combination of this freak weather event, but it's also that you have these plants that are coming to the end of life, so are they going to be reliable and be able to come online; so, there can be some challenges with that.  So, it's really understanding that every single region has a different mix of generation and power grids are very complex and I'm sure I can boil it down to a simple kind of, "This is what happened and if we'd had this magic bullet, this would have saved it", but it's very tricky and challenging.

Something you might hear about is a term called "net load" and this was never a term 20 years ago, because all generation that was online and covered was just natural gas plants, coal plants; there was no wind and solar.  So now, grids measure net load, which is essentially what is the expected load for the entire gird, subtracting all the renewables, because that's the amount of actual dispatchable generation that you need online.  So, if you have a whole bunch of wind and solar coming into some kind of winter event, it's not a big deal, because you don't have to call on so much generation to meet that demand.

The big challenge is, and this is what happened with Winter Storm Uri, is that you had very low wind and solar, so you needed to call on this large amount of generation.  That large amount of generation, there were complications with gas delivery, complications with plants that were tripping offline that were winterised; there were all these other issues that were preventing that from servicing that dispatchable generation.  You okay if I shift towards what happened here?

Peter McCormack: Yeah.

Shaun Connell: So, in the recent event, there were some rollouts in some other regions in the US that wasn't Texas.  So, an easy thing to say would be to say that Bitcoin saved the grid over here and didn't over there.  It would be nice if we could say that but it's not simple like that.  So, what happened for this event was it was a two- or three-day weather event that came through, so it wasn't a very long, prolonged period that was just sitting over Texas, and really strong wind and solar.  Coming into 21, 22 December, there was a massive amount, I think there were 35 GW of wind that was online out of a grid that's consuming, call it 50 GW, 60 GW, so a massive amount.

But then that tapered off on 23 December and on 23 December, your wind went quite low, and so now your net load is high because your renewables are offline.  So now, in 2022, we previously had 600 MW of Bitcoin mining, there was about 1,600 MW of known mining loads in Texas and all those loads came off, which essentially freed up that power that would have been being used by them and using that power for other customers on the Texas grid.  And there was enough generation online that was dispatchable that could actually meet that load.

It's also worth noting that during this event, 20% of the actual, I think the number's 20%, of the natural gas and coal plants had tripped offline.  So again, you could look at that and say, "We failed, we were supposed to winterise these plants and we didn't", but really it's about these plants that are coming into life and maybe they're not completely winterised, but there were still some issues that happened.  There were a few hours, a time period in there, where there was some scarcity happening, but it didn't get to the point like we did back in 2021 where there were rolling blackouts. 

I think, Danny, I sent you a slide, and this just kind of, so Lancium has a hosting facility that we have in Fort Stockton, and this is essentially what we did for our power consumption during this event.

Peter McCormack: Explain it so people listening can understand.

Shaun Connell: So, I've got a chart with three lines.  One line, it's green in the picture, it represents our Fort Stockton demand and this one here was a 5 MW site.  And so the green one is the 5 MW Fort Stockton load.  The white line at the very bottom is the Bitcoin breakeven, which at this time was about $75.  And then the yellow line represents the ERCOT real-time power price. 

So, on the far left, we see between 22 and 23 December, the price of power was very cheap, but it was very cold in Texas, but there was just a whole lot of wind and solar that was online that was essentially causing prices to be very low.  So, on 22 December, the facility's running full out, you can see the green line at the top; then we go into 23 December, and it was the morning when it started to get really cold and the wind and solar came offline, and you can see the yellow line spiked up.  And so, that is the axis on the left, which it spiked to $3,000 per MW for that time.  Now, the Bitcoin breakeven is $75.  So, in the same way that you're not going to trade me a $20 for a $1 bill, miners aren't going to buy the $3,000 power to mine for $75.  So, there's the right price signal that's being sent to the market, which allows the miners to actually respond to that.

With Lancium, our system is called Smart Response, and automatically essentially when the price goes above that certain threshold, it automatically reduces the load down below.  So you can see that coming into 23 December, the green line goes all the way to the bottom.  We were so certain that prices would to be high that -- for a Bitcoin mining facility, usually about 5% of your total load is just your auxiliary power; so, we were quite confident that the price would be high for the whole day.  Normally, we operate just where it's going to go up and down based on where the prices are.  But for this day, we actually took it totally offline, because the prices for the day ended up selling at $600, so it was like, "Let's just turn off the facility completely and then we'll turn it back on the next day".

So you can see on the 25th, our facility kind of ramped up and down, because there were some periods where the prices still had some volatility, but the load was just automatically dropping up and down in response to that pricing.

Peter McCormack: And when you turn the facility off, are you one of the facilities that gets paid to turn off; are you selling your energy back to the grid?

Shaun Connell: This is kind of a big topic.  I think a lot of folks -- it's very challenging to figure out the pieces.  So, when you're consuming energy, there's two transactions that can happen.  One always happens, which is I'm connected to the grid and I'm going to buy energy at the spot price of energy.  So, that's the transaction that always happens because you're physically connected to the grid.  The second one is, I have a hedge in place, which is I've bought a financial product that's going to essentially hedge my price exposure from here that's given me a locked-in, fixed price, so that if I'm consuming energy from the grid and I've got a fixed-price hedge, it's guaranteeing the price I'm going to be paying for that power, because these two are going to match out.

A Bitcoin miner that does not have a hedge, but is just turned offline, is essentially just deciding to not pay $3,000 for power that you can only make $75.  There's nobody that's paying the miner to turn off to consume that.

Peter McCormack: Well, that was my question, because when people refer to this, they talk about, "The Bitcoin miner was turned off to respond to it", and it feels like sometimes you can read between the lines and think, "Is this a relationship between the grid and the miners and they call them up and say, 'Look, we've got a difficult time, can you turn off?'"  But actually, it's all again driven by incentives; it's just driven by price.

Shaun Connell: That's right.

Peter McCormack: So, it's all automated?

Shaun Connell: Yeah.  And so, there's a second part to that.  So, the first was, I'm physically buying from the grid, turning off and not consuming.  If you have a hedge, and I think Riot announced this and they called them "energy credits", but essentially they're going to have this financial hedge that they bought at, say it's a fixed price of $50 and if the price was selling $2,000, they're going to collect the difference on this financial hedge that's going to pay them.  That's what some counterparty that's not the grid operator, it's just some other generator or some counterparty in the market that did that trade.

Now, outside of that are the ancillary services.  So, this is where a miner will be providing some type of ancillary service, like back-up power, back-up capacity that can be turned offline, if there's a frequency event, can be turned offline, etc.  The punchline on this is that these ancillary services exist for grid operators to procure these ancillaries primarily to have a grid that is stable and reliable.  Historically, only generation could provide those services, because they could ramp up and ramp down and serve that. 

So now, with miners that have now the ability to -- so, with Lancium, with our Smart Response, you can actually qualify to be dispatched for the grid operator and do frequency response, etc.  So, you can participate in the same programmes that are already in place.  So, it's not a separate subsidy or payment, but really a big picture and zooming out is, miners are now competing against generation, driving down the price of what those more expensive products were before.  So, you're servicing the customers because pretend there was 5,000 MW of generation competing for these before and now you add another 2,000 MW of miners, they're essentially competing with them and driving down the price.  So, this is the other kind of payment.  They are paid to provide those services, but these are things that are already in existence with generators.

Peter McCormack: How wild is this?

Shaun Connell: You're smirking!

Peter McCormack: I mean because it's wild!  I think the people who are very critical of Bitcoin do so at a very top level.  They've either had some bad advice, they've read things online, they haven't actually done the work.  When you dig into this, how smart and clever this integration is and the automation that makes this happen and integration with financial markets, again it's another incentive system.  But I'm smirking because it's so fucking brilliant.

