Kazakhstan’s crypto miners face new regulations after contributing to power shortages

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Kazakhstan’s energy grid is collapsing due to the massive influx of bitcoin miners. But it could turn out to be a blessing in disguise as government and industry seek an answer that won’t wipe out the industry.

The Central Asian country’s share in the global hashrate – the amount of computer processing power spent to mine bitcoin – has roughly doubled since May, when Chinese miners, banned from their own country, began to move their resources. overseas operations.

Kazakhstan now faces power shortages, a problem hard to anticipate in an energy-rich country that normally has excess electricity. Government officials blamed the problems on the influx of minors.

In response, the national grid operator KEGOC is rationing the electricity supplied to mines, and the Department of Energy has proposed a law that would introduce limits for all newly licensed cryptocurrency mines to 1 megawatt (MW) per mine and 100 MW for the whole country.

Despite these regulatory measures, five crypto miners with operations in Kazakhstan told CoinDesk they are still hopeful: in their opinion, the government is simply trying to deal with urgent power shortages, but remains supportive of mining. .

More than that, some of them believe that the influx of Chinese miners will allow Kazakhstan to cope with age-old problems in its electricity sector, including outdated infrastructure and dependence on coal.

On November 10, the Minister of Energy called on them to seek green energy solutions to the electricity conundrum.

Read more: Kazakhstan will not limit electricity to legal cryptocurrency miners, Minister said

Despite the energy crisis it has caused, crypto mining “has a bright future in Kazakhstan”, in part “because the government wants to support the production of renewable energy,” said Denis Rusinovich, co-founder of CMG Cryptocurrency Mining Group and Maverick Group.

Shortages

Kazakhstan, the largest country in Central Asia, sits on some of the largest deposits of oil, natural gas, coal and uranium in the world. It is a net exporter of energy because it produces more than it can absorb.

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But when Chinese miners moved to Kazakhstan, they used up any excess capacity and the excess was gone, said two crypto miners with operations in Kazakhstan, a representative of Kazakhstan’s largest mine hosting company. Enegix, Rusinovich and Didar Bekbau, co-founder of Kazakh. the mining company Xive.io.

Read more: Banned Chinese Bitcoin Miners Look West and Beyond

In an interview with local outlet Tengrin News on November 4, Energy Minister Magzum Myrzagaliev said Kazakhstan’s electricity demand had steadily increased by 1 to 2 percent per year until about 10 months ago. . From 2021, demand increased by 8%, from around 1,000 MW to 1,200 MW, which Myrzagaliev said was due to crypto mining.

This lack of electricity quickly became a problem for the national grid, with Almaty, the former capital and largest city of Kazakhstan, suffering a blackout in mid-July.

Shortages are expected to worsen as winter approaches, when heat demand typically increases. The average winter temperature in Kazakhstan is between -9 ° C and -12 ° C, according to the World Bank’s climate knowledge portal.

To cope with the shortage, KEGOC began cutting electricity to some miners in September, especially in the south of the country.

Bekbau said one of their mines in the south has been closed while others face power rationing. Rusinovich said the longest shutdown he is aware of lasted two days and occurred around mid-October. The Enegix representative said their mines face power restrictions during peak hours for around four to six hours a day.

Rationing doesn’t just apply to crypto mines. KEGOC announced planned outages for various consumers in October. But miners are not a priority for the government, so when there is a shortage they are the first to be targeted, Bekbau said.

The south is particularly vulnerable because there are no power stations. Electricity is mainly produced in the northern part of the country, near Kazakhstan’s rich coal deposits. Of the 21,000 MW of installed power capacity in Kazakhstan in 2017, more than half came from coal, the overwhelming majority of which was produced in the north, the World Bank said in a 2017 report.

But the Soviet-era national grid is unable to transport electricity to the south, where installed capacity is scarce, Rusinovich and Bekbau said.

However, two other minors who wished not to be identified for this article because they were not authorized to speak on the subject, denied having faced forced blackouts.

To clean

The power restrictions are accompanied by a cleanup operation, whereby the government tries to crack down on unauthorized mines that connect to the national grid without the proper approval of authorities, including KEGOC.

A growing number of illegal miners have contributed to the electricity deficit, Enegix CEO Yerbolsyn Sarsenov told CoinDesk in a statement.

