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Hope or Hype: Review on Bitcoin Mining and Renewable Energy
31 May 14:37
Image Source: unsplash.com
In 2008, Satoshi Nakamoto (web name) came up with a genius idea - the first crypto coin in human history, Bitcoin. In order to increase the cost to attackers and improve the security of the Bitcoin system, Satoshi proposed the Proof of Work (PoW) consensus mechanism. However, as the Bitcoin industry grew, the PoW mechanism created a huge energy consumption problem that raised concerns throughout the world.
On May 13, Musk tweeted that he would stop accepting Bitcoin as payment, citing the severe energy burden and fossil fuel consumption caused by Bitcoin mining. This tweet triggered a sharp drop in Bitcoin and ignited controversy over Bitcoin's energy consumption.
On one side of the controversy are opponents of cryptocurrencies from traditional industries such as the Financial Times. On May 20, the Financial Times published a feature article criticizing the growing energy consumption of Bitcoin, calling it "dirty currency". The article cites a study by Cambridge University, which estimates that Bitcoin mining consumes 133.68 TWh of electricity per year, ranking 27th in terms of electricity consumption in countries, even surpassing the electricity consumption of Sweden.
On the other side of the controversy are crypto coin backers such as Musk, Ark Investment, and Dorsey's payments company Square. On May 20, Musk said audits could solve Bitcoin’s energy concerns. On May 25, Musk tweeted that he had met with several North American mining companies to call on global miners to use clean energy for mining and help make Bitcoin sustainable. The meeting was hosted by Microstrategy CEO Michael Saylor, during which the mining companies said they would form a Bitcoin Mining Council to promote disclosure of the industry's energy consumption, in order to achieve the Environmental, Social, and Corporate Governance (ESG) goals.
With all the controversy, the real environmental impact of Bitcoin has become confusing. So, is the Bitcoin industry "dirty" or "clean"?
"Dirty" or "Clean"
Bitcoin mining is done by the mining machine, and the act itself does not produce pollution or carbon emissions. Currently, less powerful mining machines on the market consume about the same amount of energy as an air conditioner at home (the Ant s9 mining machine consumes 1400w). Therefore, whether Bitcoin mining is "dirty" or "clean" depends on how the electricity is generated. When we talk about mining, they think of chimneys, flames, and dust, but Bitcoin mining may be cleaner than we think.
In 2019, digital asset manager CoinShares released a study on Bitcoin mining (The Bitcoin Mining Network), reporting that 73% of the electricity consumed by the Bitcoin mining industry is supplied by clean energy sources such as wind, solar, and hydro. Especially in China's Sichuan Province, due to the abundant hydropower, renewables penetration has reached 90%. In Sichuan alone, the renewable energy provided meets 48% of the needs of the global Bitcoin mining industry. In contrast, the proportion of fossil fuels and nuclear energy in mining is only 27%. The carbon emissions of renewable energy are much lower than those of traditional thermal power. The carbon footprint of wind power is about 7-38 gCO2eq/kWh, hydropower about 2-13 gCO2eq/kWh, and for coal, this figure is as high as 846. gCO2eq/kWh.
The reason why Bitcoin mining gets so "green" is due to the economic considerations of miners. With the development of new energy technologies, the construction cost of renewable energy such as solar and wind energy has become lower. According to the data released by EIA, the Levelized Cost of Energy (LCOE) of traditional thermal power is about US$73/MWh, the cost of hydropower is US$55.26/MWh, and the cost of onshore wind power is US$37/MWh. The cost of solar power is US$48/MWh. In areas rich in light energy such as California, Portugal, and the Middle East, there are even quotations for solar power of US$22/MWh or even lower. Electricity is one of the most important costs of Bitcoin mining. Driven by that, miners will naturally gather in areas where electricity prices are relatively cheap, especially hills or mountains where water is abundant, sparsely populated, and electricity demand is low.
