As Kentucky’s largest coal producer mines Bitcoin, its power discounts draw scrutiny

by Liam Niemeyer, Kentucky Lantern

State utility regulator launches investigations into crypto industry’s impacts

Union County in Western Kentucky has been the state’s top coal-producer for years, mining more than 10 million tons in 2022.

Something else is being mined in Union County: Bitcoin.

In both cases, the mining is done by Alliance Resource Partners (ARP) headed by Joseph Craft III, whose wife Kelly Craft, just lost an expensive race to become the Republican nominee for governor.

Mining cryptocurrency requires enormous amounts of electricity to power high-capacity computers that perform complicated mathematical calculations, securing online transactions of virtual currencies such as Bitcoin. These mining operations are rewarded for solving the calculations with Bitcoin itself, valued at more than $25,000 a coin as of early June. 

A dispute before the Kentucky Public Service Commission (PSC), the state’s utility regulator, will determine whether electrical utilities should have given Alliance and two Bitcoin miners in Eastern Kentucky hefty price discounts on the electricity powering their computers. 

Utilities give the discounts, known as economic development riders, as incentives to businesses to locate in their service territories.

A group of environmental and renewable energy advocacy organizations asked the PSC last year to investigate the discounts.

They cite multiple reasons for closer scrutiny, including the strain these operations and their huge demand for power places on the grid, in exchange for relatively few jobs.

The cryptocurrency industry is expanding as climate experts call for the world’s power generation to rapidly decarbonize amid climate change’s increasing impacts. Utilities in Kentucky are trying to transition to lower-carbon-emission energy sources such as natural gas and renewables.

Another concern: The industry’s volatility, as already evidenced in Kentucky. Core Scientific, which has had a crypto mining operation in West Kentucky since 2019, declared bankruptcy in December. Another mining operation that set up shop in downtown Paducah moved out abruptly due to “a business decision dealing with the energy market.” 

The groups asking for more scrutiny — including Kentuckians for the Commonwealth, Kentucky Solar Energy Society and the Kentucky Resources Council — question whether the jobs created by crypto mining justify the discounts and whether the discounts shouldn’t be saved for industries that would employ more Kentuckians. 

Alliance was promised more than $4 million in discounts while promising to create five jobs, although the utility doesn’t have a process in place to make sure those employees weren’t being double-counted from another part of Alliance’s business, according to one utility employee.

“This idea of utilities providing a discount to what, by appearances, looks to be a real possibility of boom, bust — or potentially bust, and then no further boom — is very concerning,” said Josh Bills, a commercial energy specialist with the Mountain Association, a Berea-based economic development nonprofit and one of the interveners in the PSC case.

As he helps small businesses become more energy efficient and incorporate renewable energy, Bills also sees them struggle to pay electricity bils, so it troubles him when a “boom, bust” industry receives significant electricity discounts. 

He said the cases before the PSC, including Alliance’s Bitcoin mine, will set precedents and that it’s important to get concerns about subsidies for crypto on the record.

On the other hand, an advocate for the cryptocurrency mining industry says such companies are being unfairly singled out for taking advantage of economic development incentives for which they qualify, while the utility that offered discounts to the Union County mine asserts it wasn’t in error for doing so. 

Tom Mapes, the director of energy policy for the cryptocurrency mining lobbying group Digital Chamber of Commerce, said if a cryptocurrency mining company and a utility are operating within the parameters of the laws set out for the economic development incentives, they should be able to utilize those incentives. “If we’re working within the parameters of what is written out within state law or national law, why would we be judged differently?” he said. 

Mining Bitcoin on a coal mine

Because cryptocurrency mines use a lot of power, the operators are looking for the cheapest rates possible.

“Obviously, they’re going to go to where the most bang for your buck you can get in these regions, you know, the best purchasing power you have for energy or land,” Mapes said. “We’re running computers pretty much.”

Coal mining also uses a lot of electricity, and Alliance’s site in Union County had some ready-made advantages, including electricity infrastructure and meters on the former coal mine site that the company planned to transfer over to use for the Bitcoin mining operation, according to emails and reports provided by Kentucky’s largest utility, LG&E and KU, to the state utility regulator. 

An LG&E/KU representative who visited the Bitcoin mining site in October 2022 said the initial understanding was that Alliance would put its high-powered computers in “underground mine space” but that it was “too damp and didn’t have enough ventilation.” 

Kentucky Utilities, a subsidiary of LG&E and KU, offered more than $4 million in discounts over several years to Alliance’s Bitcoin mining operation, a subsidiary called Bitiki-KY. Alliance promised to create five jobs and invest $25 million into the company. 

