In the sweltering heat the grid diverts Layer1’s contracted 100MW to meet airconditioning demand.

Layer1, the bitcoin miner backed by the likes of top-flight VC Peter Thiel and early-stage investor Shasta Ventures, based its operations in west Texas to take advantage of cheap power. Wind energy and natural gas combine to make the cost of power here the cheapest in the world. But for Layer1, there’s icing on this cake. It gets paid $17 million annually to not draw power when the grid needs it most. (Forbes)

Bitcoin mining and Layer1 – it’s all about power costs

Layer1’s arrangement with the Texas grid is called a “demand response” contract. The firm can take its 100MW load off the grid at a moment’s notice, leaving the grid to transmit the power elsewhere. Layer1 receives an “annual premium” of $17 million from the Texas power authorities for this facility, whether they use it or not. Alex Liegl, CEO and co-founder says Layer1 is acting as an “insurance underwriter” for the grid.

Why does such a contract make business sense for the Texas grid? The first reason is that electricity rates soar in the summer months. They are high enough for the grid to make money on Layer1’s 100 MW even after paying the annual premium. Secondly, it saves the huge investment required to set up additional capacity just to meet the peak summer loads.

For Layer1 too it’s a big win-win. The single most important cost in bitcoin mining is electric power. Liegl goes so far as to say that mining bitcoin tantamounts to converting electricity into money. Because Layer1 enjoys big savings on its power costs through the annual premium on the demand response contract, its effective, all-in power cost comes down to less than 1 cent per kWh.

Layer1’s average cost of production per bitcoin is about $1,000, according to Liegl.

That equates to a profit margin of over 90% at bitcoin’s current price of $9,113.

Related Story:  Peter Thiel and Others Pony Up $50M for Wind and Solar Powered Crypto Mining in Texas

Image of crypto mining rig: Flickr