In China, due to the low project cost, hydropower is generally regarded as the power with the lowest cost, and its price is generally 0.1 to 0.2 yuan lower than that of thermal power. In August 2019, the official website of the Sichuan Provincial Government announced the "Sichuan Province Hydropower Consumption Industry Demonstration Zone Construction Implementation Plan", which will carry out hydropower consumption industry demonstrations in Ganzi Prefecture, Panzhihua City, Ya'an City, Leshan City, Liangshan Prefecture, and Aba Prefecture Area. As of May last year, Ganzi, Ya'an, Liangshan, and other cities and prefectures have issued policies to attract Bitcoin miners. It is reported that the electricity price of the waste hydropower market during the high water period is only 0.075 yuan/kWh. Even if the transmission and distribution costs and other related expenses are added, the household electricity price is only between 0.135-0.162 yuan/kWh.
The Bitcoin mining industry has developed a preference for renewable energy sources because they are objectively cheaper, and thus gets "cleaner".
Eating all the "duck bellies" of the renewable energy industry
In our previous article discussing the use of nuclear energy to support bitcoin mining, I mentioned a paper co-authored by Square and Ark Investments (Bitcoin is Key to an Abundant, Clean Energy Future), which called Bitcoin mining "an energy buyer of last resort". This is because of the special properties of Bitcoin mining. Once the plant is constructed, the biggest cost of mining is electricity. The cheaper electricity you can use, the more arithmetic power you can get, thus harvesting more bitcoins. As long as the price of Bitcoin remains high and mining is profitable, miners will be the "buyer of last resort" for cheap renewable electricity.
For renewable energy, a major challenge lies in balancing power and loads. Unlike thermal power and nuclear power, which can continuously output stable power, the output power of renewable energy sources such as wind, hydropower, and solar power are often affected by natural conditions. From a time point of view, this imbalance between supply and demand exists both within a day and between quarters.
1. Imbalance within a day
The supply of wind and solar energy is uneven throughout the day. Solar power is abundant during the day but disappears at night. Wind power fluctuates mainly with weather conditions but is higher at night in most regions. And on the demand side, electricity demand in most countries will peak in the afternoon or evening each day and trough around midnight. The graph below shows the electricity consumption curve for one autumn day in California, USA, in 2016. The blue line is the grid's electricity demand, which peaks at 19:00, and the gray line is solar power generation, which goes zero at 19:00. Subtracting the two gives us the orange line, which refers to the total load of other energy sources on the grid (such as coal-fired) after deducting solar generation. The shape of the curve resembles a duck, hence the name "duck curve". As the proportion of renewable energy (such as solar) in the world becomes higher, the "duck belly" will become bigger and bigger, creating serious scheduling problems.
Take California as an example. With the rapid development of the local photovoltaic industry, photovoltaic power generation has also achieved explosive growth. Since base loads such as gas and coal-fired power plants are designed to operate around the clock, frequent shutdown scheduling will reduce operating efficiency. This leads to the need to abandon the load or restrict the integration of solar energy into the grid when the supply of renewable energy is surplus, thereby generating “waste electricity”.
While the development of renewable energy storage technologies is the ideal solution to the problem of excess power, or "duck belly", caused by the mismatch between renewable energy supply and electricity demand, Bitcoin mining can also help alleviate this problem on an economic level until storage technologies such as recyclable batteries are fully developed. During periods of excess power, renewable energy companies can use excess power to mine Bitcoin, which can bring additional revenue to the power companies and thus improve the economic competitiveness of the renewable energy industry. With the revenue from Bitcoin mining "backing" the power companies, renewable energy projects could receive more investment and could be built earlier and on a larger scale, accelerating the pace of development.
