In this piece, you will learn about:
- Bitcoin as a driver for energy technology innovation
- Bitcoin as a solution to Curtailed Energy, Stranded Energy, Grid Balancing and Proving-out new energy technologies
Introduction and Data Updates
As with most things related to analysing Bitcoin, much of the data that was presented in the first four parts of the series has changed. Luckily, we took a first-principles approach, where we illustrated how Bitcoin’s power-draw (measured in GW) can be calculated by anyone, by simply multiplying the network hashrate by the average network efficiency. In May 2022 when this series commenced, this equated to an instant draw of 15.3GW, or 15.3GWh used per hour. Since then, Bitcoin’s price has plummeted, inefficient miners have gone offline in droves, and the Cambridge Centre for Alternative Finance has updated their methodology related to average network efficiency, which dramatically dropped from 70W/GH to 50W/GH. As at 24 July 2022, taking into account the changes to methodology, price and hash rate, Cambridge reports a power draw of only 9.29GW, down almost 40% since May 2022. This is due to the significant improvement in average miner efficiency as a result of inefficient miners leaving the network amidst a large price drawdown. This updated power draw is equivalent to 80.85 TWh per year, roughly 0.47% of the world’s electricity use. Using the conversion factors we presented in Part 4 of this series, we can convert 80.85TWh of electricity into 149.9TWh of primary energy, or 0.086% of the world’s energy use. Finally, using the carbon intensity metrics discussed in Part 4, we find an emissions figure of 21.7MT of GHGs, roughly 0.044% of the world’s greenhouse gas emissions.
With the above in mind, the remainder of the piece will focus less on environmental impact and more on Bitcoin’s role as a driver of innovation in the energy sector. Innovation in the energy sector will ultimately drive better environmental outcomes.
Drivers of Competition and Innovation
Like with actors in other markets, a rational Bitcoin miner’s singular economic goal is to maximise their profits. As per standard economic competition theory, as long as the cost to mine a single bitcoin is lower than its price, existing Bitcoin miners will be incentivised to continue mining bitcoin, and prospective miners incentivised to start. The greater the level of profit a Bitcoin miner can receive from mining Bitcoin, the more competition will enter the market, and the greater the necessity an individual miner faces to improve operations to remain competitive. To remain competitive, many Bitcoin miners will act as buyers-of-last resort for curtailed and stranded energy, and take risks on energy sources that are still proving out.
Curtailed energy is the excess supply of energy (renewable or otherwise) that is not demanded by anyone. As the electricity grid must always be balanced and consistent, the amount of electricity generated must always equal the amount of electricity used. If energy is curtailed, this implies that the demand for energy is below the full production capacity of a particular grid or power plant.
Curtailed energy is economically inefficient because it is effectively wasted energy. For example, a popular source of renewable energy is solar energy, and the more people install solar panels in their homes, the more energy may potentially be curtailed, since any excess supply of household renewable energy will either go to waste or go to the grid. Too much excess energy has the potential to completely overwhelm the electricity grid’s capacity.
The problem of curtailed energy can be mitigated through Bitcoin mining. By Bitcoin miners providing the extra demand for this cheap energy, energy generation and consumption can be equalised. This solution has already seen success in China (prior to their ban on mining), where over 100 TWh of renewable energy was curtailed in 2016 and 2017. However, the following year, in 2018, Bitcoin miners flocked to China’s Yunnan province to soak up this curtailed energy for a fraction of the price. As a result, China saw a decrease in energy curtailment and wastage, and consequently less strain on their electricity grid.
Another relevant problem in the energy space is stranded energy. Stranded energy is isolated energy that will never be harnessed.
The problem of stranded energy can be significantly mitigated by Bitcoin mining. Bitcoin miners are partnering with Oil and Gas companies to plumb directly into their methane flares, mitigate their environmental effects, and convert the stranded energy into electricity that is purchased by the Bitcoin miners. This is economically efficient, as it results in a maximal reduction in negative environmental impact by consuming stranded energy sources that harm the environment, and allows gas providers to reduce their emissions and monetise an asset that was previously considered waste.
This solution has already been implemented in practice by various companies, the largest being ExxonMobil and ConocoPhillips.
Proving-out New Technologies
Another relevant problem in the energy space pertains to the proving-out of new energy technologies. This is a problem because new energy technologies not yet proven in terms of reliability and safety will not be given a chance to succeed, as the majority of the population will use sources of energy that have been previously established as reliable and safe.
Bitcoin miners can help solve the problem of helping to prove out new energy technologies. To maximise profits, Bitcoin miners are economically incentivised to minimise costs by using the cheapest energy available. Hence, if an energy technology that is still proving-out is sufficiently cheap, Bitcoin miners will use this energy despite any flaws it may have. This allows for external observers to evaluate the new technology without using it themselves, and draw conclusions about whether it can succeed in the long-term.