KEGOC did not respond to CoinDesk’s request for comment on this article.

Energy Minister Myrzagaliev blamed the electricity shortages on the influx of miners. According to the minister, Kazakhstan’s gray miners consume 340 MW of electricity, compared to 600 MW consumed by lawful mining operations, he said in an interview with Tengrin News.

But the capacity going to gray mines is difficult to estimate and could reach 1,000 MW to 1,200 MW, Deputy Minister Zhurebekov told Tengrin News.

President Kassym-Jomart Tokayev called on the Energy Minister to quickly put in place a regulatory framework that would allow existing “white” miners to continue their work without further restrictions, according to a report from the October 29 meeting.

The law project

On October 1, the Energy Ministry released a bill calling for limiting the total electrical capacity for new mines to 100 MW nationwide, and 1 MW per mine, for a period of two years.

The bill is expected to come into force 60 days after its publication, but until then it is open to public comment and could be amended.

All of the miners CoinDesk spoke to agreed that the restrictions would not apply to existing mines. “The bill proposes to limit the permits granted to new miners,” so that it will not affect existing mines, said Sarsenov of Enegix.

On November 10, in a meeting with representatives of the crypto industry, Myrzagaliev confirmed that legal mines that have been properly registered with authorities will not be subject to restrictions.

When building crypto mines, companies typically sign long-term contracts with energy providers, in this case primarily KEGOC, locking in electricity prices for months or years. They have to go through a cumbersome process to get approval for their industrial energy use. It would be extremely difficult for the law to cancel existing contracts that were signed following the correct procedures, agreed people familiar with the process.

But those who were working on new projects or had projects under construction “are waiting with their fingers crossed,” Bekbau said.

“I am open to dialogue,” Myrzagaliev said after a meeting with representatives of the crypto mining industry.

After the consultation process, the final bill could include exemptions to the 100 MW limit that could create more leeway to build new mines. Some of these exemptions would speed up the country’s transition to renewable energy by encouraging miners to build their own green energy production capacity.

The law could require miners to build their own renewable energy generation capacity to match what they consume from the national grid, Bekbau said, or could exempt miners who use green or imported energy from the hard cap. , said Rusinovich.

At the November 10 meeting with the Energy Ministry, the miners said they were “ready” to import electricity from abroad and invest in renewables.

Enegix announced its intention to achieve energy self-sufficiency using hydropower plants on November 9. The company will start building factories to recover energy from rivers in the first quarter of 2022.

Read more: Kazakh mining hosting company Enegix seeks energy autonomy through hydropower

The future

Despite the power rationing and the bill, miners CoinDesk spoke to are optimistic about Kazakhstan’s future in the industry.

In June, the President of Kazakhstan also enacted a bill under which crypto miners will be taxed 1 Kazakhstani tenge ($ 0.0023) per kilowatt hour consumed, starting in 2022. Miners see this as a positive development. Taxation means the government welcomes the industry instead of banning it.

“It appears that the government wants to take advantage of the ban in China” to increase its income, a source in Kazakhstan said.

Miners CoinDesk spoke to said the shortages revealed existing problems in Kazakhstan’s power infrastructure: In 2017, when mining experienced its first boom in the country, the World Bank had already warned against an imminent energy deficit.

The deficit is linked to the blackouts of large power plants in northern Kazakhstan, said the CEO of Enegix. When KEGOC announced the rationing of electricity in southern Kazakhstan, it was reacting to the failure of three large coal-fired power plants which resulted in a loss of capacity of 1,000 MW.

These failures can in part be attributed to dilapidated installations. Kazakhstan’s energy infrastructure dates back to the Soviet Union. The government has been talking about updating it for a decade, Bekbau said.

With new taxes imposed by miners and a major new customer for KEGOC that consumes a constant amount of electricity, Kazakhstan may after all update its infrastructure and move towards renewable energy.

In the meantime, however, some minors have already left the country, such as Russia, Bekbau said. But that is only a small minority as the others await the final version of the bill, he said. Getting out of Kazakhstan is expensive because it is a landlocked country.

Miners who have done due diligence and gone through heavy legal proceedings to freeze electricity prices and set up legitimate facilities in the country are unlikely to pick up and leave, a miner told CoinDesk.

But he said the company is monitoring the regulatory situation and may change its future plans for more investments in Kazakhstan.

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