2. Imbalance between quarters
The seasonal imbalance of renewable energy is determined by the distribution of renewable resources in each region and the characteristics of electricity demand. For the UK, wind resources are the most abundant renewable energy source, but this resource is far more abundant than demand in winter. As far as China is concerned, since most of the domestic hydropower stations are run-of-the-river ones, the power generation is directly related to the river flow, which has significant seasonal changes. In the southwestern region, the average annual runoff difference between the four months with the most abundant water and the three driest months is more than 50%. Especially in the summer, due to the limited transmission capacity of the transmission line, the surplus electric energy cannot be transported out, resulting in the abandonment of electricity.
Bitcoin miners, on the other hand, are able to periodically travel to areas with a surplus of energy, like migratory birds. In May of each year, Sichuan will enter a period of excess water energy, when a large number of Bitcoin miners will "migrate" to Sichuan and Yunnan to sign power supply agreements with local hydropower plants and use cheap electricity to mine. In this model, there is a win-win situation for all parties: the mining farms get the mining revenue, the power companies consume the waste power and earn extra income, and the local government gets more income and jobs.
Bitcoin mining tied to the grid could also play a somewhat more profound regulatory role. For one thing, the power taken up by mining could be used as a "power reserve" in times of crisis, an effect that was already seen in the Texas power crisis in early 2021 (although the actual effect is currently limited).
In the aforementioned paper, the researchers use real data to study the impact of Bitcoin mining on the new energy industry (the paper uses a solar grid that takes into account battery storage). The model assumes that photovoltaic (PV) generators also participate in mining and sell their own "excess" electricity production. Then, as the overall PV industry and mining industry grow, the share of PV in the grid can gradually increase. Studies have shown that ideally, the consolidation of the mining industry could increase the share of clean energy in the grid from 40% to 99%.
After the "regulatory boots" landed
While Bitcoin mining may contribute to the development of the clean energy industry, mining still consumes a significant amount of electricity. In addition to the mining committee promoting the use of clean energy in the Bitcoin mining industry, governments also get involved. In 2021 during China's two sessions, the concepts of carbon peaking and carbon neutrality were written into the government work report for the first time, with the Chinese government stating that it will develop action plans to strive to achieve carbon peaking by 2030 and carbon neutrality by 2060. Under the carbon neutrality strategy, Bitcoin mining, as a major energy consumer, naturally cannot escape regulation.
On April 7, Tsinghua University and the Chinese Academy of Sciences published a joint article in Nature Communications, pointing out the impact of Chinese Bitcoin mining on climate. On May 25th, the Inner Mongolia Development and Reform Commission issued a document requesting further cleanup of crypto currency "mining" behavior, strengthening the disciplinary efforts, and building a long-term regulatory mechanism.
In terms of energy structure, Inner Mongolia is rich in coal resources, with existing coal production capacity reaching 1/4 of the country's. Inner Mongolia's mining industry has a renewable energy penetration rate of only 16% (2017). Before this regulatory action, Inner Mongolia has carried out several rectifications of mining enterprises in its territory. Between 2019 and 2020, many mining companies have already moved to Sichuan, Yunnan, and other places. Currently, Sichuan has entered a period with abundant water, but by October when Sichuan enters the dry period, companies can no longer move back to Inner Mongolia. At that point, the impact of regulation on Chinese Bitcoin mining may really manifest itself.
For the Bitcoin mining industry, regulation can certainly promote the use of renewable energy in the industry. It is expected that wind power, photovoltaic, and hydropower mining projects will take up an increasingly high proportion of the total, and the momentum of disorderly development of the Bitcoin mining industry in China will be brought under control.
Summary: The "Renewable" Vision of Bitcoin Mining
The combination of renewable energy and Bitcoin mining has a bright future. It seems that the global mining industry consumes a lot of energy, but not as much as the total installed capacity of a single Baihetan hydroelectric power plant (in Sichuan China). With the "invisible hand" of the market, the miners' pursuit of low-cost power has been combined with the renewable energy industry's efforts to keep costs low. But in a system that combines renewable energy and Bitcoin mining, sensible regulation is also essential. Although Bitcoin currently consumes a large amount of electricity, admitting Bitcoin into the global energy system and helping to leverage the market's resource allocation is an effective means of promoting the renewable energy industry.