Troy Cross: Can I put please back to Shaun, see if I understood the last point you made?  So, ancillary services, there's a market for ancillary services and previously, before Bitcoin miners, the people in that market were generators.  We've increased the size of the market by adding Bitcoin miners so that ancillary services are now paying out less?  They would be because there's more counterparties to the grid.  And so, that's ultimately saving the ratepayers because ancillary services are now cheaper to provide for the grid?

Shaun Connell: Correct.

Troy Cross: Yeah, that's a fantastic narrative, that slide is a fantastic narrative.  Can I push back on the kind of ways that I get pushback from these points?  So, I don't know how much power tripped off during that storm from Bitcoin miners; I've heard 1 GW, I think from someone at ERCOT.  I know that you can just look at the global hashrate, the storm affected a lot of the US where a lot of the mining is and the global hashrate was markedly down, maybe close to 30% on that one day.

Peter McCormack: Oh, right, okay.

Troy Cross: So, this is what's cool.  The whole Bitcoin Network really responded to a weather event by drawing less power, and did not make the network any less secure during that time because if you had wanted to attack the network during that time, you would have had to procure power, and power was very expensive during that time.  So, isn't that cool?  It made me realise that the security of Bitcoin doesn't necessarily vary with the hashrate if the hashrate dip is due to a weather event and power price spike.

We had a massive response from Bitcoin, and even though Shaun doesn't want to say Bitcoin saved the grid in Texas, I think if we look at the counterfactual, what would have happened if Bitcoin miners had not been there?

Peter McCormack: I had the exact same question.  Well actually, I had a double question.  I had, what would have happened if there was no Bitcoin mining?  Say Bitcoin had never existed, how would we be different in terms of the energy mix in the grid and what would happen in this scenario?  And the question was, okay, Bitcoin mining exists but there's no relationship between the Bitcoin mining and the grid; Bitcoin miners themselves are just independent doing their thing.  How would those scenarios have played out, as best as you can assume?

Shaun Connell: So, Danny, there's a slide that's in the first slide deck, talks about different types of flexible resources.  Yeah.  So, I kind of think about, Who Wants To Be a Millionaire?  Do you remember those lifelines?

Peter McCormack: Yeah.

Shaun Connell: Right, call a friend, poll the audience, I forget the other one.  But for grids, when they're addressing flexibility concerns, they've got four lifelines, these are the four categories of flexibility.  The first one is, Flexibility from Generation.  So this is, we're going to call on the natural gas plant or the coal plant to turn up, to turn down, to balance the grid for what we need.  The second one is that we've got Flexibility from Transmission.  So, this includes the transmission network internally, but more so the transmission connections to other grids, so you can pull on and ask for some help sometimes.  The third one is Flexibility from Storage, which is batteries.  And the fourth one is Demand Response.  So, these are the four lifelines that grids have.

Texas is very unique and so I'm going to tie back to what would happen to Texas, because there's a transition that's happening where you're replacing the fossil fuel generation; the market share of fossil fuel generation is being taken over by renewables.  So, the trend's in motion.  Last year, I think it was 28% of the power came from renewables versus in 2015, it was 15%, so it's continuing to grow.  So your four lifelines are here and in ERCOT, there are retirements that are happening on these fossil fuel plants.  So, one of your lifelines is generation; you're losing the connectivity of that one, so it's decreasing.  Because, now you can't just call on wind and solar, you need to have flexibility.

The second one is transmission.  So, ERCOT's an islanded grid.  So, it has DC ties that connect to its neighbours, so that lifeline is not there.  Every other grid across the US has neighbouring regions that you can pull in.  So, that leaves ERCOT in a very unique position that you're phasing out your lifeline of generation and you've got two other lifelines of storage and demand response.  So, batteries are playing a very big role in Texas, I think.  A few years ago, there was nearly 0 MW of batteries, and the number's quite large, call it 5 GW to 10 GW of batteries are coming into ERCOT and in the queue is something like 70 GW in the queue as well, so a very large number.

Peter McCormack: Can you give some context of how much power that is?

Shaun Connell: The total peak demand, record summer peak last year in ERCOT was 80 GW.

Peter McCormack: Okay, so it's like an insurance then?

Shaun Connell: Right, but there's large CapEx that's required for these batteries and there's a cost you have to do and the economics have to make sense.

Troy Cross: And there's a time limit, how much time can those batteries provide that 5 GW to 10 GW.

Shaun Connell: That's right.  So, they can be two-hour duration batteries or four-hour duration.  Most of them in Texas are two hours.  This goes back to the kind of Swiss army knife again.  You can think about Bitcoin as like a long-duration storage that's just one way, and so it's a different way of thinking about it.  Then, on the demand side management is that as Texas brings on more and more wind and solar, they're going to need a really strong showing from batteries and demand response.  So, there's the way things were in the past and the way things are in the future. 

ERCOT, they've been fabulous to work with and they're excited to integrate these controllable loads, because it's really the Holy Grail for a grid operator to have a load that you can dispatch up and down and have certainty that it's going to do that.  So, ERCOT's going to have a very large need from batteries and demand response; that's very specific to Texas.  You go outside Texas, it's a very different mix, because every different grid has different access to these lifelines, if you will.  But Texas is a very specific spot.

So, what would happen this year without Bitcoin mining?  Call it 1,600 MW, you kind of have to look at what was it also doing prior to that, so you can't just look at it in one day of saying, "What would have happened if they would have just been consuming the power?"  Well, there would have been some challenges, I'm not sure exactly if they would have had blackouts, but they would have probably gone to some type of emergency alert.  The thing is, what else did this load do prior to that event?  It's like, well now, there's this baseload bid that's going to buy power when nobody else wants it, so it's going to help you with having some type of baseload buyer that allows you to continue to expand out renewables in certain areas. 

Those miners, for the past year-and-a-half or so, have also been participating in ancillary services and different demand sides.  So, they've been providing, again the Swiss army knife, they've been helping grid operators with the reliability of the grid and then what they needed from the miner during that event was to turn off, and so they did.  If they hadn't, it probably wouldn't have been a good outcome; I just don't know the exact picture, what that would have been.

Peter McCormack: Do you know what's quite ironic, when you showed me that previous chart, is that Bitcoin is reducing volatility within the energy sector.  That's something which is super-volatile and it's one of Bitcoin's main criticisms; it does the opposite in the way it supports the energy sector, which is kind of ironic.

Troy Cross: Can I push back on the kind of FUD I get on this point?

Peter McCormack: Yeah.

Troy Cross: So, when I show graphs like Shaun just showed, here's the analogy I get back, and some are from energy experts too.  Bitcoin miners turned off, they did not give back power to the grid, because they don't generate power, so they're only giving back what they shouldn't have taken in the first place.  So the analogy I get is something like, "Someone holds a gun to your head and then they don't fire it and you're supposed to be grateful for that?"

Peter McCormack: I would be!

Troy Cross: I would be too!

Peter McCormack: I would be, "Thank you for not shooting me in the head"!

Troy Cross: But the real problem is that you pulled the gun on me in the first place, right!

Peter McCormack: Maybe you were a dick.

Troy Cross: Maybe I deserved it.

Peter McCormack: Yeah, you got a warning!

Troy Cross: But I think you've kind of addressed what's missing in this picture, which is what would the grid have looked like without that baseload demand, without that buyer of first resort, stabilising the price in the first place; would we have had the same amount of generation that we do have, if we hadn't had Bitcoin there in the first place?

Peter McCormack: Well, possibly, but it would have been more expensive, because you would have had to have more investment and you would have had to have more build-out.

Troy Cross: You wouldn't have the same incentive to build, because the price on the bottom end would have been lower, like Bitcoin's putting a floor under price that wouldn't have been there without Bitcoin.

