The role of Bitcoin mining in renewables projects
There's been a lot of talk lately about Bitcoin's energy consumption and its impact on the environment. The narrative from many politicians, media outlets, and industry critics is that mining is cooking the earth and that Bitcoin is gobbling up the world's precious energy and is responsible for a large amount of carbon emissions.
But is there another side to this story?
It's true that, on a global basis, Bitcoin mining alone consumes 164 TWh per year, comparable to the electricity consumption of Argentina, the United Arab Emirates, or Sweden, and six times that of New Zealand. US and European lawmakers have been making arguments about the environmental impact of Bitcoin mining, with proof-of-work mining, used by the Bitcoin network, being banned in New York State and narrowly escaping a similar fate in the European Union.
One argument in favor of Bitcoin mining is that miners have the unique capability to turn on or off their power consumption in a matter of minutes. This means they can soak up excess capacity that characterizes renewable electricity generators, helping to stabilize the grid and reduce waste. In fact, some argue that this makes it too hard for other industries to compete, slowing down the energy transition required in other sectors and projects such as large-scale battery manufacturing and electrification of the transport sector.
Furthermore, while Bitcoin mining does consume a lot of energy, the actual impact on the environment is smaller than some may think. According to a study undertaken by the US government, global electricity generation for the cryptoassets resulted in approximately 140 million metric tons of CO2 per year (0.3 percent of global annual greenhouse gas emissions), and, in the US, cryptoasset activity resulted in greenhouse gas emissions at a level similar to emissions from diesel fuel used by US railroads.
It's also worth noting that while Bitcoin is currently the most energy-intensive cryptocurrency, there are other less energy-intensive cryptoasset ledger technologies available, with different attributes and uses. Switching to alternative cryptoasset technologies such as proof-of-stake, could dramatically reduce overall power usage to less than 1 percent of today's levels.
So, while it's important to consider the environmental impact of Bitcoin mining, it's also important to look at the bigger picture and consider the potential benefits. As the world continues to transition to renewable energy sources, Bitcoin miners could play a key role in stabilizing the grid and reducing waste. Moreover, as technology continues to evolve, we may see even more energy-efficient cryptoasset technologies emerge.
Renewables’ curtailment problem
There is a problem with renewables that isn’t often appreciated: curtailment.
Because the sun does not shine and the wind does not blow 24/7, renewables generators have fluctuating supply characteristics. However, the grid was designed for a stable supply source that can adjust to demand. This means that a lot of generated electricity is wasted when there is insufficient demand, and renewables generators are required to “curtail” their connection to the grid until demand increases. The inability of grids to manage fluctuating supply and fluctuating demand means that many renewables projects are prevented from adding their excess capacity to the grid, leading to revenue loss, the expense of temporary shutdowns and, in some cases, heavy losses.
The other unique characteristic of Bitcoin miners is their ability to locate in the remote areas where renewables projects are typically located. Electricity doesn’t transmit well over long distances; a lot of energy dissipates. Being able to make use of electricity close to the generator is far more efficient, and is even more so when Bitcoin miners can tap into this power before it hits the grid.
Texas manages Bitcoin mining well
Texas is a good example of how the grid operator (ERCOT) has worked with Bitcoin miners to assist with the integration of renewable energy into the grid, by providing attractive pricing in return for contractual obligations to participate in demand management programs. Bitcoin miners smooth the fluctuating supply that characterize renewables like solar and wind. Additionally, ERCOT has actively encouraged Bitcoin miners to locate to west Texas, where there is excess capacity from solar and wind projects. The additional revenue to producers can help lower the cost to consumers and fund grid upgrades to better enable renewables projects to connect to the grid.
The benefits of this partnership between Bitcoin mining and renewable energy extend beyond Texas. By consuming this excess capacity, Bitcoin miners help to balance the loads on the grid, ultimately contributing to the transition towards a greener and more sustainable energy system.
