Driving growth in renewable energy production with bitcoin mining
The sustainability of Bitcoin and the mining process to create the currency hit the headlines again earlier this year with Elon Musk’s abrupt sea change regarding its acceptance. Initially championing the cryptocurrency, he rapidly decided to stop Tesla from accepting bitcoin as payment due to concerns over the rapidly increasing use of fossil fuels for mining.
The problem is the amount of energy needed for each transaction is enormous in comparison to traditional credit cards: for example, each Mastercard transaction is estimated to use just 0.0006 kWh (kilowatt-hours), whilst every bitcoin transaction consumes 980 kWh, enough to power an average Canadian home for more than three weeks according to some commentators. The Bitcoin network currently consumes around 93 Terawatt Hours (TWh) of electricity per year.
The amount of energy needed to power the Bitcoin network is astounding. Tim Berners-Lee, credited as the inventor of the World Wide Web, has gone so far as to describe Bitcoin mining as, “one of the most fundamentally pointless ways of using energy.”
However, when comparing energy use it must be remembered that Bitcoin is a complete financial system whose energy consumption can be measured and tracked, unlike the fiat system. The current system cannot be accurately measured and requires a range of additional layers to function, including ATMs, card machines, bank branches, security vehicles, and storage facilities in addition to its data use.
Despite these issues, UN experts believe that cryptocurrencies and the technology that powers them (blockchain) can play an important role in sustainable development and improving our stewardship of the environment. “The UN should continue experimenting in the blockchain space,” Minang Acharya, one of the authors of a recent UNEP foresight brief on the applications of blockchain, says. “The more we experiment, the more we learn about the technology. This is likely to improve our UN-wide knowledge on the blockchain, our understanding of the environmental and social implications of mining operations and improve our chances of coping with any problems the technology may bring in the future”.
A path to decarbonisation
In April 2021, three important organisations (the Energy Web Foundation, Rocky Mountain Institute, and the Alliance for Innovative Regulations), formed the Crypto Climate Accord, which is supported by organisations spanning the climate, finance, NGO, and energy sectors. The Accord aims to decarbonise the industry in record time and achieve net-zero emissions in the global crypto industry by 2030.
The sustainability of cryptocurrency is an important topic and one that is easy to come away with a misconception. “Clever people look at this and ask, why are you doing all this?” Andrew Webber, founder, and CEO of Digital Power Optimisation says. “It takes a little work beyond that to understand, which is true of many things in life. I sometimes find that the initial impression is not necessarily the correct one.”
In recent months, there have been many articles come out about cryptocurrency, mainly Bitcoin’s energy usage including the about-face from Elon Musk talking and tweeting about this. But that focus on the deleterious aspects of Bitcoin mining belies the positive impact that it can have on the power sector. “What is most compelling about all this is how it can be used as a tool for the energy sector to advance the deployment and adoption of renewable energy around the globe,” Webber continues. “Not only is this crypto mining a user of renewable energy, but because it is a heavy user and a voracious user of power, it is going to drive and cause more development of green energy around the world as a demand source.”
There is a lot of flexibility in the way that this can be applied. First, it is crucial to understand why Bitcoin mining uses energy and other coins do not. Elon Musk’s recent change of allegiance from Bitcoin to Dogecoin was apparently due to his concerns over the sustainability of bitcoin mining.
Proof of work or proof of stake
Back in 2009 When Satoshi Nakamoto built the first ever cryptocurrency, bitcoin, he needed a mechanism to verify the transactions without utilising a third party. His answer was the proof of work (POW) system. POW is used to determine how the blockchain reaches consensus. In other words, how can the network be sure that the transaction is valid and that someone is not trying to circumnavigate the system? To achieve this, he made use of an advanced form of mathematics called cryptography – hence the moniker cryptocurrencies.
Cryptography uses mathematical equations that are so difficult that only powerful computers can solve them. No equation is ever the same, meaning that once it is solved, the network knows that the transaction is authentic. But this high-power computing needs a lot of equipment and a lot of electricity.
Because of this, the search was on for other consensus mechanisms that were seen as more sustainable, with one of the most popular being the proof of stake (POS) model that was devised in 2012 by two developers called Scott Nadal and Sunny King. Proof of stake makes the consensus mechanism completely virtual.
While the overall process remains the same as POW, the method of reaching the end goal is entirely different. In POW, the miners solve cryptographically hard puzzles by using their computational resources. In POS, instead of miners, there are validators. The validators lock up some of their Ether as a stake in the ecosystem. Following that, the validators bet on the blocks that they feel will be added next to the chain. When the block gets added, the validators get a block reward in proportion to their stake.
“I take objection to the idea that Doge is better,” Webber says. “There is a fundamental reason why energy usage was chosen to be utilised in this application and that is security. The use of energy is a perfect security mechanism; you cannot cheat it, you cannot lie about it, you cannot fake it, you either use this energy or you do not.