Peter McCormack: But they would still have had to build out the amount of power generation that the grid needed, they wouldn't have just said, "Okay, well, we just won't build it and we'll just have some rolling blackouts", you would hope not, but my assumption is that just energy would be more expensive.

Shaun Connell: You definitely need generation, right.  So, what Bitcoin mining is not is power generation.  And I've heard you mention this before as well, Troy, what it allows you to do is it allows you to really overbuild out that renewables base.  So, instead of having, for example, there's a term about like a wind or solar premise capacity factor.  That capacity factor means that if a wind has a capacity factor of 30%, it means that on average, a 100 MW facility will be producing 30 MW.  They're sometimes producing 80 MW and sometimes it's producing 4 MW, and very rarely is it 0 MW, but that's the capacity factor.

For a grid to be very much mostly wind and solar is that you need to build it for that lowest capacity factor.  And so, there's got to be other resources.  I feel very strongly that this is an "and" statement about you need nuclear, you need wind, you need solar, you need other types of technologies to do that.  But for building out wind and solar, if the capacity factor is 5%, well you need to do a 20X on the total capacity just to serve that.  And if you do that, what happens is that there's going to be days when there's lots of wind and solar and you can have an example of a grid that has 100 GW of demand, for easy maths, and there's some days that you have 700 GW of wind and solar.  So, you need a buyer to take all that excess of some base bid that otherwise would just be being curtailed.

What mining can do in these really flexible loads is, it can be that buyer, that consumer that only consumes those cheap megawatts and allows you to overbuild those wind and solar resources.  So, you take away Bitcoin mining, and there are other technologies that are coming up too, like hydrogen electrolysis and other mobile use cases, but you take away those end markets for flexible power, you essentially don't create the signal of price that gives enough of a return for these wind and solar producers to build more, so it doesn't happen. 

This is kind of what Bitcoin's doing is it's saying, "We're always a bid and it's always above zero", and prices can be negative quite often.  So, there's a new option that's saying, "I'd rather sell it for $1 using -- call it 20 years from now, somebody using an S9 and getting $1", which is better than a negative price, and that's good thing.

Peter McCormack: We talk about ERCOT a lot, it obviously comes up, but is this happening on any other grids, any other parts, sorry, of the grid?

Shaun Connell: It is.  I was just thinking about where we go with that, Troy.  There's the 20-year forwards.

Troy Cross: That's pretty fascinating.  I would love it if you could share that.

Shaun Connell: So, Danny, I just sent one of those, like the latest, deck number two?

Danny Knowles: Yeah.

Shaun Connell: So, the end of the year just passed and I received broker marks to get what is the cost of power on a 20-year forward strip.  So, if you're in a competitive wholesale market and beyond, there's other markets that are not just wholesale markets, but there's a price of power for what they expect that price to be over a 20-year period, and it's based on the supply and demand in that market.  From left to right is where power's cheapest to most expensive.  So, this is essentially the majority of the different power markets in the United States. 

On the left is SPP, which is Southwest Power Pool, which is just above ERCOT.  And then it goes ERCOT; there's PJM, which is up in the Mid-Atlantic; MISOL is in the Central US; and then CAISO and near CAISO up in the Northeast; and MidC, which is in the Pacific, so you can see that on the far left, where should Bitcoin mining go?  Pretend you're going to go buy an iPhone and the iPhone costs you on average, a ten-year we'll call it, $35 in SPP, but it costs you over at WECC, let's see, $90.  That's a big difference.  So, miners are going to gravitate to where the power is lowest cost.

What's really neat about this is where a lot of this red exists is that it's pretty much right over the top of where the largest wind resources are and solar resources that they kind of match out, because this is causing the prices to be lower for times when they can be negative, but they can sell at those high prices.  But this is a scan of what does it look like in the US and if you're a miner, where should you be going towards?

Peter McCormack: My gut would say, the network, the energy grid, would want you to go to the right to help reduce the price where electricity is most expensive; but for the miners themselves, they want to go to the left, because that's where they get the cheapest prices.

Shaun Connell: So, I'd actually think about it a little different.  They don't want them going to the high-priced area because power prices are already high, and so they'll call it like -- power grids don't want miners consuming power where it's scarce.

Peter McCormack: Oh, it's because it's scarce.  But could the miners go there to help build out load sections?

Shaun Connell: So, they could go there to provide the same flexibility and some of the characteristics of the Swiss army knife.  But unfortunately, the power prices are so expensive that, if they can go some other place and provide those same services and have a lower cost…  So, you can think about these markets the same.  They're attracting the miners, because they have a lower price and actually since they have lower prices, usually they're in markets with lots of wind and solar, so there's usually a larger market for the demand response because of the volatility that's happening throughout the day.

Peter McCormack: Okay, that makes sense.

Shaun Connell: So, you kind of think about it like the evolution of mining where I think that seven years ago, if you're mining, you're sitting about as close to your house as possible.  So, you're doing it in your house on your laptop; and then you go to that 2 MW container industrial park that's in your city because it's not really known about all the prices everywhere and it's a project that's close by.  So now, we're getting to these very large, industrial scale, and they're realising the Swiss army knife has many applications and can be monetised in different ways and different areas, and it's being drawn now to the right pricing, so we're seeing this natural shift that they're being located in these areas where there's lots of wind and solar. 

So, even though folks are saying, "Bitcoin mining should be heavily renewables for their sourcing", and miners are saying, "That's all we can afford.  We can't afford fossil fuel generation because that's more expensive".  So, it's just a natural fit that these miners are going to be based on areas where there's lots of renewables, because the power prices are going to be lower, there'll be other revenue streams from demand response, so it's just a natural fit to them.  They're not going to be defiant and say, "No way, I'm going to go to the expensive place and I'm going to consume the fossil fuels and I'm going to go out of business.

Peter McCormack: Is there a particular risk whereby if this accelerated, if the grid started to adopt Bitcoin miners quite rapidly and then if Adam Wright was super-successful in using Bitcoin miners to flare off methane and landfills, and if the oil sector started to use it a lot more for gas flaring, there would be a highly disproportionate amount of the hashrate here in the US that introduces its own risk, especially if, I saw recently the whole of the US went into a deep freeze, that we could see a significant amount of the network go offline and that maybe would slow down -- okay, I understand your point on security, but that would maybe slow down the Bitcoin Network?

Troy Cross: I don't think slowing down would be a concern.

Peter McCormack: But it is because what happens is, when a particular amount of hashrate goes offline, the finding of new blocks is slower and can be significantly slower.

Troy Cross: Sure, but if we look at say the China ban, that was an unbelievably traumatic event, where almost half the hashrate tripped offline.  Blocks weren't terribly slow, you know what I mean?  We didn't have a problem of congestion.  I expected it, I thought, "Oh my God, block space is going to be scarce and we're going to have a problem here".  I don't remember what the block times were, but it was like 16-minute block times instead of 10.  Okay, no big deal.

Peter McCormack: Is that correct?  Okay, fair.

Troy Cross: But it does pose a security risk obviously and a risk and a vulnerability to regulatory capture.  I mean, if the Treasury Department wants to enforce let's say miners in the US with an executive order like, "Sorry, you can't process transactions that come from this address that's touched North Korea", if we have enough concentration of hashrate in the US and setting aside issues of federalism and legal issues, then that's a vulnerability, that's an attack vector.

Peter McCormack: So, is there essentially a 51% geographic attack?

Troy Cross: Well, I would think of it in terms of a nation state attack because it's a legal attack.  If there's mining in Alaska and Hawaii, which there's not going to be because it's super-expensive power, but it would apply there just as well and it would apply to US allies that are close enough that we can lean on them as well.  So the question, as a bitcoiner, I don't want hashrate that's US-controllable coming to 51% and it's hard to say what that is, because geopolitically that's going to be shifting all the time.  But that's why there's this little part of me that when mining flares up in some area that the US has no control over because they're at odds, I'm like, "Okay, that's kind of good"!

