A Miner Setback: Conifex and the B.C. Cryptocurrency Moratorium
Cryptocurrencies aim to create a means of exchange that has built-in safeguards against inflation, counterfeiting and double-spending by leveraging cryptography. This invariably requires limiting or restricting the creation of new digital “coins.” Some cryptocurrencies (including Bitcoin) achieve this by requiring computers to solve ever more complicated algorithms to “mine” additional coins. What may have started with a handful of technically savvy individuals using gaming computers has thus morphed into an industrial-scale operation for cryptocurrency “miners” who now use large server banks to create additional cryptocurrency.
Certain cryptocurrencies are remarkably energy intensive. For example, an article published by Forbes in 2022 stated that Bitcoin, the largest cryptocurrency by market capitalization, had a higher annual energy consumption than the entire nation of Norway. In the U.S., the Energy Information Administration estimates that cryptocurrency mining currently accounts for between 0.6% and 2.3% of total total electricity consumption. Canadian provinces with crown-owned hydroelectric utilities have some of the lowest electricity rates in the world, so it is not surprising that those provinces have attracted the attention of the cryptocurrency industry.
Not every cryptocurrency operates identically or uses the same amount of power. However, cryptocurrencies that rely on a “proof of work” consensus mechanism require computers all around the world to solve complex mathematical problems to verify transactions. Since transactions happen 24/7, the computers that process these transactions, and the cooling mechanisms that prevent them from overheating, consume a high level of electricity around the clock.
The challenge in serving new large industrial loads is that the marginal cost of new generation significantly exceeds the embedded cost of legacy generation. This means that a load that cannot be served without building new generation facilities can have an outsized impact on the rates paid by all customers. Most Canadian crown utilities operate on a “cost of service” basis, which means that the cost of providing service to customers must be recovered through rates. Higher costs translate into higher rates. Provincial governments accordingly have a policy interest in balancing the cost impact of new industrial customers against the economic benefits of those customers to the provincial economy, including the creation of new jobs. The electricity demand of cryptocurrency operations can be immense, which has led several provincial governments (including Manitoba) to declare moratoriums on connecting new cryptocurrency mining rigs to the electrical grid.
The Supreme Court of British Columbia has just had an opportunity to consider the validity of such a moratorium, which may provide some valuable guidance to other provinces.
British Columbia’s Moratorium
Utilities in British Columbia are regulated by the British Columbia Utilities Commission constituted under the Utilities Commission Act. The province’s largest supplier of electricity is BC Hydro, a provincial Crown corporation.
On December 21, 2022, British Columbia issued an Order in Counsel directing the British Columbia Utilities Commission to issue orders relieving BC Hydro of the obligation to connect cryptocurrency operations to the electrical grid during an 18-month moratorium period. This effectively halted new cryptocurrency operations in the Province. The moratorium is currently still in effect.
An Order in Council is an executive instrument issued by Cabinet. Cabinet’s power to issue such orders usually arises from legislation. In the case of the moratorium order, the power to issue such orders is set out in section 3 of the Utilities Commission Act.
The Conifex Case
Conifex Timber Inc. is a forestry company that was planning to expand into the cryptocurrency business when the provincial government issued the moratorium. At the time the moratorium was issued the company was at the front BC Hydro’s interconnection queue and planning to construct two new datacenters. The moratorium halted those plans and prevented Conifex from receiving electrical service.
Conifex decided to apply to the British Columbia Supreme Court for a declaration that the Order in Council was invalid because it discriminated against certain customers based on the customer’s purpose in using electricity.
The provincial government defended the order and highlighted the size of the proposed operations. The court heard evidence that Conifex’s planned operations dwarfed the electricity demand of British Columbia’s other industrial customers at a projected demand of 2,500,000 MWh per year. A representative from BC Hydro estimated the total usage of cryptocurrency interconnection requests amounted to 16,000,000 megawatt-hours per year, the equivalent amount of energy needed to service 1.5 million residential customer premises in the province.
Based on the evidence led by the provincial government, the court concluded that cryptocurrency operations have a unique load profile. After reviewing the relevant legislation and caselaw, the court found that treating electricity customers differently based on economic or cost-of service reasons, including their unique electricity consumption characteristics, does not amount to undue discrimination.
The court found that one of the economic reasons underlying the Order was
“the very real prospect that devoting such a large proportion of the available electrical power supply to one industry would leave less energy for other uses which might result in increased costs to all other residential and industry customers in BC.”
Conifex has indicated that it may appeal the decision, so it is possible that the British Columbia Court of Appeal will have to consider this issue in due course.
What Does the Decision Mean?
The ability to issue political directives to utility regulators is a common feature of Canadian utilities law. With several other jurisdictions having imposed moratoriums on cryptocurrency operations, project proponents have been wondering what is next and what their potential options are to challenge those moratoriums. The British Columbia decision in Conifex suggests that legal challenges against provincial cryptocurrency directives are unlikely to succeed. Considering that all provincial governments are currently wrestling with the impact of electrification and the energy transition, cryptocurrency operations may face a daunting political hurdle, needing to convince governments that retracting moratoriums is in the public interest.