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Environmentalists and Ky. AG want to pump the brakes on a massive crypto mining facility. Why?

A graphic shows coin-like interpretations of crytocurrencies
Bitcoin
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Bitcoin

An international company that mines cryptocurrency wants to build a $250 million facility beside a natural gas power plant in eastern Kentucky, but state utility regulators want the proposed 10-year deal to sit tight while they investigate what it could mean for ratepayers.

Kentucky Power filed for approval of a special contract with the crypto operation Ebon International in late October saying the deal would benefit the community and lower bills for ratepayers.

Details about the potential discounts Kentucky Power’s offering under the deal are confidential, but several groups, including the Attorney General’s Office, have expressed concerns that ratepayers could actually end paying higher electricity bills while subsidizing the cryptocurrency company.

“On its face, this special contract does not appear to protect existing ratepayers,” wrote J. Michael West, assistant attorney general, in a filing with the Kentucky Public Service Commission.

Ebon International is a subsidiary of the publicly traded Ebang International Holdings (EBON). The Chinese-owned corporation has a market capitalization valued at $31 million. Shares in Ebon have lost about 88% of their value in the last year. The company did not return a request for comment.

The company proposed a $250 million computing complex on 55 acres leased from Kentucky Power at the Big Sandy Generating Station, according to PSC testimony from Brian West, vice president, regulatory and finance for Kentucky Power.

West told regulators the eastern Kentucky facility would mine cryptocurrencies including Bitcoin and Ethereum and provide blockchain and data processing services. Ebon plans to hire 50 to 100 full time employees with salaries up to $76,000, according to the contract.

Kentucky Power’s service territory includes much of eastern Kentucky, which has experienced a decade-long decline in large electricity users in the coal industry and industrial operations such as the former AK Steel plant.

That’s pushed rates higher for those who remain because the company’s fixed costs are spread over fewer customers. At the same time, ratepayers are struggling with increases in the company’s fuel adjustment charges.

West told regulators the so-called “special contract” would benefit ratepayers by helping to cover those fixed costs while providing high-paying jobs for the community.

“The establishment of Ebon’s operations in Lawrence County will help stabilize the economy in that part of the Company’s service territory,” West said.

Crypto in Kentucky

Kentucky’s seen a wave of interest from crypto companies with ambitions to build in the state thanks to a combination of relatively cheap power, land and tax incentives passed by the Legislature last year. Among the incentives, House Bill 230 provided sales and use tax exemptions on electricity and on the tangible personal property directly used in commercial mining of cryptocurrencies.

It probably goes without saying, but mining for cryptocurrencies is nothing like mining for coal. The most common form of mining involves warehouses full of computer servers that use vast amounts of electricity to perform so-called “proof of work” calculations that reward miners with digital currency such as bitcoin.

Cryptomarkets have been volatile over the last year with Bitcoin losing around 70% of its value, and the cryptocurrency exchange FTX filing for Chapter 11 bankruptcy protection. The rise and fall of digital fortunes reached Kentucky as well with a crypto mining operation pulling out of Paducah less than a year after acquiring a 120,000-foot facility, according to the Paducah Sun.

There is also growing concern about the potential long-term energy demands of these companies, large enough that the White House has put out a paper suggesting the industry could hinder the country’s efforts to meet climate commitments.

The proposed deal with Ebon comes as Kentucky’ Power’s parent company, American Electric Power (AEP), sells its operations to Liberty Utilities. AEP signed that deal in September and is set to close in January, following approval from the Federal Energy Regulatory Commission.

With all eastern Kentucky is going through, between increasing energy prices, flooding and unreliable water service, Kentucky Conservation Committee Director Lane Boldman said it doesn’t seem an appropriate time for Kentucky Power to be investing in crypto mining.

“The whole industry has been very volatile, in some states they’ve seen increasing energy prices not reduction,” Boldman said. “A lot of the regulation and oversight with this industry is not up to par.”

Costs for customers 

Details about the discounts Kentucky Power will provide to entice Ebon to build the facility remain confidential, but critics say Kentucky Power ratepayers would end up paying more on their electricity bills as a result of the deal.

The Attorney General’s office, the Kentucky Resources Council, the Kentucky Industrial Utility Customers and other groups are intervening in the case to express concern over the publicly available details.

“The Attorney General is in full support of efforts to promote economic development throughout the commonwealth and specifically in eastern Kentucky. However, proposals to facilitate economic development should be tailored carefully to ensure that the ratepayers of eastern Kentucky do not unfairly subsidize companies,” wrote West, assistant attorney general.

Attorneys for the Kentucky Industrial Utility Customers analyzed public details on the contract and found Kentucky Power would pay Ebon nearly $15 million a year for the option to interrupt their power service, increasing the average ratepayer’s bill by $36 a year.

But the deal may have an even larger impact on the fuel adjustment charges Kentucky Power customers pay. When prices for natural gas spike, as they have over the last two years, utilities pass those costs directly on to ratepayers. That’s already the subject of an investigation from utility regulators.

This deal would potentially increase fuel adjustment charges as long as the cost of fuel purchases to serve the Ebon facility are greater than the cost of Kentucky Power’s self generation, according to Kentucky Industrial Utility Customers.

Also, the way the deal is currently structured, there are no protections in the contract should Ebon default before the end of its 10-year contract, according to Kentucky Industrial Utility Customers.

“There are serious concerns that providing electric service to this Bitcoin mining facility may do more harm than good by raising rates on existing customers and by exposing those customers to greater risk,” wrote Michael L. Kurtz, attorney for Kentucky Industrial Utility Customers.

Power requirements

In the first phase of the project, Kentucky Power would supply up to 90 megawatts of electricity. In a second phase, Ebon projects it would need around 250 megawatts of power -- similar to the entire generating capacity of a small power plant.

To put it another way, this one facility would represent an approximately 39% increase over Kentucky Power’s 2021 retail energy sales, according to Kentucky Industrial Utility Customers.

At the moment, Kentucky Power doesn’t have the energy infrastructure necessary to meet the terms of the deal. Kentucky Power told regulators the utility would provide power in the first phase until Ebon paid for the construction of a new substation that would provide 250 megawatts beginning in 2024.

Earthjustice attorney Thomas Cmar said the deal could result in Kentucky Power building even more carbon-intensive infrastructure at a time when it should be cutting greenhouse gas emissions to meet climate commitments.

“Our concern is that it’s going to raise costs on all the other customers in the region and create a much bigger energy need that Kentucky Power will eventually fill by trying to build even more fossil fuel-fired power instead of moving to cleaner energy sources,” Cmar said.

State regulators investigate  

Utility regulators at the Kentucky Public Service Commission reviewed the contract and determined an investigation was necessary to see if the terms of the deal are fair, just and reasonable for all parties involved, including ratepayers.

The PSC has since suspended the contract for five months until late April of next year.

Cmar, with Earthjustice, said the commission has the authority to block the deal, but expects it will look for a way for the deal to move ahead in some form.

“The commission has shown, and they have the responsibility to look out for regular customers,” Cmar said. “So we would expect them to dig into the details of this deal and question the provisions and make sure that ratepayers aren’t left holding the bag.”

Ryan Van Velzer is the Kentucky Public Radio Managing Editor. Email Ryan at rvanvelzer@lpm.org.