I would not be surprised if you initially find this week’s blog to be on the most boring subject imaginable. But, the topic I treat today may be the most destabilizing observation I’ve made on these pages. 

We are at an inflection point in U.S. energy consolidation. And, it’s not a good one. 

You’ve heard me advocate for sustainable energy many times before. In fact, my concerns about energy sustainability induced me to write the book “Understanding Sustainability.” In this week, when we broke the global temperature record on Sunday, and then broke that record on Monday, and again on Tuesday, scientists almost universally recognize the dire state of our atmosphere and the more than a dozen tipping points we are starting to trip. Scientists also agree that the burning of hydrocarbons is to blame, including Exxon scientists back in the 1960s. Sure, there are others processes in play or provoked as well, but the chemical conversion of hydrocarbons to heat, with greenhouse gasses as the byproduct, is the smoking gun. 

The world, including the natural world, needs energy to survive. Most all that energy is provided by the Sun. Some of the energy used by humans is stored in heavy radioactive elements delivered to our planet billions of years ago and still helps heat its molten core today. Some is in the form of carbon bonds made in the natural refinery underneath the surface of the Earth and its oceans where biomass is converted to oil and natural gas over hundreds of thousands and millions of years. And some arrives every day in the form of heat from the Sun that warms our planet and fuels air and water currents and our climate that can then be used for solar, wind, tidal, and hydroelectric power. 

Let us summarize these forms of energy as nuclear, chemical (hydrocarbon-based petroleum products primarily), and solar (photovoltaic, wind power, tidal, and hydroelectric). Of these three forms of energy necessary to fuel all life, nature itself relies on the latter solar power, while humans rely on all three. 

You’ve seen in blogs before that there are technologies that can harness nuclear power safely and can even recycle past spent nuclear waste. These technologies are expensive. The conversion of stored chemical energy to power for heat or electricity is cheap, if the environmental and global warming consequences are not considered. The various forms of solar power are now the cheapest of them all, but each requires heavy up-front capital outlays. 

It is increasingly clear that the planet must move away from the chemical conversion of hydrocarbons to heat, and then often to electricity through steam turbines. Both nuclear and solar-based power can produce heat and electricity as well, so our energy future will be almost entirely electricity-based in the future. 

Here’s where it gets interesting. The heavy elements that generate nuclear power and the solar sources that generate sustainable energy are both natural resources. But, to tap these resources that should belong to all of humanity requires financial and physical capital. Hence, these power sources are owned, either collectively in the public sector, or privately through corporations. 

Let me step back for a moment and mention one of the first companies that attempted to privatize and monopolize energy to generate enormous profits. Enron was a high flier in the 1990s that flew too close to the sun, no pun intended. Their idea was to buy up both natural gas lines and sources and power generation sources in the Southwest U.S. and then constrict these markets to drive up energy prices. The company was incredibly profitable until some of their monopolization and financial misdeeds came to light. Sarbanes-Oxley regulation followed to keep closer tabs on publicly listed corporations. 

Enron could be viewed as an energy privatizer and aggregator. It bought up huge allocations of chemical energy and of electricity generating facilities that consumed these petroleum products. They then constricted the supply to raise prices and generate far more profits through such constrictions than any publicly operated or regulated entity could or would muster. Brownouts and blackouts in California cost ratepayers and residents tens of billions of dollars as a consequence. 

We thought that such energy aggregators and market manipulators have disappeared. But, here’s the news. They are back. 

The new energy aggregators are mammoth bitcoin mining operations. Companies like Riot go around the country buying up smallish bitcoin mines and applying to state authorities in Texas, New York, Kentucky, Georgia, the Carolinas, Wyoming, and elsewhere to garner greater allocations of power. U.S.-based Riot recently reported that 20% of their revenue and an even greater share of their profits come from renting back some of their aggregated electricity when the grid is most desperate for it. In that same public statement they noted that they are ready to sell power for artificial intelligence (AI) processing, at least once that becomes more profitable than the very lucrative bitcoin mining.

You see, modern bitcoin mining is not what Satoshi, the founder envisioned. Back then, mining was a hobby. Now it is a financial arbitrage industry. A large and sophisticated entity such as Riot buys power at three cents a kilowatt-hour or less and sells it in the form of bitcoin at a breakeven price of about six cents per kilowatt-hour, given the state of today's best miners. The difference between the value of the input, electricity, and the output, bitcoin, is their gross profit. They double their money when they can buy at three cents and sell at six cents per kilowatt-hour. That is why miners focus so much on their energy allocation. If they can buy a gigawatt of power at a very good rate of 1.5 cents, and essentially repackage that power as bitcoin at six cents per kilowatt-hour, they make $45,000 of profit every hour, more than a million dollars in a day, and almost $400 million per year. That's not bad, given they don't have to worry about competition, marketing, or even any significant employee costs. All they need are machines and huge power allotments as a license to print bitcoin.

These crypto bros expect they can make even more money selling their power to desperate AI companies, and even more yet by renting back some of their power to utilities in times of dire need.

Those entities that allocate power recognize that they offer industry electricity rates at as low as a tenth the cost we pay as retail users to light and heat our homes. These 90% subsidies are used to fuel economic activity and generate jobs. To get an allocation, an industry must show that they produce a profitable product. Applications are often measured in the number of jobs created per megawatt of power allocated. 

