ABLs, Bitcoin Miners and Monetizing Stranded Energy

This article discusses the bitcoin mining industry’s role in providing demand support to energy producers by monetizing otherwise stranded energy produced from oil drilling and solar and wind facilities. Consumption of stranded energy by bitcoin miners should help secured lenders underwrite loans, because it can reduce air pollution resulting from natural gas flaring and improve life cycle economics of renewable energy sources. 

It is very difficult to get a senior credit officer comfortable with bitcoin. Utter the words “bitcoin mining” to a group of asset-based lenders and it will not likely go over well. How has a working-capital intensive, increasingly carbon-neutral, industry with hundreds of millions of dollars of equipment, accounts receivable and real estate, received practically zero debt capital from any secured lender? Most likely, because bitcoin carries a stigma that it is (i) a mechanism for fraud used by unscrupulous executives to purchase homes in the Bahamas,¹  (ii) inherently worthless without backing by “real” assets or a central bank,² (iii) a device for criminal misconduct,³ (iv) a Ponzi scheme,⁴  (v) “probably rat poison squared,”⁵ and (vi) a massive waste of energy resources and deleterious to the environment that will inevitably cause the industry to enter a spiral of decline and losses.⁶ The merits and value of the above are yet to play out in the open-market, and the reality is more complex. However, it is this last critique which will be addressed herein. This article argues that bitcoin miners offer energy producers consistent, reliable demand support for wasted energy generated from oil drilling and solar and wind facilities (such energy, as described below, “stranded energy”). Consumption of stranded energy by bitcoin miners should help secured lenders underwrite loans, because it can reduce air pollution resulting from natural gas flaring and improve life cycle economics of renewable energy sources.

The rise of bitcoin mining has sparked debate about its energy consumption and environmental impact. Some say that it has negative attributes when evaluated through the lens of climate related risk methodologies, while others insist that it’s a workable investment opportunity with positive energy and climate externalities. This article suggests that by optimizing stranded energy, bitcoin miners can reduce the amount of greenhouse gas emissions caused by drilling oil wells and improve rates of return on renewable energy production. More importantly, once the negative energy use and environmental stigma begins to unravel, asset-based lenders may realize a traditional borrowing base can be built with these companies’ assets just like any other mainstream industry. This discovery would lead the asset-based lending arms of banks, finance companies, and financing subsidiaries of major industrial corporations to many opportunities to extend first lien, senior secured debt capital to an industry operating in the physical world.

To understand how bitcoin miners can reduce air pollution and improve life cycle economics of renewable energy sources, bitcoin mining and the concept of stranded energy needs unpacking.

Bitcoin Mining Basics

The purpose of bitcoin mining is to verify transactions that take place on the bitcoin network.⁷ The bitcoin network operates 24 hours a day, 7 days a week, 365 days a year.⁸ Miners receive newly created bitcoins as an incentive for verifying transactions approximately every ten minutes.⁹ The only things needed to mine bitcoin are – power, specialized computers (i.e., ASICs)10 and an internet connection. ASICs cost approximately $2,000 each and are readily available for purchase

online.¹¹ Mining can be small scale like the six-month Fort Worth pilot program that netted the city $1,019.31 in profit,¹² or institutional-scale like Riot Platforms, Inc., a NASDAQ listed miner (ticker: RIOT), that reported net revenue of $184 million in FY 2021 from mining bitcoin.¹³ Generally, miners have two different revenue streams: (1) bitcoin mining and (2) hosting fees.¹⁴ For bitcoin mining, bitcoins received are either sold on the open market for cash or held on the miner’s balance sheet.¹⁵ In contrast, hosting acts more like traditional accounts receivable – miners receive cash payments in exchange for providing an account debtor with access to a portion of the miner’s electrical power.¹⁶ These account debtors are typically other bitcoin miners looking for access to cheap power. For example, at Riot’s 700MW capacity facility in Rockdale, Texas, a portion of the ASICs are owned by Riot and the rest are either owned or leased by Riot’s account debtors which pay it a hosting fee for access to power.¹⁷

Importantly, bitcoin is easy to mine. Fort Worth is mining bitcoin in the basement of city hall.¹⁸ The ability to operate 24-7-365 virtually anywhere there is power and an internet connection, combined with the surplus of stranded energy discussed below, makes bitcoin miners unique consumers of power.

Bitcoin Miners Exploit Stranded Energy

Every energy producer – solar, wind, geothermal, landfill gas, hydro, coal, and O&G has plenty of energy that is produced, but has nowhere to go.¹⁹ This type of already-produced energy with no buyer is called stranded energy. Bitcoin miners, willing to travel to remote locations in search of the cheapest available electricity, exploit stranded energy.²⁰ Over the last 50 years and most recently with Joe Biden’s signing of the Inflation Reduction Act in August 2022, the United States has invested heavily in O&G, wind and solar production, contributing significantly to its production of stranded energy.²¹Please click here to read the full article.

This is a guest article with permission from SFNet and courtesy of Collin Z. Groebe with Winston & Strawn LLP.