Peter McCormack: Well, that's a problem with the concentration of Bitcoin activity in the US, which it is.  I mean, we come out here to make our show because this is where the majority of the activity is and conversations are.  And that's not to say it's entirely here and we have done sprints in Europe and we're planning to go down to Africa and do a sprint, I've been out to South America.  It's not to say it isn't elsewhere, but there is a deep concentration of activity interest happening here in the US so perhaps, Troy, you need to be going on a world tour and selling this!

Troy Cross: Well, I look at this chart and a couple of reactions I have to it.  First of all, what you said about Bitcoin stabilising price; exactly right.  If you think in your head Bitcoin's a huge industry, it's not, it's $5 billion in annual revenue.  But if it was huge, what would happen?  We would fill up that red side and we'd push those prices up just a little bit on the bottom end and stabilise these prices.  And the same goes worldwide.  If at home, mining starts pouring into the US, guess what; we've got cheap power elsewhere in the world.  There's super-cheap power in Morocco; there's super-cheap power in Northern Africa.  That's what Europe is trying to tap into with super-long-distance transmission, because you can generate solar for 1.5 cents a kWh in North Africa.  Australia has a lot of cheap power.

So, this is the US version.  There's a global version of this chart and I want to back up to the FUD.  I think some of the FUD around energy is coming from a misplaced heuristic of how we think about conversation.  I think about power as a scarce good.  In that storm, it was scarce.  In general, we're having an energy crisis in Europe, power is scarce.  The simple heuristic that we come up with the rule of thumb, and maybe in the US it's a carry over from puritanism, or whatever, it's like, "Waste not, want not", don't waste a precious resource.  And it's easy to think in those simplistic terms, and you see that, you see that on Twitter even from energy people, "Bitcoin's using a precious resource, it's using a scarce resource, this is the last thing we need to be doing in an energy crisis".  I hear that a lot.

When you look at this chart and you think about it extended over the world, and you also think about it extended over times of day, because electricity is also more expensive at some times rather than others in the day, you have a kind of 3D heat map, time and space, of price and there are radical discrepancies across that, and then you realise that what Bitcoin's going to do is even that up, electricity is not scarce, it's not like a commodity like other commodities are scarce, like water in a drought where if you don't use it, you're saving it for some other use.  It's use it or lose it and it is radically scarce and radically abundant at different places and times.

So, your simple heuristic of, "Don't use a precious resource; waste not, want not", doesn't apply to electricity, and in fact it's something like the opposite.  We need more users of electricity, where it's overly abundant, in order to provide revenue for those generators.  The updated version of the, "Don't waste precious resources" heuristic that we need to embrace is, "Don't waste precious resources where and when they're scarce".  If you are using tremendous amounts of electricity for recreational activity during the winter storm, you're a dick, you shouldn't do that!  But if you're doing it when power is abundant on the grid and there's negative pricing, good for you. 

So, there's just a disconnect to me in the way the fundamental tools we have for thinking about it, in policy, in media, and the reality that you begin to see once you just look at this chart and you're like, "Well, is there anything wrong with using power over on the left side?"  No, that would be great.

Shaun Connell: Yeah, and also we haven't touched on, there's also the curtailments.  There's prices of being negative, and then there's curtailments because there's just nowhere for it to go.  So, as an example of wind and solar, the wind speed and sun quality aren't distributed equally across the globe.  There's some really great spots where there's this perpetual resource that you can tap into and you put a panel in that location, it's going to produce more power than if you put a panel somewhere else.  So, in West Texas, there are some areas where there's really amazing sun quality in West Texas, but it's amazing for anybody that puts a panel there. 

So, there's been a lot of buildout of solar in the last few years and I think the number is something, I'd have to check for sure, but it's something about 10% or 15% of all the solar this year was curtailed, just because you couldn't put it out into the grid, there was nowhere for it to go, so it was just spilt.  So coming back again, is the best option to waste it; or is the best option to put it to some type of use and to kind of also create this price floor that could be put there?  So, just a thing of point that is not really well understood and it's just curtailments are very real and those curtailments are not happening in areas where there's not a lot of wind and solar; they're happening specifically in those areas where there's a ton of the resource but just not enough demand at that time, in that location.

But that same resource, there could be very high demand at some point, and that's the point I'm saying.  During those scarcity times, the price signal says, "The price is high, it's above what breakeven for mining would be.  The signal says, turn off".  So, I think that's an important part too on the curtailments.

Troy Cross: One last thing on this chart that is interesting to me is that we're in this religious war about sources of power.  Part of the rabbit hole, part of the fun of being in this energy space is that people have these deep, deep convictions about forms of electricity.  I mean, it's amazing, it's a weird religion, but many religions actually because there are many tribes.  But Shaun is showing, in a way, these incentives that don't care about your religion.  It's like, "Where is power cheapest?  That's where Bitcoin mining is going to go".  Well, it's where there's wind, it's the Great Plains, it's the strip up and down the US.

I mean, of course these are 20-year power forwards, who knows how accurate these predictions are?  We could have technological breakthroughs that change it; a number of things could interfere with this chart.  But if this holds up, like Shaun said, you're not going to be insisting on your religion to go to one part of the country or the world; Bitcoin mining is going to go to the place where power is cheapest, because if you don't do that, you won't survive.

Peter McCormack: Well, that's the same for customers, people in the UK at the moment, with energy prices so high.  I mean, the government's just announced another massive subsidy for companies for their energy bills.  They don't care about the religion now, they want to be able to heat their home at a price they can afford.  So, I think that works; again, it comes down to incentives though.

The other thing that's been niggling at the back of my mind is there is so much opportunity for Bitcoin mining, but the network has to be big enough and the price has to be high enough to be able to compensate enough miners to build out these projects, and that's a really important part of this.  This only works with the Bitcoin at a high enough price.  And every time there's a halving, that's going to change the economics of these projects.  And so there's almost this, "Bitcoin mining fixes it" thing at the moment for certain industries, certain parts of the grid, Adam Wright's project; but the economics have to work out, and that's the tricky part.

Shaun Connell: So, I want to come back to this after, which was this energy part is just a component of the Bill and there's more pieces of it that I want to touch on after.  Sorry, what was your question again?

Peter McCormack: So, the Bitcoin Network distributes, what is it, 800 Bitcoin a day or is it 900 now?

Troy Cross: It's about a $5 billion annual industry.

Peter McCormack: Yeah.  So, it can support $5 billion of activity, let's say.  If the price doesn't go up in the next halving, it can support $2.5 billion.  So, the network needs to continue to grow and continue to be able to provide, distribute revenue to the miners.  And so, I don't know, with all the projects that everyone wants to do, I don't know if it needs a $10 billion network or a $20 billion network in terms of miner revenues, and that's an important piece of work that needs to be done.

Shaun Connell: So, I think the projects are more economic now than they were a year ago.  The maths works out that if -- and it's because machine costs have come down so much.  So, when I was here last time on the show, I think that the S19 miner was about $100 a terahash.  So, to buy 1 MW of S19 miners was about $3.5 million, just for 1 MW of miners.  So, if you're going to take those and say, "My CapEx spend on these is $3.5 million and I need to recover my CapEx", and so say you take the project as 4 years, and you're going to be running every single hour, so 8,760 hours times 4 years.  What you need to do is you need to recover $100 per MW just to cover your CapEx spend on your machines. 

Then you need to make your profits on what was the actual value of the mining versus the power price.  So, we're now in this new environment where the machine could cost another $100 per terahash; they are somewhere around $10.  So, that $10 a terahash means that that $3.5 million is now only $350,000.  So, if you think about amortising that on the life of the project, instead of needing to get $100 every hour, you only need to get $10.  So, going back to that $3.5 million, if you had 50% uptime with a $3.5 million spend, you need to get an extra $200. 