Bitiki-KY has been running high-powered machines on a former coal mine site near Waverly in Union County since last year to mine the cryptocurrency using a constant stream of 10 megawatts of electricity, enough to power thousands of homes over the course of a year. 

Whether Alliance actually needed those electricity discounts as an incentive to locate at the Union County site it already owned became a central topic at a PSC hearing on May 31. Alliance did not respond to an interview request for comment about its Bitcoin mining subsidiary Bitiki-KY, which changed its legal name from Bitiki Blockchain last year. 

Thom Cmar, a senior attorney for Earthjustice representing the environmental and renewable energy groups in the PSC case, said there normally is evidence that without such incentives, a company proposing a new facility will move elsewhere.

“There’s no evidence here that they even looked anywhere outside of Kentucky Utilities territory,” Cmar said in an interview with the Lantern. “They were taking an existing site that they already owned, or that an affiliated company already owned, and just transferring it over.” 

In that late May hearing, Cmar asked John Bevington, director of business and economic development for LG&E and KU: Was there specific evidence that the electricity discounts were necessary to make sure Bitiki-KY didn’t locate elsewhere?

Bevington said that he wasn’t aware of evidence the coal company considered potential sites outside KU’s territory and that the need to offer the discounts came over time as the utility talked with Alliance.

“Our goal is to try to get customers to grow and locate here without providing any incentive. But you know, occasionally it becomes a competitive environment, and the cost considerations are necessary as they were in this case,” Bevington said.

He told Cmar that Alliance’s previous history with the site and the existing infrastructure “was definitely attractive” to the coal company. 

Also during that hearing, Cmar honed in on the jobs Alliance said it would create, asking: Did the utility have evidence those five jobs were actually created? 

Bevington, who previously worked in the Kentucky Cabinet for Economic Development, responded Bitiki-KY had “committed” to creating five jobs in its application for the incentives, but the utility didn’t have a process in place to make sure those employees weren’t being double-counted from another part of Alliance’s business. 

In written testimony, Bevington added that it’s “impossible” for the utility to know exactly how many jobs a company would create through electricity discounts. He said the utility also relies on cues from state officials, such as if a company receives state tax breaks, on whether to give discounts. Bitiki-KY in March 2022 received from the Kentucky Economic Development Finance Authority (KEDFA) $250,000 in tax benefits through the Kentucky Enterprise Initiative Act. 

Instead of jobs being at play with these electricity discounts, Bevington said, the Bitcoin mine’s electricity usage hinges on the incentives; Bitiki-KY would likely not increase its power usage from 10 MW to 13 MW without the discounts. 

“[I]t is both facially plausible and consistent with my experience in economic development that an entity proposing to deploy $25 million of capital and create 13 MW of load might also create five jobs,” Bevington said in written testimony. 

An LG&E and KU spokesperson declined to answer detailed questions emailed by the Lantern about how and whether the utility verifies economic development created from electricity discounts. 

Does crypto benefit the community?

For Cmar, the Earthjustice attorney, Alliance’s Bitcoin mining site is a microcosm of what cryptocurrency mining companies are bringing to Kentucky.

“There’s a real concern when the company comes in and says things like, ‘Well, we’re going to be creating five jobs.’ But there’s no evidence that has been presented that any significant amount of jobs have been created,” Cmar told the Lantern.. “Why should a company like this get a discount? Shouldn’t the economic development discounts be saved for other types of industries that are bringing real meaningful economic development to the area?”

Alliance’s Bitcoin mining operation isn’t the only operation moving into Kentucky and receiving electricity discounts. Two of the other PSC investigations into cryptocurrency mining involve discounts provided by Kentucky Power to operations in Pike County and Lawrence County, the latter of which would build what would likely be the state’s largest such facility and have the capacity to use up to 250 megawatts of electricity. The PSC will hold hearings regarding both of those operations in July. 

Cmar said those operations cumulatively are soaking up “all this extra electricity.” 

“At a time when we are working to try to transition our electric sector to cleaner forms of energy and address the imperative need to try to avoid the worst impacts of climate change by reducing emissions wherever possible, having these energy intensive — energy wasteful, really — operations coming in … has put an incredible strain on the grid.” 

Mapes, the cryptocurrency mining lobbyist, said crypto mining operations such as in Union County still provide much needed jobs to rural communities. He also said crypto mining’s need for power will spur development of solar and wind generation to meet the demand .

Paul Monsour, treasurer of the Union County Chamber of Commerce and a city council member in Morganifield, the county seat,  recognizes that the five jobs created by Alliance will have a small impact compared to the company’s coal mining in the county.

 “It’s five more jobs than we had,” Monsour said. “But I would think the county would support mostly everything Alliance would want.”