While the term "bitcoin" is a hot topic in Alberta in recent weeks, the physical operations, infrastructure and approvals required to operate a large-scale cryptocurrency operation is unknown to many. Cryptocurrency mining operations require large powerful processors that are used by miners to process and confirm the transaction of digital assets. Imagine a large warehouse housing rows of several computers or "mining boxes;" these specialized computers consume large amounts of energy and require non-stop climate control (central heating and cooling systems) to operate.
Due to the high costs of procuring power and recent measures taken by the Chinese government to halt bitcoin mining activities, operators have started looking to Alberta's deregulated generation market and relatively low cost natural gas as a source of inexpensive energy. However, with energy production comes regulation and oversight. Cryptocurrency companies should be aware of the regulatory requirements in Alberta to ensure compliance with the overarching legislative framework and avoid the potential for enforcement actions and hefty fines.
The Alberta Utilities Commission ("AUC") regulates electric generation in the Province and oversees the development of generation units under the Hydro and Electric Energy Act1 (the "Act") to ensure that proposed activities are in the public interest, having regard to social and environmental effects. Cryptocurrency miners intending to build their own generation to operate in Alberta must obtain approval from the AUC unless their operations are exempt.
In order to construct, connect, or operate a power plant to power a cryptocurrency mining operation, a formal application for approval to the AUC is required for all the generation plants over 10 MW. An application requires an operator to satisfy several requirements including conducting a participant involvement program in accordance with AUC guidelines, the provision of technical information, noise control and emergency response plans, environmental testing and compliance, and the provision of information related to funding end-of-life management. Because these requirements can be onerous, costly and may potentially trigger a regulatory hearing before the AUC, small generation facility operators may seek to rely on applicable exemptions permitted under the regulatory framework. An application to the AUC is not required where all of the following criteria are met:
- The power plant's capacity is less than 10 megawatts;
- The operator generates electricity solely for their own use;
- No person is directly and adversely affected by the power plant;
- The power plant complies with AUC noise control rules; and
- There is no adverse effect on the environment.
The Link Global Decision
A recent decision of the AUC, Decision 26379-D02-2021 (the "Link Decision") provides a useful analysis of the AUC's requirements in the context of cryptocurrency mining operations. In the Link Decision, Link Global Technologies Inc. ("Link Global") began operating a 5 megawatt power plant in Sturgeon County (the "Sturgeon Plant") and a 3.5 megawatt power plant near Kirkwall (the "Kirkwall Plant") without obtaining approval from the AUC. The Sturgeon Plant and Kirkwall Plant consisted of natural gas facilities supplying fuel to thermal electrical generating units, which in turn provided electric energy to cryptocurrency processing facilities located onsite.
The Sturgeon Plant was located approximately 685 metres from the first row of homes of Greystone Manor, a community located just east of the plant. The residents of Greystone Manor made complaints about the noise generated by the Sturgeon Plant, which initiated an investigation by AUC Enforcement Staff. Following the investigation, the Enforcement Staff filed an application with the AUC which included, amongst other things, an allegation that Link Global was not generating electricity at the Sturgeon Plant and Kirkwall Plant for its own use.
What Constitutes Own Use?
Section 13 of the Act provides that the requirement that a person obtain approval from the AUC to operate a power plant does "not apply to a person generating or proposing to generate energy solely for the person's own use." The term "person" is defined as a "municipal corporation or other corporation."
Link Global sold the energy at both the Sturgeon Plant and the Kirkwall Plant to a third party, Block One, under a master services agreement. The agreement set out the terms of the relationship between Link Global and Block One and specifically provided that the parties were independent contractors. The issue was whether the consumption of electric energy by the bitcoin mining equipment, which was owned by Block One, met the "own use" requirement.
Notwithstanding the master services agreement, Link Global and Block One characterized their relationship as a de facto partnership and argued that the electric energy was being generated for that single entity's own use. The AUC found that the definition of "person" in the Act did not extend to a de facto partnership or a joint venture arrangement and therefore Link Global was not generating electricity for its "own use."
On March 8, 2021, Block One transferred its ownership of the cryptocurrency processing facilities to Link Global. As a result of the transfer of ownership, Link Global's exclusive ownership of the generating units and the cryptocurrency processing facilities was determined by the AUC to meet the "own-use" criterion.
While the definition of "person" under the Act does not specifically exclude partnerships or joint ventures, the AUC narrowly interpreted the definition and concluded that it was not the intention of the legislature to extend the meaning to separate corporate entities. Accordingly, operators intending to set up cryptocurrency mining operations at a less than 10 MW capacity should seek input on a corporate structure that will satisfy the exemption criteria.
Notifying the AUC and Other Exemption Criteria
Section 4.1.1 of AUC Rule 0072 explicitly notes that an owner may proceed without filing an application provided that all of the abovementioned requirements associated with an exemption are satisfied. While the wording in section 4.1.1 suggests that there is no requirement to seek approval or notify the AUC in circumstances where the exemption criteria apply, although not stated explicitly, the Link Decision suggests that prudent operators should notify the AUC of a proposed operation regardless of whether or not it is eligible for an exemption.
Further, the Link Decision specifies that power plant operators should conduct a comprehensive analysis of whether they meet the exemption criteria. Operators should consult with potentially affected persons, conduct a noise impact assessment, and conduct a site-specific analysis on potential environmental impacts in order to demonstrate that the operation is in fact exempt.
Companies that are considering owning and/or operating a power plant should familiarize themselves with the requirements of the regulatory scheme prior to securing investors, committing resources and beginning operations.
2. AUC Rule 007
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