I saw these arguments when I was a professor of sustainability and of money and banking who was elected mayor of a small city in upstate New York in 2016, just as the first wave of large bitcoin mines came to the U.S. and settled on Plattsburgh because of our incredibly low industrial electricity rates. Back then, public discussion of the noise and environmental nuisances of bitcoin mining was absent, as was the concern over rising electricity rates that soon followed. Miners were content to fly below the radar screen and use the opacity of their claims of high technology innovators to cover up the huge profits to themselves and essentially no returns to the communities that hosted them. I produced some pieces of public policy that discouraged them from coming here, and wrote "The Bitcoin Dilemma" to document the process bitcoin employs, but, as they always do, miners simply went elsewhere. Since then, my early whistling in the wind has been amplified and championed to much more effect by experienced advocates across the country.

Things got worse soon after the Plattsburgh experience. Bitcoin miners began vying for electricity allocations elsewhere in the U.S.  This trend accelerated when China kicked out mining (but kept mining machine manufacturing) for fear that too much energy is being diverted from job-creating industry to bitcoin mining that in fact produces few jobs. 

As you know, most all cryptocurrencies do not use the wasteful proof-of-work mining that bitcoin employs. Should the U.S. ban bitcoin mining on its shores, because the mining protocol won’t change, these mines will go elsewhere. If the cost of their electricity rises, they will use proportionally less, for reasons discussed last week. 

Here’s the clincher, though. What happens to the gigawatts and tens of gigawatts of power rights aggregated by a handful of huge bitcoin mining corporations? 

These corporations know full well that regulations could destroy the bitcoin mining model in the U.S. at any time, despite all their lobbying efforts. Yet, they keep investing in the industry. When they make a purchase of a smaller mining operation, they don’t report that they purchased a certain number of mining machines or the capacity to hash a certain amount of coin each day. They report they purchased energy allocations. 

Then, if bitcoin mining goes away, they will sell that energy to an increasingly energy-thirsty artificial intelligence (AI) industry. They can then curtail those machines temporarily if during a brownout ratepayers are willing to pay 100 times what they would normally pay for electricity. 

The profit is in buying up and privatizing our public supplies of energy, and then manipulating markets to make absolutely huge profits, with very little investment and absolutely no innovation necessary. 

This emerging energy privatization and manipulation seems innocent enough today. Our average power usage is about 440 gigawatts (GW). These energy aggregators already own the rights to more than 2% of total power generation and have requested allocations that will increase their ownership ten-fold. At 20% control of our electric supply, their potential for manipulation and amazing rates of return of 100%, 1000%, or 10000% over their investment is incredibly destabilizing. If their requests are met, they will emerge as the number two energy provider, after investor-owned utilities, but ahead of publicly owned utilities, cooperatives, and all other providers, and without generating any power themselves. They will be in a position to act as a middleman energy broker through the rights they are purchasing across the country that already total the equivalent of ten nuclear power plants.

Just how much energy can miners use? Mining requires a lot of electricity and new machines to remain competitive. For these purchases in electricity and electronics miners worldwide are receiving about $1.3 million per hour in bitcoin payments. U.S. miners constitute about 40% of the mining industry, and hence generate about half a million dollars of mining rewards every hour. Let's assume half of those payments must go to profits, maintenance, facilities, and upgrades to machines so they can remain competitive. That leaves U.S. miners free to buy about $250,000 of electricity every hour. If they can obtain power at a ridiculously low and highly subsidized price of $0.025 per kilowatt-hour, which is a tenth of what many residents pay, that leaves them with the ability to profitably employ about 10 GW of power. Nationally, they have already obtained more power than that, and, in Texas alone the industry has requests for allocations far in excess of what the industry can profitably use. Yet, a few large mining corporations continue to gobble up and request more power.

Why would they vie for more power allocations than they can use? Clearly, they have another agenda beyond just bitcoin mining and the hope that bitcoin prices rise faster than the scheduled halvings in coin rewards to miners. Their bitcoin mining storefronts are obscuring their long term business plan. In the end, they will make the energy manipulations of Enron seem like infants play. 

Surely our regulators are too smart to simply dole out a significant share of our precious electricity and open up the energy market to Enron-style manipulations. That is why Trojan horses such as proof-of-work bitcoin mining are so dangerous. The industry is setting itself up to become a major energy provider and controller without actually generating any power themselves. They aggregate competitively produced energy from public and private utilities, cooperatives, and municipalities into a single large monopoly source with the power to control prices. As Texas has discovered recently, and California found out in the Enron days, with something so valuable to us all as our electricity and such a close match between supply and demand, even an entity that controls but a few percentage points of the market can act as the market leader and dictate the price we pay.

On the surface, these energy aggregators present a plausible (if problematic) business model through their bitcoin mining storefronts. But, that is only the tip of the spear of their plans for U.S. consumers. The world needs sustainable, accessible, and affordable electricity to address the needs of humanity and the planet. We cannot afford to have all of our investments in clean energy monopolized by a few Enron imitators striving to convert our sustainable energy desperation into their personal profits by becoming the marginal brokers in U.S. electricity markets. We need to allocate our energy based on the good users can generate for humanity and the planet. And we need to ensure users employ the energy gifted to them in the way they pledged. Use-it-as-pledged-or-lose-it legislation would help. Shame on us if we can’t see their intentions to concentrate and monopolize a significant share of U.S. electricity production.