Riot Platforms (RIOT) is one of the largest Bitcoin mining companies in North America with a current market capitalization of $2.42 Billion, as at July 5th, 2023. Their current site at Whinstone, Rockdale, Texas, has 12.5 EH/s of self mining when fully operational, and a number of sizable hosted clients, is probably the largest Bitcoin mining facility in the world with a power capacity of 700 MW.
A second facility, only a 2 hour drive away, is currently under construction at Corsicana, in Navarro County, Texas. Once fully built, it will have capacity for 1 GW of power. The first 400 MW, all of which will utilize the latest immersion cooling technology, is due to be completed in the next 12 months and only last week the company announced the purchase of 33,280 latest generation miners from MicroBT Electronics Technology Co., for a total consideration of $162.9 million to be installed in this new facility.
This will add 7.6 EH/s of self mining hash rate, taking their self-mining capacity to 20.1 EH/s upon full deployment by mid 2024. The agreement also includes an option to purchase up to 66,560 additional miners providing a hash rate up to 15.2 EH/s at same terms.
Why is Texas a popular location for Bitcoin Miners?
As you can tell Riot Platforms is keen to operate in the Bitcoin mining friendly state of Texas, with cheap renewable energy and friendly regulators. In recent months we have witnessed policy on bitcoin mining at the federal level lagging, but Texas being the state with the largest energy production in the U.S., is moving forward and with its own legislation.
In the last few weeks there have been two bills, SB 1929 and HB 591, that both provide support for Bitcoin miners, which have made it through the legislative stage and await the Governor’s signature. Once signed they will take effect on September 1, 2023.
When introduced SB 1929 would authorize the Electric Reliability Council of Texas (ERCOT) to require a person or company wanting to connect to the grid with a large electricity-demanding project, in excess of 75 MW of power, to provide information relating to existing and future electricity consumption ERCOT deems necessary. HB 591, when approved, would introduce tax exemptions from companies that put to use otherwise wasted gas, including data centers.
Energy Cost is Key to Bitcoin Miners
Riot Platforms have taken advantage of being active in (ERCOT) Energy Market, and have long-term power purchase agreement in place which enables the company to keep the cost of mining a bitcoin low, extremely important as we approach the next Bitcoin halving in May 2024, where the cost to mine one bitcoin will effectively double in cost overnight.
Under this agreement the company purchased blocks of hedged (fixed) power costs, which vary in size, price and duration, adding up to a total power capacity of 345 MW with contracts currently running to 2027 or 2030 respectively.
Energy markets are inherently volatile, subject to fluctuations driven by factors like geopolitical events, supply and demand dynamics, and weather conditions. Therefore, hedging involves taking a position to offset potential losses resulting from adverse price movements. To have a meaningful impact, a hedge requires a sufficiently large position, which therefore requires significant capital resources.
Having a fixed power price enables the company to operate the 345 MW of power round the clock, 365 days a year without any requirement to curtail. This contracted capacity actually covers the majority of the power used by the company, thereby reducing the risk of market volatility.
If the cost of power becomes higher than is economical to mine, and the company is using more than 345 MW, they will curtail part of the power load in order to get under this total, where the price remains fixed.
The hedged power blocks enables Riot Platforms to do two key things:
Participate in Ancillary Services (A/S)
This effectively allows ERCOT the right to ask the company to curtail parts of the load at specific hours on specific days. Before each day, the company offers how many MW and what hours of the day they’d like to bid into A/S. In the day ahead market ERCOT will let the company know how many MW of power they’ve taken (obligation) and at what price. The great benefit of this service is that although the company has a power load in A/S, it still gets paid for participating, in cash, regardless of whether they are required to curtail or not, making it a great program.
It should be noted that Riot Platforms are not required to participate in this program. However, when they choose to participate, they choose exactly how much power and which hours they want to offer.
Sell power
When Riot Platforms curtail their power load under 345 MW, they gain on the spread between their hedged (fixed) power price and the market price of power.
For example, if the company curtailed their load down to 300 MW, they would essentially be selling 45 MW of power at whatever the market price is. Riot Platforms cost of power would be the cost of their hedge.
The reason Riot Platforms would do so is because it is more profitable to sell power than to mine, and is an especially useful tool when power prices increase, during high demand. Any sales made during the month will offset that month’s power bill. For example if the company is billed $10 million in power, but has sold power worth $3 million, they are only required to pay the balance of $7 million for that particular month.
It should again be noted that Riot Platforms is not required to sell power, but chooses to do so as an economic decision.
ERCOT’s 4 Coincident Peaks (4CP)
Another energy program that Riot Platforms participate in is called 4CP. This program allows companies to save on transmission costs for the subsequent year, as long as they curtail on each “peak” interval, during the months of June, July, August and September. A company will not necessarily know what the peak intervals are until the month is complete and therefore to be sure, Riot Platforms will curtail energy during higher risk peak interval hours.
This is typically about 10-15 times a month, lasts a couple hours, and generally coincides when power prices are high. Riot Platforms have been successful at participating in 4CP and benefit from not having to pay the transmission cost recovery factor on the curtailed mWh, approximately $5/mWh.
A combination of 4CP, A/S and selling power all contribute to Riot Platforms power strategy. These result in reduced uptime, but also a reduced all-in (net of these three pillars of the strategy) power cost to drive a low cost of production.
June Mining Production
In the month of June, Riot Platforms mined 460 Bitcoin while significantly leveraging their power strategy. As the temperatures in Texas reached near record levels during the month, causing power demand to be high, the company made dynamic decisions on their power usage based on market signals.
Through participation in various programs within ERCOT, highlighted above, the company generated $8.4 million in power sales and $1.6 million in demand response revenue. This total of $10 million represents the equivalent of an additional approximately 361 Bitcoin when based on the average price of Bitcoin during the month of June.
Summary
Riot Platform’s decision to locate their Bitcoin mining and integrated services in Texas and implement an energy strategy that has the optionality of the various ancillary services available, along with the 4 CP program, has certainly been paying off so far.
In my recent article which considered the cost of mining a Bicoin based on Q1, 2023 financial updates, Riot Platforms were able to produce a mining margin of 58% only bettered by TeraWulf (WULF) with 63% and Cipher Mining (CIFR) with 62%.
In FY 2022, the company received a total of $27.345 million in energy credits and ancillary service payments.