It has been said that, because Bitcoin miners are so perfectly placed to soak up excess capacity from renewable generators, it is too hard for other industries to compete, slowing down the energy transition required in other sectors and projects such as large-scale battery manufacturing and the electrification of the transport sector. However, battery projects have been largely static in the last few years, and until there are other options to managing the fluctuating power characteristics of solar and wind projects, the additional revenue source provided by Bitcoin miners can assist grid operators to fund grid upgrades to better accommodate renewables projects.
Renewables are attractive to Bitcoin miners
For Bitcoin miners, using renewable-sourced energy is an economically sensible move since it is cheaper than fossil fuel equivalents, particularly when accessed close to the source. Miners are also able to attract institutional investors that operate under ESG mandates, which lowers their cost of capital.
Bitcoin mining and social responsibility
Because it makes economic sense for Bitcoin miners to locate close to the renewables power source, miners can bring employment and revenue to remote communities. Grid operators such as ERCOT in Texas often include local community obligations in their agreements with Bitcoin miners.
Similarly, because Bitcoin mining is relatively simple process, remote communities can use Bitcoin mining to subsidize investments in developing local renewables power generation projects. Despite the prohibition on Bitcoin mining in China, there is evidence of small-scale mining operations starting up in remote communities enabled by small scale hydro projects. Indeed, China’s Bitcoin mining ban has boosted renewables globally as miners in other parts of the world with greater transparency requirements take up the capacity, with renewables being the preferred energy source.
Bitcoin mining essentially involves purchasing a box made by someone else, plugging in a cable and joining a mining pool. So there’s little barrier to entry other than cost of capital, and it’s feasible that energy producers may vertically integrate Bitcoin mining operations. Indeed, when Bitcoin was at $40,000, electricity producers could have made 10 times the profits from selling the electricity to miners.
By corollary, large-scale miners will likely consider investing in their own renewables projects to better manage their key cost input, as with the Tragalana project in Australia where a miner and renewables generator partnered to develop a solar farm that was otherwise prevented from connecting to the grid.
An inherent feature of the Bitcoin algorithm is that it automatically increases mining difficulty as more Bitcoin miners come online. This creates a need for continual hardware upgrades to remain profitable. The large Bitcoin miners replace ASICs every three to four years with faster more efficient models. Because ASICs cannot be repurposed, superseded ASICs accumulate at the rate of 30,700 metric tons per year (0.06 percent of global e-waste). A shift to upgradeable components and industry consolidation will help reduce this problem.
The adoption of renewables can be furthered by Bitcoin mining
The discussion about the environmental impact of Bitcoin mining should not only focus on the negative aspects but should also acknowledge the industry's potential to help address the challenges of integrating renewable energy into the grid. By partnering with renewable energy producers, Bitcoin mining can be an essential part of the transition to a cleaner and more sustainable future.
The supply of renewable energy is less flexible since it is variable and unable to be controlled, making it challenging to balance loads on the grid. Bitcoin mining can act as a demand-side response to this problem. Bitcoin miners are also able to locate in the remote areas close to renewables projects, supporting local communities and more efficiently making use of renewable energy that would otherwise be lost due to transmission dissipation.
Bitcoin mining has emerged as a potential solution to the problem of stranded or curtailed renewable energy. Miners can turn on or off their operations based on energy supply and demand, unlike most other industries. In places like west Texas and British Columbia, where there is oversupply of renewable energy, miners can pay for otherwise wasted energy, turning it into pure profit. In places like Australia where the existing grid capacity prevents renewable energy projects from connecting, Bitcoin mining can make renewables projects viable.
Moreover, using renewable energy sources makes economic sense for miners since it is cheaper than fossil fuel equivalents, and it can help miners attract institutional investors that operate under ESG mandates, lowering their cost of capital.
Bitcoin mining is providing an additional revenue source to energy producers and grid operators that can be invested in transmission capacity, flexible loads, and energy storage projects.