So now you come to this environment that says, it's $350,000, you need to get $10; that's no problem.  50% uptime, now you need $20; that's no problem.  So now, what's really unique is just with this hardware cost, a ton of these projects are pencilling out in the current economics because if you find an area with low-cost energy and you're really optimising for your power usage and doing a whole bunch of strategies with low-cost power, you're doing better now in this environment with the new cost machines than you were a year ago.

Peter McCormack: But each halving still puts pressure on the economics if the price itself hasn't doubled.

Shaun Connell: Yeah.  And to push back on that is that the Bitcoin mining breakeven is approximately $85 right now, so call it $80.  If we doubled the amount of hashrate on the network, that means that the breakeven will be about $40.  And then, the global procurement of hashes, where power needs to go to the lowest cost areas with efficient machines, are going to find new crevices and they're going to have lower uptime, but they're going to find the cheapest power on the planet.  So, nothing changes, you've just doubled your hashrate and you can make this $40 environment work, but you've got to find new spots to make that happen.

So, tying it into halving, in the halving the economics change.  Well, these projects can still pencil out if the hardware is a different type of cost environment, but it comes down to finding these low-cost powers and still make them work.

Peter McCormack: The moratorium that's just been implemented in Canada on Bitcoin mining, you must have seen this?

Shaun Connell: Was it Canada or BC?

Peter McCormack: Well, BC is Canada -- sorry, yes, in Canada but in British Columbia.

Shaun Connell: Is Ireland England?!

Peter McCormack: Northern Ireland is!

Shaun Connell: I'm just kidding. 

Peter McCormack: Well, BC is in Canada?

Shaun Connell: It is, it's one of our provinces.

Peter McCormack: Bedford is in England.  Does it want to be an independent state?

Shaun Connell: British Columbia?

Peter McCormack: Yeah.

Shaun Connell: It is a province, but it doesn't want to be outside Canada.

Peter McCormack: No, exactly.  You nearly got me there!  I read an 18-month moratorium, and that's a moratorium on new miners coming in, right?  What do we know about this?

Troy Cross: I haven't deeply looked into it, but just looking at the rationale, it's spilled over from the New York moratorium and the general moral panic.  It's using a scarce resource, it's creating demand for power, which is expensive, and we want to study it, we want to see what its impacts are and I think, "Sure, go ahead".  I'm not really troubled by this.  If the global market in hashrate -- it's one province of Canada, there aren't a whole lot of new mining operations that are firing up right now in this market.  Existing ones are just trying to survive.  It means they won't get those for a while, and then they'll do a study.

I think when they do a study and they get into the weeds, they're going to be surprised and they'll be pleasantly surprised.  And I have to back up to the New York Moratorium, which I know more about, just briefly.  The New York Moratorium, I talked to a number of lawmakers in New York, just called up offices and said, "I'm at the Bitcoin Policy Institute and I'm happy to talk about these issues" and I had a number of conversations.  And what was so fascinating was I think both bitcoiners and advocates of Bitcoin within the legislature in New York, and also the opponents, they were both casting this legislation as a moratorium on Bitcoin mining.  It was just like a moratorium on Bitcoin mining.

When you look into what the actual legislation was, "No renewed permits for existing generators that are increasing the amount of behind-metre mining if those generators are fossil", so you can't increase the size of your mine behind the metre if you're Greenwich, let's say, on a gas plant.  You also couldn't create a new gas plant with mining facilities and get permitted, but it meant nothing for existing mining and it meant nothing for mining on grid power, even if that grid power is heavily thermal, and it meant nothing for behind-metre mining on renewables.

So, it was actually very narrowly targeted legislation and it comes with a study.  So, looking deeply into it, shrug, you know.  BC's like a step up; it's a step up because it's a moratorium on the mining.  But I have the same kind of shrug response like, "Okay, you'll just learn about it later".  And in New York, the main thing that came out of it was because everybody hyped the actual legislation on both sides, when the legislation was actually signed, and people who penned it did the rounds of talk shows and interviews, and the people who opposed it bemoaned what happened, it sends a huge, symbolic symbol that New York is not the place to do business, and that was the message that got sent, even though the legislation was actually, I think, toothless and harmless. 

As Margot has pointed out, she wrote a nice report for us on the BPI website, the state already had the authority to deny these permits in any case, so it was really symbolic.  Not only did it take a very small bite out of future Bitcoin mining, but that bite could have been taken anyway by existing authority under New York law, so purely a symbolic gesture.  Here's a little bit more than symbolic, but ultimately inconsequential since I doubt there were many, if any, serious plans for mining in BC that got cancelled because of this.  I don't think there's a bunch of miners say, "Oh my God!"  So, that's my perspective, it's kind of a shrug.

Peter McCormack: Okay.  I mentioned I did two interviews last week regarding nuclear, one with a guy who'd worked on subs and aircraft carriers.  He'd been involved in the maintenance and, well, what would you say?

Danny Knowles: He was like maintenance safety.  I think he'd worked all through the nuclear industry.

Peter McCormack: Yeah, he was involved in Fukushima and helping with that and he discussed the dangers of nuclear power and how they're very, very limited these days, very low risk now.  He talked about the low number of deaths from nuclear; I think it was the 46 at Chernobyl and none at Three Mile Island, none at Fukushima, he talked about waste.  And then we had somebody who came on to talk about these Generation IV small reactors.  And one of the things that came out of that for me was, nuclear is a significant answer to energy issues.  If there was no green agenda against nuclear, would we even be investing so much in wind and solar?

Shaun Connell: So, to put a close to the BC hydro thing, just a quick insert, is that this is a stretch of an analogy, but you can think of like capitalism and communism, and maybe it's fair to say capitalism and capitalism-light!  There are competitive wholesale markets, like ERCOT, PJM and MISO, and in those markets, miners can participate in demand response programmes as a price signal for being how they can be dispatched.  In British Columbia, the grid is owned by the Crown, so BC Hydro, and there's no price signal, and there's no way for miners to react or to know to react.

So, when you put a moratorium, it's because the market design wasn't really well-suited for miners to give that flexibility to the grid operators, where they could just be running as baseloads.  I just wanted to share that there's very different designs of power markets, and how those markets are designed create the behaviours in the system.

Peter McCormack: Okay.

Shaun Connell: On the nuclear side, so I think that if nuclear was invented today, it would feel like the silver bullet like, "Oh my goodness, this is amazing", and I'm mentioned before that I've had some concern about mining and the importance of communicating all the benefits and putting good information out there that mining gets branded the way that nuclear did, and it's really hard to rebrand nuclear, because you grew up thinking a certain way and it's really hard to relearn those things.

So, in that future state of what this energy transition looks like, I think it's again an "and" statement, I think that nuclear can play a big role.  I'm not sure about the technical characteristics of flexibility, if it's a pure baseload, similar to how nuclear power plants are now, which means you have a baseload of energy but you can't ramp it, so you still need to have some flexibility.

Troy Cross: They can ramp.

Shaun Connell: Can they?

Troy Cross: Yeah, that's one of the things I've learned about nuclear recently.  They do have ramping capability, they just prefer not to, because why load follow when you can produce all the time?

Shaun Connell: The new ones, you mean?

Troy Cross: Yeah.

Shaun Connell: The new ones, okay.  I had some experience in Ontario where the units were called Bruce Nuclear Power Plants, and they could ramp them but it just went from say 800 MW to 400 MW for five hours and ramped up, but there was no load following.  So, I think that, yeah, I believe that if nuclear was just being rolled out now, it would be a big part of the solution.  I'm not sure of what the impacts would be on say the subsidies that exist right now, because a lot of the buildout of wind and solar is due to the federal subsidies, called Production Tax Credit and Investment Tax Credit.

