The Renewable Energy — Bitcoin Nexus
At 9 GW of global power demand today and growing, bitcoin mining could represent a large and foundational source of demand response for enabling greater adoption of intermittent wind and solar on the grid.
Advocates for renewable energy and grid operators have long debated the technical and economic challenges of dealing with intermittent generation. The electric grid requires that supply precisely equal demand at all times through the year, day and night, winter and summer, during windless days and solar eclipses. As more wind and solar generation enter the system, their generation volatility translates to massive fluctuations in real-time electricity prices, which are updated evert 5 minutes in some regions, as well as massive headaches for grid operators, who need to rapidly dispatch or shutoff other power plants, and grid planners, which need to make sure there are enough extra power plants waiting around to be dispatched as back-up. There have been many solutions proposed to this problem and they generally fall into five categories:
- Build large scale, long duration energy storage (expensive)
- Build a lot more high voltage transmission to connect supply with demand (very expensive and politically hard)
- Over-build renewables and curtail the ones that are not needed (extremely expensive)
- Keep a bunch of extra dispatchable power plants lying around as back-up (expensive to do with clean generators)
- Aggregate a bunch of load that is willing to be turned on and off by the grid operator (historically hard to organize because most electricity customers need to or prefer to have electricity all the time)
While some combination of all five options (depending on relative cost) will ultimately decarbonize the grid, this fifth category may have some of the most economic potential as new electricity intensive technologies (like Bitcoin) gain adoption. This category is known in the industry as “demand response” (DR) or sometimes more generally as “demand elasticity”. There are about 28 GW of demand-response today in wholesale electricity markets in the U.S. but it is predominantly manually dispatched (by a phone call) and has a slow response time (> 30 minutes). It is mostly made-up of large industrial facilities that need to balance considerations like labor, capital equipment utilization, and delivery schedules before shutting off the power. In contrast, Bitcoin mining (or more generally: proof-of-work blockchain verification) may represent the perfect form of demand response to compliment a volatile renewables-heavy grid. Bitcoin mining has several characteristics that make it an ideal elastic electric load:
- electricity represents >90% of the operating cost structure
- it is a largely autonomous operation
- the output product can be stored for free
- the capital cost is or can be very low ($100–600/kW versus $800-$1200/kW for hydrogen electrolysis or $800-$3,000/kW for batteries)
- the cost structure can be easily variablized up or down by turning it on or off
- The equipment can easily be started up or shut down on a short time scale
As bitcoin gains further institutional adoption as a global store of value, it will grow from its roughly 9 GW of global mining capacity today to well into the 10s or 100s of GWs, representing a larger and much more responsive demand response resource than exists today. Let’s discuss briefly the factors influencing this capacity:
- As the price of bitcoin rises, more miners are incentivized to turn-on, and the power capacity increases
- As mining equipment becomes more efficient (silicon chip die sizes decrease), power capacity may contract
- As the mining reward halves, mining capacity may contract
- The block fee may increase, causing capacity to increase
However, there is a bigger factor that may trump the others: given bitcoin mining’s highly competitive nature, the majority of mining tends to concentrate around the lowest cost sources of electricity. In the long-run, there may be a significant accumulation of low-utilization factor, low efficiency bitcoin mining containers sited near the greatest amount of excess renewable generation and transmission congestion to absorb the zero or negatively priced electricity. Such infrastructure would be economically rational long before energy storage price arbitrage would become economic in the same locations. Why use expensive hardware to store the electricity so it can be used later if you can use very cheap hardware to convert the electricity into something valuable and storable now? Energy storage needs large and predictable electricity price swings to justify infrastructure investment. Bitcoin just needs electricity that is a bit cheaper than the long run average cost of electricity everyone else is paying. These factors should naturally help bitcoin mining decarbonize over time as well as help enable more renewable generation to integrate into the grid for use by other segments of the economy.
Renewable Energy and Bitcoin are two types of volatility that compliment each other well.
Jake Jurewicz offers professional consulting at 1st Principles Consulting, LLC.
For more, see the related article on upstream net-metering.
For more on the energy consumption of bitcoin mining, see Choose Energy’s article on the subject.