A real life example of Bitcoin miners helping to prove-out new energy technologies is Compass Mining, a company that specialises in allowing retail and institutional investors to mine Bitcoin, partnering with nuclear fission companies. This deal allows Compass Mining to access cheap nuclear energy to be used for mining purposes, and consequently for the improvement of the nuclear energy technology in question. In the broadest terms, bitcoin mining could make many future potentially unviable renewable energy projects viable.
Bitcoin Containers and Adjustable Load
Bitcoin miners can also address the issues associated with Variable Renewable Energy (VRE) sources. VRE sources produce energy intermittently instead of on demand, and their output cannot be perfectly controlled by an energy transmission operator. Examples of VRE sources include solar and wind energy. While solar energy output varies due to the amount of sunlight over the course of the day, wind energy output varies due to location, geographical factors, the time of the day and weather.
The key challenge that VRE sources pose is to be able to match electricity demand with corresponding supply at all times. By nature of their variability, transmission operators cannot ensure that electricity supply will always meet demand. This is important to overcome, as a mismatch between electricity demand and supply will either lead to an excess supply of energy being produced, or not enough supply to meet demand, which will cause people to be left without power. Thus, grid balancing, the process of ensuring that the correct amount of energy is supplied to the grid to meet supply, is essential.
Grid balancing services can be provided by Bitcoin miners. This service, more commonly known as a “controlled load resource” (CLR), involves Bitcoin miners either consuming any excess supply of electricity produced by VRE sources, or providing the grid, at a price, with excess electricity in times of peak demand and limited supply.
This solution has already been implemented in the Texas Electricity Reliability Council of Texas (ERCOT) grid, one with high amounts of variable wind power, where they permit Bitcoin miners to equalise the level of electricity demand automatically to the level of electricity supply., This solution has been lauded, particularly after a February 2022 winter storm which could have seen many Texans lose power. This situation was prevented by Bitcoin miners curtailing their own energy consumption at the Texas ERCOT grid, which reduced the demand load on the grid, and helped to provide Texans with excess power reserves during the storm.
In this five-part series on Bitcoin and The Environment, we thoroughly discussed Bitcoin’s current and future environmental impact.
To provide a base-layer of knowledge regarding Bitcoin and its relationship with the environment, we discussed and established what variables drive Bitcoin’s energy use, namely its Proof-of-Work mechanism that underpins Bitcoin’s guarantees of fixed supply, and unstoppable peer-to-peer transactions.
With this knowledge in mind, we then provided an overview of the prevailing conditions in the Bitcoin mining space. This allowed us to evaluate the state of the network and establish how much room the Bitcoin network has to grow from an environmental standpoint.
We then delved into further detail regarding Bitcoin’s current level of emissions, particularly as related to Bitcoin’s energy mix. Additionally, we discussed how Bitcoin can help reduce global emissions through consuming flared methane as an energy source to power the network.
After this, we considered Bitcoin’s relationship with electricity and energy. We assessed the energy to electricity conversion ratios of each of the energy sources in Bitcoin’s energy mix.
Finally, we described the various methods through which Bitcoin can drive innovation in energy. In particular, we elaborated upon Bitcoin’s ability to consume curtailed and stranded electricity, prove out new technologies, and balance the grid.
All in all, we described Bitcoin’s current relationship with the environment through establishing what variables drive its energy use and how much energy Bitcoin uses. We demonstrated that Bitcoin consumes a comparatively minor amount of energy in the global context, continues to use an increasing proportion of sustainable energy sources as part of its energy mix, and will continue to use less energy per unit of hash power, i.e. become more efficient, as chip and semiconductor technology continues to evolve.
Important Information: This material has been delivered to you by Monochrome Asset Management Pty Ltd (ABN 80647701246), Corporate Authorised Representative (CAR No. 128 6428) of Non Correlated Capital Pty Ltd (AFSL No. 499882, ABN 99 143 882 562), and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation. This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should read and consider any relevant offer documentation applicable to any investment product or service and consider obtaining professional investment advice tailored to your specific circumstances before making any investment decision. A copy of the relevant Information Memorandum relating to a Monochrome financial product or service may be obtained by emailing email@example.com or by visiting www.monochrome.co.
Past performance is not necessarily indicative of future results and no person guarantees the future performance of any strategy, the amount or timing of any return from it, that asset allocations will be met, that it will be able to be implemented and its investment strategy or that its investment objectives will be achieved. This material may contain ‘forward-looking statements’. Actual events or results or the actual performance of a Monochrome financial product or service may differ materially from those reflected or contemplated in such forward-looking statements.
This material may include data, research and other information from third party sources. Monochrome makes no guarantee that such information is accurate, complete or timely and does not provide any warranties regarding results obtained from its use. This information is subject to change at any time and no person has any responsibility to update any of the information provided in this material. Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of Monochrome. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon.
Any trademarks, logos, and service marks contained herein may be the registered and unregistered trademarks of their respective owners. This material and the information contained within it may not be reproduced, or disclosed, in whole or in part, without the prior written consent of Monochrome.