Peter McCormack: But that is because there's a goal to move towards carbon-friendly, or what are considered carbon-friendly power sources.  But my understanding is that solar and wind are quite complicated, not only complicated in building up the infrastructure, but actually complicated in the variability of energy coming from those sources; whereas, nuclear's quite consistent, and the resources required in terms of land mass, etc, is very limited.  So, I'm just wondering, I'm pretty sure there are certain locations where if you only needed a small amount of energy, it might be more suitable for wind or solar.  But if it was purely on the economics and building out this, I'm not sure we'd have these massive wind and solar farms if you could just have a nuclear plant, all subsidies being equal.

Troy Cross: You know what, I think it's complicated.  I tried to dig into this and I'm not at the bottom of this rabbit hole yet, right, but I've been talking to people and I've talked to the people who are anti-nuclear, in a sophisticated way, and as Austin Mitchell did on your show, that nuclear requires subsidy in the form of insurance.  No private insurer insures a nuclear plant worldwide.  So, despite the fact that these are safe, there's still the dependence on government in that respect.  They're heavily regulated and they must be really because they're dangerous, and I think we should all acknowledge that, and that means they're one of the most centralised, bureaucratically governed forms of power.

The nuclear projects vary in how well they deliver, but mostly they're way over budget and way over time, so they take twice as long as they say they're going to take, and they deliver power that's twice as expensive as they said it would be.  And when you push into the reason why that's so, you get into this "no true Scotsman" type argument, "Well, we just haven't done it right".  One nuclear engineer told me, "Every nuclear project is bespoke". Imagine you're trying to build a building but you use no prefabricated materials; there's no regulations made for buildings there, you just have to go to that spot, deal with the local politicians, get all your raw materials and manufacture each part in a one-off way and then assemble it, with constant feedback loops where you encounter more obstacles.  That's what it's like to build a site, a nuclear plant.

If we could make it more like Henry Ford, where we have assembly lines, we have a couple of designs for nuclear plants, depending on how they're sited, and we put the pieces together in a factory and we have regulations that extend over larger regions, not just a separate set of regulations in each state, but multi-state coalitions that come together to -- I'm getting too far into the weeds.

Peter McCormack: I understand what you're saying, but we're coming down to incentives again.

Troy Cross: Right now, it is really difficult and expensive and these projects come in slowly and over budget.  Part of the reason and part of the push for solar and wind is, you can put up solar panels with minimal government interference, with minimal licensing, and you can make it happen within months.  And if you want to build a nuclear plant, what are you talking?  At least seven years, but maybe more like -- people are like, "By the mid-2030s".  When you read stories on nuclear, it's always, "By the mid-2030s", and then, "Well, this depends on how you feel about the urgency of climate action".  But a lot of people are looking to move more by 2030 to shift the grid dramatically, and nuclear's not going to achieve that.

So, to answer your question, it might be that nuclear comes on in the mid-2030s in a big way, if we're planning well, and we've got a period that we have to bridge, where solar and wind are just cheap and abundant and we have a lot of problems that will go away with an advanced nuclear grid.

Shaun Connell: If you think about wind and solar, another analogy is the digital camera.  So, when the digital camera first came out, and however many megapixels it was, what was really the constraint was the memory card and just how many pictures you could get on the memory card.  So, if you think like the digital camera's kind of like the wind and solar right now; you can produce infinite amount of wind and solar, but you've got to use it at exact times, record that on your digital camera whatever you're consuming on the single screen.  But if you want to store it, that's the challenge.  So, they're advancing these cameras, but you need to advance your memory card that could hold more storage, etc. 

I think that we observe what's in front of us and it's really hard to project out what five years would look like on something that's fast emerging, kind of like the example of Bitcoin mining of 2 MW containers in 2017 and here we are now.  So, we're seeing this really large amount of energy storage that's coming to the grids, we're seeing a massive amount of EV vehicles that are going into different markets.  I tried to do the maths last night, that my house consumes about 1.5 MWh per month, which is about 2 kWh each hour.  So, I've a Tesla and the storage on that's 100 kW.  So, there's enough storage in just my battery that can store that. 

So I think it's again like an "and" statement of saying, I think that we look at this world where there's wind and solar and there's a challenge because we can't store it because it hasn't been mass deployed, but what are all the different types of resources that can really help with that.  So, mining is that flexible load that can consume the buyer of these megawatts nobody wants, provide a lot of the same ancillary services; but it's also these batteries that are going to be coming on that I think will help with the renewable story, that's the equivalent of that memory card growing in size.

Troy Cross: I mean, so much of the debate about nuclear is actually debate about how fast storage will grow.  From the one perspective, you have storage getting cheaper and the growth of storage is just dramatic.  What's the projected storage growth in Texas?

Shaun Connell: 70 GW in a queue.

Troy Cross: 70 GW in a queue; that's insane.  But on the other hand, you have people pointing out that basically, all of the lithium-ion storage that we have right now is the equivalent to one major pumped hydro facility that we built out in the 1970s along with nuclear, and it's just tiny compared to what we need; especially, storage works in a couple of ways.  It works on a daily basis for fluctuations, but then it works on a seasonal basis for fluctuations in sun and in hydro, and lithium-ion's not well-suited for that.  So, the debate on nuclear becomes a debate about the prospects for storage technology.

You probably know, there's a gazillion nutty and cool ideas for how to store energy.  I was talking to someone who was talking about storing it in the form of heat underground, a geothermalist.  You can actually heat up salt underground and store it there for long periods of time.  We're working on more than just lithium-ion technology for storage, but basically this large amount of super-cheap, but intermittent unreliable energy, is creating a massive incentive for storage at all scales and of all kinds.  Anyway, some of these questions are just, "How does that technology play out over time; how does that market play out?"

Shaun Connell: I'd like to go through the bill, the component there.

Peter McCormack: Yeah, okay.

Shaun Connell: So, you ever book a hotel and the room rate's $250, and then you go to the hotel and they've got a resort charge --

Peter McCormack: Yeah, Vegas!

Shaun Connell: -- and a tax charge.

Peter McCormack: Hold on, this is all of America by the way, when you go to the store and you go to a shop and you buy a T-shirt and it's like the T-shirt's $20, and you get there and it's like $30.  This is not something we have in the UK; the VAT is included in the display price.  It really annoys you, doesn't it?

Danny Knowles: Really, so I just never know what I'm paying for anything.

Peter McCormack: Yeah, and because it's different state to state, it's a lottery, "How much am I actually going to pay?"

Shaun Connell: Yeah, exactly, so this is kind of like your posted rate of a hotel.  But what is the actual amount of the bill?  It's dependent on whatever region you go in, they've got a whole bunch of different adders.  But this is the big part of the bill.  So these are kind of the components of the hotel bill, if you will, and so I use the analogy of a bicycle.  The all-in delivery energy cost is the bicycle; the energy is the frame of the bike, so there's all the pieces of the costs that are associated with that; the wheels get you essentially the power to your location --

Peter McCormack: And the rent-seeking at the end.

Shaun Connell: -- and those are reflectors, those are optional.  Sometimes places put a lot of reflectors on, sometimes they have none.  Then there's also state and local tax.  So this is in Texas, so these are the building blocks.  So, there's the capacity charges; there's no capacity charge, and this is a big number in places like MISO, PJM.  So ERCOT is the only market without a capacity charge, so call that a resort fee.

Peter McCormack: Why?

Shaun Connell: Because they're energy only, which means that they encourage high prices.  That way there'll be a response that high prices are a cure for high prices, and then generation will come on so they can actually achieve that high price.

Peter McCormack: Smart.