Reference:
CoinShares, The Bitcoin Mining Network: Trends, Average Creation Costs, Electricity Consumption
EIA, Levelized Costs of New Generation Resources in the Annual Energy Outlook 2021
BCEI, Bitcoin is Key to an Abundant, Clean Energy Future
Author: Gate.io Researcher: Edward. H
* This article represents only the views of the researcher and does not constitute any investment suggestions.
*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all other cases, legal action will be taken due to copyright infringement.
On May 13, Musk tweeted that he would stop accepting Bitcoin as payment, citing the severe energy burden and fossil fuel consumption caused by Bitcoin mining. This tweet triggered a sharp drop in Bitcoin and ignited controversy over Bitcoin's energy consumption.
On one side of the controversy are opponents of cryptocurrencies from traditional industries such as the Financial Times. On May 20, the Financial Times published a feature article criticizing the growing energy consumption of Bitcoin, calling it "dirty currency". The article cites a study by Cambridge University, which estimates that Bitcoin mining consumes 133.68 TWh of electricity per year, ranking 27th in terms of electricity consumption in countries, even surpassing the electricity consumption of Sweden.
On the other side of the controversy are crypto coin backers such as Musk, Ark Investment, and Dorsey's payments company Square. On May 20, Musk said audits could solve Bitcoin’s energy concerns. On May 25, Musk tweeted that he had met with several North American mining companies to call on global miners to use clean energy for mining and help make Bitcoin sustainable. The meeting was hosted by Microstrategy CEO Michael Saylor, during which the mining companies said they would form a Bitcoin Mining Council to promote disclosure of the industry's energy consumption, in order to achieve the Environmental, Social, and Corporate Governance (ESG) goals.
With all the controversy, the real environmental impact of Bitcoin has become confusing. So, is the Bitcoin industry "dirty" or "clean"?
"Dirty" or "Clean"
Bitcoin mining is done by the mining machine, and the act itself does not produce pollution or carbon emissions. Currently, less powerful mining machines on the market consume about the same amount of energy as an air conditioner at home (the Ant s9 mining machine consumes 1400w). Therefore, whether Bitcoin mining is "dirty" or "clean" depends on how the electricity is generated. When we talk about mining, they think of chimneys, flames, and dust, but Bitcoin mining may be cleaner than we think.
The reason why Bitcoin mining gets so "green" is due to the economic considerations of miners. With the development of new energy technologies, the construction cost of renewable energy such as solar and wind energy has become lower. According to the data released by EIA, the Levelized Cost of Energy (LCOE) of traditional thermal power is about US$73/MWh, the cost of hydropower is US$55.26/MWh, and the cost of onshore wind power is US$37/MWh. The cost of solar power is US$48/MWh. In areas rich in light energy such as California, Portugal, and the Middle East, there are even quotations for solar power of US$22/MWh or even lower. Electricity is one of the most important costs of Bitcoin mining. Driven by that, miners will naturally gather in areas where electricity prices are relatively cheap, especially hills or mountains where water is abundant, sparsely populated, and electricity demand is low.
In China, due to the low project cost, hydropower is generally regarded as the power with the lowest cost, and its price is generally 0.1 to 0.2 yuan lower than that of thermal power. In August 2019, the official website of the Sichuan Provincial Government announced the "Sichuan Province Hydropower Consumption Industry Demonstration Zone Construction Implementation Plan", which will carry out hydropower consumption industry demonstrations in Ganzi Prefecture, Panzhihua City, Ya'an City, Leshan City, Liangshan Prefecture, and Aba Prefecture Area. As of May last year, Ganzi, Ya'an, Liangshan, and other cities and prefectures have issued policies to attract Bitcoin miners. It is reported that the electricity price of the waste hydropower market during the high water period is only 0.075 yuan/kWh. Even if the transmission and distribution costs and other related expenses are added, the household electricity price is only between 0.135-0.162 yuan/kWh.