“If you are not using energy or not actively mining, you do not participate in how the network determines how things run and operate. Only those committed to expending their capital and resources to secure this can control this network. You must generate these machines, plug them in and run them to participate in the security of this network. More than half of these computers are necessary for control, which is tricky to replicate, cheat, or reproduce.
“On the flip side of that is the proof of stake where the ownership and control of that network is driven by ownership and control of the coins, not of this independent mining verification network. If you control 51 per cent of Ethereum coins on Earth, you own and control everything in that network. I still have not heard a reasonable explanation for what prevents China or Russia, or the US for that matter, printing up a bunch of currency and buying up 51 per cent of these coins, either in the open or in secret through a bunch of different proxies. Because of that, I think that proof of stake coins has less security, and will by default, end up with a small, concentrated oligopoly of managers or controllers. There will be three or four entities that control 51 per cent or greater of the Ethereum network, and they will dictate how it works.”
If that is the case it is not that different from what we have today with the current financial system. It is just another mechanism and technology, but in the end, you have a relatively centralised system based around a core group of decision-makers, whereas, with Bitcoin, it is truly decentralised.
“China cannot out-manufacture machines and power supply faster than the entire rest of the world,” Webber adds. “That is what causes this proof of work to be the superior use for the store of a valuable use case. For some uses, Ethereum and these proof of stake coins might be ideal, but for securing your wealth or for ensuring the globe’s wealth, Bitcoin is exceptional.”
Overcoming sustainability woes
One of the main reasons that proof of stake has gained traction is to overcome the sustainability concerns of Bitcoin. Some people talk about scalability, where there are only so many transactions that can be processed on the Bitcoin blockchain in a certain amount of time. Every time a transaction is sent, it takes about 10 minutes for the network to confirm it.
This is viewed as a limitation, so other coins such as Bitcoin Cash or Bitcoin SV have been created with different rules and have become their own entities. As a result, they are valued separately and appreciated differently for other characteristics of their function. Those are also POW coins, and there are other coins like Ethereum that used to be POW but are now transitioning to proof of stake to solve the energy case.
Many issues are being solved by many different strategies, one of which is the POW against POS debate. Other currencies are just changing the underlying mechanisms and thresholds within Bitcoin itself to try to create further POW coins that perform better. “It is an entirely evolving ecosystem of strategies to try to fix this,” Webber says. “That is one thing that is beneficial of a POS versus POW, is that it does use less energy, but as a result, it is less secure.
Increasing energy usage
There are only 21 million Bitcoins that will ever be mined. The last ones will be mined in the year 2140, 120 years from now. 18.7 million of those 21 have already been mined to date, so the vast majority have already been created. The remainder will be created in smaller and smaller increments, which means that you will have to expend more and more energy to earn the next incremental Bitcoin going forward.
As Bitcoin prices go up, more competition and more computers will fight over the fewer bitcoin distributed every day. The declining availability of new bitcoin will mean that producing a bitcoin in the future will require more energy than producing a bitcoin today. “That is thinking about it from a different angle because that assumes that the end goal is to produce more bitcoin,” Webber explains. “The end goal is to secure and create this blockchain network, which requires millions of computers to run.
“The reward of creating a new Bitcoin is almost an ancillary piece of all of this. It is just the incentive for the computers to do what they are doing. The computer’s goal in doing what it is doing is to build and maintain this global security network of information that works as a worldwide accounting ledger. To keep that secure, you need these computers running all day, every day, but nobody is going to do that out of the goodness of their heart. That costs a lot of power.
“They have created a mechanism to incentivise miners to do this by rewarding them with new Bitcoins mined over time. But ultimately, the end goal is not just to generate more Bitcoins but to create a network that functions to replace a lot of things in society in a more efficient way.”
Bitcoins and sustainability
Energy takes on many forms and Webber is of the view that carbon accounting in the use of money is a fundamental link to creating value. “The energy that creates bitcoin, my body, and the table I am sitting at is all energy in different forms,” he explains. “Our money today has nothing to do with energy. We just created it out of thin air as ones and zeros on a screen; there is no linkage between the value of our society and the value of our money. The means that the use of cash is divorced from carbon. There is no accounting for carbon in printing more money.
“I argue that crypto mining becomes the perfect judge of what is good energy use and what is not. If it is a good use of energy and is valued by society, they will use that instead of using it for crypto mining. Everything that follows on the other side of that line will be eliminated. Imagine all the things that are undertaken today that are wasteful in terms of energy.
“How many neckties were produced in a year? I do not know, but it requires a lot of energy, and nobody complains about that. We have become intensely focused on Bitcoin and its energy usage because it is wasteful if you do not understand what it is doing. If you appreciate that this provides something that has never existed before, I will argue that it is exceptionally valuable. Any usage that is ultimately determined by society to be wasteful can be more easily eliminated by providing a better use for it.”