Shaun Connell: Which is great for mining, because you just turn off for the high price, which means that you're avoiding this capacity payment by not consuming that high-priced energy.  And then there's no RECs, and the reason for that is that in some regions where there's not a lot of wind and solar, they need to prime the pump and so there's a cost that they need to have people procuring RECs to make economic in an area, but Texas has so much wind and solar.  

Then this, I can tell the story on this.  This is, pretend you're a Bitcoin miner that is consuming energy around the clock, baseload, not participating in any demand response.  What I did is I took the five-year forward price of energy, which was $45 a megawatt in West Texas, and then I've got $0 for demand response and then these are some of the price adders with the energy, the transmission side, the $6, and there's $8 for your distribution; and then in Texas, the tax is 8.25%.  So, if you're a minor in Texas consuming baseload, not providing any value back to the grid, and so call this a steel plant or Bitcoin miner, so again that sticker price was $45 but all the other pieces added on came to $72.50, which is quite a bit different than just that number.  If you go to the next one?

So I think this is the really big theme that we're going to see, that's kind of what I observed in the power generation space when I started in 2000, which was all these generators came from an environment where there was a ratepayer, which was a customer; you got to pass through costs.  So there wasn't a lot of efficiencies that were tuned into, because you weren't rewarded for being efficient because you just pass your costs on to the customer.  And then deregulation happened around 2000 and it took about five years for those generation companies to start behaving exactly the way they should be, meaning that from a gas plant and power prices are high, I can actually sell my gas for higher than I can actually sell my power for, so I'm going to sell my gas and I'm not going to run the power.  So, they they're optimising around the efficiencies of the generation asset.

What this chart shows is, this is a Bitcoin miner in Texas that's going to be that efficient power generator that's going to do 95% uptime and do a whole bunch of behaviour shifts to match with the price signal being received from the market.  And so, this has $45 for the energy; I put $10 for a turndown which means, over the past four years in Texas, if you turn down for the top 5% of hours, your bill would have been 60% less on that $45 just for 5% hours.  If you strip out the winter storm Uri, which was a very big outlier because there's big numbers in there, it's 35%.  So I put a number here that's $10 for a turn down.  $5 is the demand response that's being able to participate in some ancillary service programmes in Texas. 

When a Bitcoin miner has a very high breakeven, so call it $400, the demand response number is a bigger number because they're always participating in demand response and they're running more hours.  But when mining's at lower prices, they're going to shift that into turning up and turning down when prices are above the breakeven.  So there'll be a less amount of demand response and more on this turndown.

If you go to the cost of delivering energy, the bottom box would have been the distribution.  So in Texas, you can actually connect to transmission voltage, which is equivalent of -- transmission voltage is like the highways, the interstate highways, and distribution would be like side streets.  So, if you're connecting at the highway at the transmission voltage, you don't have to pay for all the costs associated with the side streets in the lower voltage.  

In Texas, there's a way that miners can actually change their output during these summer months where the costs they're going to pay for their transmission next year is based on what was their average demand during the 15-minute quints and peaks, the highest demand points in the month of June, July, August, September; and if they turn down say from 100 MW to 2 MW, that means for next year they're only going to pay for 2 MW of transmission because they're able to avoid those quints and peaks, which is helping with the grid to bring down that demand at certain times.

Then your tax went to $2.50, so this is now showcasing --

Peter McCormack: It's nearly half price?

Shaun Connell:  Right, to $39.

Peter McCormack: Yeah.

Shaun Connell: And then the last slide.  So this is important, that never before has there been the ability to have a price signal to attract load to come to a location.  So it's called nodal pricing in all these different markets, and that's the exact price a generator would get paid for injecting power to that location.  And so, if you're going to build a power plant somewhere, you look at this kind of heat map of where is power expensive and where's the load and you say, "I'm going to go locate in one of these areas where price is expensive.  I've got access to a pipeline so I'm going to build a power plant there".

The way load has been billed in the past has been, if you're in Texas there's four major zones and in West Texas, wherever you are located in West Texas, they'll use the average price across all those nodes and that's your power price.  And it was a zonal pricing because there's nobody that was going to be moving specifically to a location of a cheap power price.

So post Winter Storm Uri, so what was an outcome in the learnings of Winter Storm Uri and what came after, they realised that as in other markets, the more renewables that you bring on, you need to have a market redesign that allows for more rules and ancillary services to provide grid reliability.  And so one of those rules in Texas that they're pushing through is, they want to change it so instead of having a zonal price, where you're just the average of everything, they want to be able to have it at the nodal price.  

Why is that important?  It's because if there's a wind farm or a solar facility that's located in some area and the price they're receiving is -$4 for their node, but the entire average across the west load zone was $50, you could be located right beside that solar plant relieving that issue, but paying $50 and they're getting paid -$2.

So now what this is going to do is, now miners get to look at this heat map if you're a controllable load in Texas in transmission voltage, you can now start to go to exactly where that point is.  So you're looking at this heat map and saying, "Okay, well there's a whole bunch of wind and solar over here, I'm going to build right there because now I'm going to have nodal pricing that's going to drive down my cost", because the signal's there, they can actually go to those areas.

Peter McCormack: That's amazing.

Shaun Connell: So this one, I just dropped the $45 down to $41 because you're not paying that average of the load zone you're getting specifically at that node.  So you can see this now goes to $36.  So it's zooming out and where we are in the cycle is that, I believe that in the last bull run, there were two price signals going on for miners and the public miners were getting the big price signal.  And so, the public miners are getting the price signal that said, "If you have Bitcoin on your balance sheet and you're building hashrate, we're going to treat you like a gold stock that's a 3X bull.  So mine Bitcoin, buy machines, keep building this", and so the equity values of these Bitcoin miners was just very high.  So they could actually ignore some of the price signal that's actually happening on the grid because the market is saying bitcoin's more important than maybe doing things perfectly with kind of how you're interfacing with the grid.

So then, we all know what happened after that; they got slaughtered.  So that message isn't there any more, that signal's gone of saying, "Don't just mine at all costs and don't just keep Bitcoin on balance sheet" now it's about being profitable companies.  So now, we're seeing the shift of those saying miners are now starting to behave those power generators that came around 2005 that says, "Oh shit, we can't operate like we used to, we need to find every different tool in our kit to change our behaviours to align with what the market signal is.  And so, our competitive advantage that we need to gain is through how we're operating, how we're actually running as an operator".

Because, if you think about in North America, if I go buy stock of a power company, I'm not taking a speculative bet on the price of power, I'm gauging on them as an operator and their ability to sign great contracts and to deliver on those.  And so I feel like we're in that shift that's happening in the mining space that's saying, "You need to be solid operators, you need to do everything you can to actually control these".  So that goes back to that map of where the prices are cheap, "Go to those areas the prices are cheap, find out the programmes that you can have maximum participation in and develop these optimisation strategies for really getting maximum value on your site", and it's very similar, it's completely déjà vu of what I experienced with in 2000 when the power markets were happening.

The last point is just the option value of these miners is very similar to the option value of a power generator.  So if I'm a power generator and I've got a $35 breakeven price and I say, "Well I'm going to sell power tomorrow at the clearing price, as long as it's above my breakeven".  If that price comes in at $50 for the next day it's, "Okay, great.  It's $35 and $50, I can lock off $15 because I've sold the $50 power".  You step into the real-time market and so there's a whole bunch of wind that's online and demand coming in and so instead of the price being $50, it's $10, right.  Well the generator is just, "Well, I guess I'm just not going to generate", and I collect the difference between my $50 I sold in the day ahead and the $10, so I'm going to get paid to not do anything, because I didn't need to show up.