The Bitcoin mining industry has developed a preference for renewable energy sources because they are objectively cheaper, and thus gets "cleaner".
Eating all the "duck bellies" of the renewable energy industry
In our previous article discussing the use of nuclear energy to support bitcoin mining, I mentioned a paper co-authored by Square and Ark Investments (Bitcoin is Key to an Abundant, Clean Energy Future), which called Bitcoin mining "an energy buyer of last resort". This is because of the special properties of Bitcoin mining. Once the plant is constructed, the biggest cost of mining is electricity. The cheaper electricity you can use, the more arithmetic power you can get, thus harvesting more bitcoins. As long as the price of Bitcoin remains high and mining is profitable, miners will be the "buyer of last resort" for cheap renewable electricity.
For renewable energy, a major challenge lies in balancing power and loads. Unlike thermal power and nuclear power, which can continuously output stable power, the output power of renewable energy sources such as wind, hydropower, and solar power are often affected by natural conditions. From a time point of view, this imbalance between supply and demand exists both within a day and between quarters.
1. Imbalance within a day
The supply of wind and solar energy is uneven throughout the day. Solar power is abundant during the day but disappears at night. Wind power fluctuates mainly with weather conditions but is higher at night in most regions. And on the demand side, electricity demand in most countries will peak in the afternoon or evening each day and trough around midnight. The graph below shows the electricity consumption curve for one autumn day in California, USA, in 2016. The blue line is the grid's electricity demand, which peaks at 19:00, and the gray line is solar power generation, which goes zero at 19:00. Subtracting the two gives us the orange line, which refers to the total load of other energy sources on the grid (such as coal-fired) after deducting solar generation. The shape of the curve resembles a duck, hence the name "duck curve". As the proportion of renewable energy (such as solar) in the world becomes higher, the "duck belly" will become bigger and bigger, creating serious scheduling problems.
Take California as an example. With the rapid development of the local photovoltaic industry, photovoltaic power generation has also achieved explosive growth. Since base loads such as gas and coal-fired power plants are designed to operate around the clock, frequent shutdown scheduling will reduce operating efficiency. This leads to the need to abandon the load or restrict the integration of solar energy into the grid when the supply of renewable energy is surplus, thereby generating “waste electricity”.
While the development of renewable energy storage technologies is the ideal solution to the problem of excess power, or "duck belly", caused by the mismatch between renewable energy supply and electricity demand, Bitcoin mining can also help alleviate this problem on an economic level until storage technologies such as recyclable batteries are fully developed. During periods of excess power, renewable energy companies can use excess power to mine Bitcoin, which can bring additional revenue to the power companies and thus improve the economic competitiveness of the renewable energy industry. With the revenue from Bitcoin mining "backing" the power companies, renewable energy projects could receive more investment and could be built earlier and on a larger scale, accelerating the pace of development.
2. Imbalance between quarters
The seasonal imbalance of renewable energy is determined by the distribution of renewable resources in each region and the characteristics of electricity demand. For the UK, wind resources are the most abundant renewable energy source, but this resource is far more abundant than demand in winter. As far as China is concerned, since most of the domestic hydropower stations are run-of-the-river ones, the power generation is directly related to the river flow, which has significant seasonal changes. In the southwestern region, the average annual runoff difference between the four months with the most abundant water and the three driest months is more than 50%. Especially in the summer, due to the limited transmission capacity of the transmission line, the surplus electric energy cannot be transported out, resulting in the abandonment of electricity.
