Powering Strong Communities

Fitch Outlines Public Power Supply Risks Tied To Crypto Currency Mining

Digital asset or crypto currency mining in the U.S. could present power supply risks to public power utilities unless they are sufficiently mitigated, Fitch Ratings said on Jan 24.

Crypto mining “is energy intensive and requires a considerable amount of power that can significantly increase a utility’s overall electrical load. Utilities must balance the revenue prospect of increased electrical sales with the commitment to procure or generate large amounts of power for crypto mining operations,” Fitch said.

The rating agency noted that crypto mining operations are price-sensitive entities that may be quickly scaled back or shut down if mining becomes uneconomical.

To date, Fitch's rated public power utilities “have successfully limited their risk by restricting the scope of crypto mining operations in their service area or by defining their power procurement commitments in a way that protects the utility from nonpayment, including due to a sudden closure of the mining facility,” Fitch said.

It noted that utilities that have excess generation capacity may have the ability to meet the power supply requirements of crypto mining operations from existing power supplies. “This is the case in the state of Washington, where energy-intensive aluminum smelting operations have gradually closed over the last two decades and wind energy production has increased available energy supplies over the last decade. This, coupled with abundant low-cost hydroelectric generation, made the region an attractive location for data centers historically and crypto-mining operations in recent years.”

A utility with excess capacity “must evaluate the opportunity costs and benefits of a new large crypto load versus retaining capacity for other economic development opportunities,” according to the rating agency.

Crypto mining operations “typically bring in very little additional economic benefits in the form of jobs or ancillary business to a local economy,” Fitch said. While crypto mining operations have a wide range of sizes, in some instances they can become the largest customer in a rural service territory.

“The volatile and unregulated nature of crypto mining and the large influx of load requests led a number of Washington utilities to adopt new practices beginning in 2014 to mitigate exposure to crypto mining entities, including crypto-currency load moratoriums, evolving rate structures to capture the departure risk of a high-risk industry, and defined customer concentration limits,” the rating agency said.

Much of the recent cryptocurrency mining expansion is occurring in Texas, Fitch noted. “Unlike Washington, Texas utilities generally do not have excess generation capacity, but the structure of the regional energy market offers other perceived business advantages. For utilities with a supply and demand imbalance, utilities may need to invest in new generation facilities, sign new long-term power purchase agreements or procure power via real-time market purchases in order to serve additional crypto mining load.”

Fitch said that the first two of these three options pose the greatest risk to the utility should the crypto mining operation shut down, “as utilities could be left with stranded assets and costs that then must be recovered, typically by customers in the form of rate hikes, although the utility may utilize reserves to recover costs if there is little rate flexibility.”

Increased costs or a reduction in reserves could lead to negative credit pressure if operating margins are compressed; similarly, lower liquidity could lead to a weaker overall financial profile.

To date, Fitch-rated utilities have opted to use short-term market purchases with pass-through cost arrangements to mitigate financial risk to the utility, the rating agency said.