Webber agrees that if the objective is to keep someone’s lights on by ensuring a stable and reliable electricity supply then you need storage. However, he believes that if you want to maximise the economic capture of an energy project, crypto mining might be a better alternative than that battery. “You could just run the crypto mining computers instead of storing it now and selling it later. Get rid of all of that, use it now for yourself, and you can capture and store all the value of your renewable energy in this digital form and then transport it across the globe at the speed of light. No counterparty, no other off taker, you use this as a tool for yourself to maximise the value of your energy. Why are you selling it to that guy so that he can make cheap plastic toys with it? Why are you selling it to that guy so that he can make neckties with it? You should keep it and use it for yourself. If someone else comes up with more practical usage and offers more value for the energy because they have a worthwhile use, then the energy will go there.”
This ability to generate cash without any third party off-take agreement could enable more renewable energy projects to get past the planning stage. The viability of an energy project on the edge of being profitable or developable but not financeable can change dramatically if you add the revenue stream of crypto mining into the scenario.
As the price of bitcoin continues to rise, as it will with the decreasing amount available to mine, it will create a massive demand for new energy worldwide. “I do not believe that the United States, Europe, Africa or even China will be approving new coal plants,” Webber says. “There will be a lot of exciting power generated to help mine crypto, and crypto will be a driver of new technological innovation, forcing cheaper, more renewable, greener energy.”
Displacing fossil fuels
Under this scenario, it is easy to see how renewable energy can grow, but the actual test is how much fossil fuel generation it displaces. Webber concedes thatin the immediate term it is unlikely to displace fossil fuel generation. “If there is incremental demand for incremental power, you are not getting rid of the old power; it is still being used for whatever it was before,” he says. “However, when you look at Europe, which is ahead of the United States in terms of renewable energy deployments, it causes what has become known as the duck curve. This is a curve in the shape of a duck’s back where, during the daylight hours, there is so much solar in California and parts of Europe that the grid prices go to zero. There is so much energy that there is nothing to do with it.
“As the government incentivises more of this renewable generation, as crypto mining is incorporated into new renewable assets being developed, it will assist with displacing those higher costs. More green energy will cause prices to go down, which pushes out more expensive fossil fuels, especially if you keep taxing them. I believe what will happen is increased carbon taxes, which will make fossil fuels more expensive. There will be more government-funded and crypto driven deployments of renewable energy, even if those deployments are not utilising 100 per cent of that asset.
“A new crypto mining renewable asset might be a 100 MW asset with a 20 MW crypto mine attached, just enough so that when you account for capacity, downtime, capacity factor reductions, and cloudy days, that 20 MW will always run the crypto mine. But if you have got a very sunny day, the excess is supplied into the grid. The crypto mining function can support building out assets that create additional power beyond what is being used by the crypto mine. That excess generation will, by default, go onto the grid, making it less economical for carbon driven fuels which will cause them to shut down over time. I think this will accelerate the demise of carbon energy.”
In this scenario envisaged by Webber, crypto mining will become a de facto strategy that every new power project on Earth must consider. Not every project needs a battery, and not every project needs crypto mining, but it is an effective tool for many projects going forward, and it will be a consideration for virtually everyone.
Crypto mining is also an excellent tool for grid balance with its non-time-sensitive compute requirements. It can provide net benefits to the grid, power producers, and regulators by smoothing out production. “It is a perfect balancing mechanism, and this is an ideal tool for the energy space that puts the value and importance of their product at the centre of our financial system,” Webber says. “The best thing that could happen to renewable energy would be the entire globe adopting Bitcoin as the national currency; green energy would be springing up everywhere on Earth the very next day.”
Developing a business model
Webber’s company, Digital Power Optimisation (DPO), is at the heart of the driver to improve the viability of renewable generation assets and therefore increase the pace of deployment. He has developed a model that he believes will become the de-facto crypto miner for the power utility. In this scenario, the operators keep the profit minus DPO’s management fee.
“That alignment of interest is critical for us; we prove to them and show them we want them to make more money,” he concludes. “Unlike virtually everyone who comes to a power producer who wants to buy their product for cheaper, we say we want to make you more money. The more you make, the more we make. We are genuinely aligned and power producers like that. They recognise that we are giving them good advice and are genuinely aligning our interests with theirs.”
The crypto mining debate will continue to rage on, but the technology is not going away. The exact future for the currency itself I will leave to those bettered versed in the intricacies of the financial system. However, as a power and data-hungry technology, there are a myriad of opportunities and synergies between crypto miners, data centres and green power producers that the industry needs to investigate and develop to pave the way to a more sustainable future for digital infrastructure.