Bitcoin miners, on the other hand, are able to periodically travel to areas with a surplus of energy, like migratory birds. In May of each year, Sichuan will enter a period of excess water energy, when a large number of Bitcoin miners will "migrate" to Sichuan and Yunnan to sign power supply agreements with local hydropower plants and use cheap electricity to mine. In this model, there is a win-win situation for all parties: the mining farms get the mining revenue, the power companies consume the waste power and earn extra income, and the local government gets more income and jobs.
Bitcoin mining tied to the grid could also play a somewhat more profound regulatory role. For one thing, the power taken up by mining could be used as a "power reserve" in times of crisis, an effect that was already seen in the Texas power crisis in early 2021 (although the actual effect is currently limited).
In the aforementioned paper, the researchers use real data to study the impact of Bitcoin mining on the new energy industry (the paper uses a solar grid that takes into account battery storage). The model assumes that photovoltaic (PV) generators also participate in mining and sell their own "excess" electricity production. Then, as the overall PV industry and mining industry grow, the share of PV in the grid can gradually increase. Studies have shown that ideally, the consolidation of the mining industry could increase the share of clean energy in the grid from 40% to 99%.
After the "regulatory boots" landed
While Bitcoin mining may contribute to the development of the clean energy industry, mining still consumes a significant amount of electricity. In addition to the mining committee promoting the use of clean energy in the Bitcoin mining industry, governments also get involved. In 2021 during China's two sessions, the concepts of carbon peaking and carbon neutrality were written into the government work report for the first time, with the Chinese government stating that it will develop action plans to strive to achieve carbon peaking by 2030 and carbon neutrality by 2060. Under the carbon neutrality strategy, Bitcoin mining, as a major energy consumer, naturally cannot escape regulation.
On April 7, Tsinghua University and the Chinese Academy of Sciences published a joint article in Nature Communications, pointing out the impact of Chinese Bitcoin mining on climate. On May 25th, the Inner Mongolia Development and Reform Commission issued a document requesting further cleanup of crypto currency "mining" behavior, strengthening the disciplinary efforts, and building a long-term regulatory mechanism.
In terms of energy structure, Inner Mongolia is rich in coal resources, with existing coal production capacity reaching 1/4 of the country's. Inner Mongolia's mining industry has a renewable energy penetration rate of only 16% (2017). Before this regulatory action, Inner Mongolia has carried out several rectifications of mining enterprises in its territory. Between 2019 and 2020, many mining companies have already moved to Sichuan, Yunnan, and other places. Currently, Sichuan has entered a period with abundant water, but by October when Sichuan enters the dry period, companies can no longer move back to Inner Mongolia. At that point, the impact of regulation on Chinese Bitcoin mining may really manifest itself.
For the Bitcoin mining industry, regulation can certainly promote the use of renewable energy in the industry. It is expected that wind power, photovoltaic, and hydropower mining projects will take up an increasingly high proportion of the total, and the momentum of disorderly development of the Bitcoin mining industry in China will be brought under control.
Summary: The "Renewable" Vision of Bitcoin Mining
The combination of renewable energy and Bitcoin mining has a bright future. It seems that the global mining industry consumes a lot of energy, but not as much as the total installed capacity of a single Baihetan hydroelectric power plant (in Sichuan China). With the "invisible hand" of the market, the miners' pursuit of low-cost power has been combined with the renewable energy industry's efforts to keep costs low. But in a system that combines renewable energy and Bitcoin mining, sensible regulation is also essential. Although Bitcoin currently consumes a large amount of electricity, admitting Bitcoin into the global energy system and helping to leverage the market's resource allocation is an effective means of promoting the renewable energy industry.
Reference:
CoinShares, The Bitcoin Mining Network: Trends, Average Creation Costs, Electricity Consumption
EIA, Levelized Costs of New Generation Resources in the Annual Energy Outlook 2021
BCEI, Bitcoin is Key to an Abundant, Clean Energy Future
Author: Gate.io Researcher: Edward. H
* This article represents only the views of the researcher and does not constitute any investment suggestions.
*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all other cases, legal action will be taken due to copyright infringement.
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