So this can happen now in mining, right, but the reverse, and these strategies are going to happen and this is what we're doing at Lancium.  You go into the market and say, "Well I'm going to buy power for the next day, as long as it's below my breakeven for mining", so say I'm going to buy as long as it's below $70, I'm going to buy that.  And so then the next day clears at $50 again and it's, "Oh great, I'm mining and I can lock on what my gain's going to be".  And then in real time, so say the prices go to $200 it's, "Well, it doesn't make sense for me to mine any more.  I'm actually just going to turn off and I'm going to collect the difference between what I actually bought the power at, $50, and where it's selling, $200", and I've just now been able to achieve that because I have an actual physical asset that's acting like a real option that's deriving this additional value that if you hadn't had that mine, you wouldn't be able to achieve that.

So I know that's quite complex and deep, but it's really kind of the same lens of these power generation assets that are real options, and the same thing for these mining facilities.  And I think that what really caused me to, when I left -- the company I worked for was called TransAlta, a power generation company, and it was this total déjà vu of just seeing what these Bitcoin mining facilities were and what we've experienced the past 20 years with these power generation assets, and it was identical.  And you could see the path about how do you become a solid operator and having the capability to actually get the most value out of these sites.  That's I think the trend and the path of what we're going to see in this mining space here the next call it one to two years.

Peter McCormack: Can I ask you a tricky question regarding Lancium?

Shaun Connell: Yeah.

Peter McCormack: Patents!  The reason I bring it up is you mentioned Lancium there and last time you were on the show, it was the only thing that came up, and it came up a little bit, and whether it's really within the ethos of Bitcoin to have patents in a network which is really an open-source network.  Is that something Lancium would ever consider walking back from?

Shaun Connell: Well, it's one of those things that similar to a drug company that spends a whole bunch of money on research and development, is that Lancium spends quite a bit of money on the research, development and the time.  So along that way, they protected the IP that they developed.  So for Lancium, as it works for licensing is we're open to anybody for licensing.  And if you think about a service that's offered in Texas, for example, is a retail electric provider, and what that person is, the company is, is they own the meter for what you're consuming energy at and so they're going to charge you a certain fee for them just to actually settle with ERCOT and to collect payment and to give you your invoicing.  So they're your interface for power purchasing.

That fee that they're charging is somewhere between, I've seen it as low as a dollar and up to $4, and so the licensing fee we have at Lancium is lower than what a retailer is charging just to send you an invoice.  So the punch line on this is that we're open to working with anybody; it's an open license that's not restrictive, yeah.

Peter McCormack: I had to ask!

Shaun Connell: Yeah, I'm glad you did.

Troy Cross: I was blown away by Sean's analogy between Bitcoin miners and power generators, in the sense that once those markets have developed and became less regulated, there became these very sophisticated ways of maximising revenues and hedging, and it took time for the industry to learn those methods.  Once they did, then they became decoupled from the price of the good they were delivering; power, and it became about operation. 

The same, exact transformation will happen within Bitcoin, it is happening within Bitcoin, as miners become more sophisticated and decoupling from it itself, rather than just being -- I mean, in a way it's created, we were talking about this, this situation is in some way a by-product of us not have an ETF, a spot ETF in Bitcoin, because miners became a proxy for the commodity, rather than what they actually are, which is operators; they are a separate industry from Bitcoin itself.  So, in some ways, the distortion is a by-product of the SEC's decision.

But also, it tells you where Bitcoin could be headed, which is that large generators themselves become Bitcoin miners, because they already have this whole sophisticated suite of tools, they have the balance sheets to hedge in a way that doesn't risk themselves, they have a diversity of hedging devices, Shaun was walking me through this; and so, that's kind of one picture. 

To come back to your earlier concern about centralisation and locality, is that the people who are best positioned to operate in the Shaun Connell super-sophisticated power trader way, that definitely I think most of us plebs barely grasp, not having lived in these markets, if that's where Bitcoin mining is headed, then certain large, centralised, super-sophisticated players will dominate that market, because they'll dominate on everything other than the production of Bitcoin and they'll be hedged against volatility in the price of Bitcoin in ways that are going to be harder for less sophisticated and large and centralised and diverse operations to do.  So, that's the one picture.

The other picture is what I spelled out on the show last time, of Bitcoin mining as an auxiliary tool that integrates with lots of different industries, whether it's paper mills or it's purifying water or it's district heating, or what have you.  Those operations are necessarily going to be smaller in part because a lot of it's about raising heat, and ASICs produce a ton of heat.  It's low-grade heat, but it doesn't take a lot of ASICs to heat that swimming pool, right, it's remarkable how much energy is going through the system.  So, that puts a natural limiter on how big a given operation can be.  It doesn't mean that one entity couldn't control a lot of these distributed things; but if you look at where the need is for water purification, how many ASICs it takes to purify water, or how many ASICs it takes to heat at a paper plant, or whatever, that's a need.  If that's the primary revenue stream, that's highly distributed and there's a cap on how big that is. 

So this is the open question that's cool for me and I really don't know where it will go, which is, does the Shaun Connell vision of sophisticated, generator-like, or just generator, miner where you get the economies of scale, obviously a lot of mining does have economies of scale, you build a facility and it's a marginal addition to have more ASICs there in all sorts of ways; you get the economies of scale, but you also get the sophistication and the tools that come with being a large operator versus the distributed, small, varied, alternative revenue streams, methane credits would be another one, Adam Wright's size, like 1.5 MW facilities or 1 MW facilities on small landfills, that's tiny compared to Rockdale which is like a 1 GW facility.  That's a lot of landfills! 

So, these are the two visions and to come back to your point about how much can $5 billion buy us.  Shaun's point is that $5 billion is going really far compared to where it went a year ago, and that's because the CapEx portion is shrinking and the OpEx is expanding.  And these alternative revenue streams are going to make it go farther and we talked about that last time.  But what's the distribution and what benefits?  Because, as you say, this is Bitcoin fixing different things: Bitcoin fixing grids, Bitcoin fixing heating, Bitcoin fixing other industries.  The question of what Bitcoin will fix is to me a wide-open question, it has to be carefully modelled how much profit maximisation comes from being a generator-style operator, and how much comes from these alternative revenue streams, and that's the exciting, open question I have.

Shaun Connell: And the last thing I'll just add on to the patent part was that, we went through the bill there of what $70 bill is, and with our pens and our offering it's not just a, "Here's the software and go deal with it", it's essentially us doing everything for you.  So you're going from that $70 bill to this $36 bill, so it's all the services of having a power desk that's actually allowing the Bitcoin miners to mine but having somebody that's actually doing all those activities that's actually interfacing with you to deliver that so it's not just about here's the software.  So for a few bucks to go from the $70 to the $35, that seems like a pretty good outcome.

Peter McCormack: Look, I don't disagree with that.  I mean, there are people who have software and licensing within Bitcoin, but Bitcoin is about human flourishing and open source.  I think there's a difference between a licence and a patent, that if someone did something similar without ever knowing what you'd done, that you may enforce that patent.  I just know that it's the only thing that's come up with regards to Lancium, and you coming on the show, it came up so I had to ask.  But it is what it is.  I don't know enough about it to properly grill you on it, I may do at some point in the future.

But listen, this is so wild.  I mean, I think back to when I started this show just over five years ago, the types of conversations I was having then with regards to, "What is Bitcoin; what is a UTXO; how does the network work?  This is good money for people in other locations".  We're now at the point where we're discussing the integration of mining within grids to provide grid stability and supporting the future of hopefully carbon-free energy sources.  To go from there to this is fucking wild.  I've got no idea what we'll discuss in five years' time, but these unknown unknowns are very exciting.

So, I want to say a big thank you to you both coming on, it's a real pleasure to interview you separately, but to have you together is an honour.  Yeah, thank you, good luck.

Troy Cross: Thanks, Peter.

Shaun Connell: Thanks for having us.