Bitcoin is not a good fit for renewable energy. Here’s why.

Recent research suggests that Bitcoin network is using an appreciable fraction – 0.1% – of the world’s total electricity use and is projected to use up to 0.5%, or about what all the solar panels in the world produce, by the year’s end. These troubling developments have been met by claims that Bitcoin is actually a good thing, since increased demand promotes investments in new renewable energy technologies and in any case Bitcoin miners would “soon” convert to low-carbon, renewable energy anyway.

These claims belie a lack of understanding of how energy systems actually work, and why the fundamental economics of Bitcoin mining make it, in fact, one of the least renewables-compatible industrial processes on the planet today. In reality, in most jurisdictions Bitcoin mining most likely promotes increased and continuing use of coal. In the following, I try to explain as briefly as possible why this is so.

Let’s start by examining the economics of Bitcoin mining. As is well understood by everyone with more than a passing interest in Bitcoin, mining these days is the domain of specialized ASIC mining rigs. These mining rigs are relatively expensive investments that have no other profitable use, except as very expensive electric heating elements. As a result, a miner will try his utmost to make the most of the investment in the time available, meaning that the goal is to keep mining rigs in operation 24 hours per day, seven days a week, until they become obsolete.

All this consumes considerable quantities of electricity, so the miner has significant incentives to locate where this 24/7 electricity supply is available as cheaply as possible. We see the results in the concentration of miners in China, where coal power stations and lax environmental rules provide plentiful cheap electricity.

Now, in theory the miners could provide their power, or at least some of it, from renewable energy sources like wind power or solar photovoltaics (PVs). Proponents of this theory note the fall in the price of renewables and the fact that in many situations, the cost of electrical energy produced by these generators – usually expressed as Levelized Cost Of Electricity or LCOE – is already lower than the LCOE of fossil fuel fired plants.

However, the problem with this theory is that these promising renewable energy sources produce only intermittent, or variable, power. For reasons that ought to be obvious, both types of renewable energy are available only when weather conditions are favorable. Typically, the availability of variable sources is expressed as “capacity factor”, meaning what is the actual energy output relative to “nameplate” capacity. For wind power, typical capacity factors range from 25-30% for land-based wind to little more than 45% for the largest offshore wind farms in particularly suitable locations; for solar PV, capacity factors tend to fall between 8 to 15 percent.

What this means in practice is that variable renewable sources are and will always remain a poor fit for industrial processes where maximizing returns to the investment requires steady 24/7 operation. This problem has been understood and acknowledged by most existing industries, and even smelters are these days redesigning their technologies to better cope with variable production of electricity. For example, Swedish steelmaker SSAB is experimenting with hydrogen reduction techniques, where a major component of the steel plant would be a hydrogen storage tank that is filled when excess power is available and withdrawn for the process when it is not. (Additional benefit: no need for coal in the process, saving CO2 emissions in that way as well.) Bitcoin mining, however, cannot adapt easily, because there is no method for “saving” any energy-intensive component of the produce for less energy intensive processing in periods of low production.

It needs to be stressed at this point that the LCOE figures, which are the most commonly cited figures for the cost of renewable electricity, by definition do not account for this problem. LCOE simply means what it costs to produce an unit of electricity by a given source: whether or not that unit of electricity is produced when it is actually needed is a question LCOE figures cannot answer.

Of course, these problems can be mitigated to some extent by various solutions and combinations of solutions. One solution would be to construct large interconnector networks so that renewable generators somewhere would always produce at least some power. This helps to some extent, but it is not a panacea, and increases costs significantly: in effect, the total cost is the cost of all the generators required plus the cost of interconnectors. In energy researchers’ jargon, this is known as “overbuild” and various studies suggest a 24/7 energy system would require overbuild of something between 2 to 5 times of nominal capacity – in other words, at 2 to 5 times the nominal LCOE cost of electricity from a single renewable energy generator. Furthermore, there are significant political problems involved: local opposition to transmission lines is already a bottleneck to renewable energy increases in Germany, and constructing a grid that would markedly help Europe with solar PV’s inherent tendency to produce only during daytime would require installing the demand’s worth of solar panels along every longitude between Moscow and the Canary Islands.

For these reasons, energy researchers don’t see grid expansion as more than a partial solution to the problem. Energy storage methods, ranging from pumped hydro stations to synthetic gas to vast battery banks, are another partial solution. Again, these solutions entail additional costs that are not captured in the LCOE figures, and again, for various technical and economic reasons, these are nevertheless unlikely to amount for anything else than a partial solution at best as well. A basic problem here is that fossil fuel sources, which are the baseline against which all other solutions have to compete, are at the same time a source and a very convenient store of energy: a lump of coal stores energy very effectively until such a time as it is needed.

This leaves the third option: demand flexibility. If energy demand were to flex according to production, the problems with low-carbon production not quite matching the demand would diminish significantly. Therefore, literally every energy scenario produced during the last two decades concludes that switching the world’s energy supply from easily controllable (or “dispatchable”) fossil fuel supplies to energy sources whose drawbacks don’t include a probable collapse of human civilization requires a combination of vast interconnector networks, energy storage, and demand flexibility – and that the latter is extremely important. Google any energy report you want, and you will see that it stresses the essential importance of increasing demand flexibility. This means, simply, that we should shun processes that cannot be or are not easily throttled in response to variable supply.

Which brings us back to Bitcoin. Unless a way is devised to cheaply “store” hash rates achieved during periods of peak electricity production, Bitcoin mining will continue to require steady, inflexible 24/7 supplies of power. Theoretically, Bitcoin miners could certainly invest in battery banks or other energy storage methods to produce such energy services: in practice, this would very greatly increase the cost of electricity used.

For the foreseeable future, the cheapest source of steady 24/7 electricity supply will be coal or gas, except in few locations that are blessed with extremely abundant hydropower reserves. Bitcoin mining creates a stable, predictable demand coal power stations in particular love: throttling coal power up or down is generally difficult, and in fact one of the main reasons why renewables sometimes can shut down coal power plants is because coal plants have problems coping with flexibility demands. The more there is Bitcoin mining, the less need there is for coal plants to close, the more revenues they can collect, and the more political clout they have. In fact, there have already been news of shuttered coal plants being opened to power Bitcoin mining.

So for the foreseeable future at least, Bitcoin mining will promote and extend coal use in most places, most certainly in China. More inflexible demand is not great for renewables, and in general, inflexible uses should be shunned, not promoted these days.

Bitcoin enthusiasts might have a better case if they claimed that Bitcoin mining promotes the use of nuclear power, whose characteristics match more closely those of coal plants. However, I at least haven’t seen such a case made yet, and somehow I doubt the people who claim to be decentralizing everything are that enthusiastic about large, centralized power plants.

PS. Before anyone asks: yes, hydro and geothermal power plants could produce steady 24/7 power. However, 1) building more hydro plants in particular is very problematic, 2) geothermal electricity is competitive only in places where there is significant volcanic activity, 3) there are many other industrial processes where flexibility is difficult to increase, and dispatchable low-carbon power sources like hydro would be more gainfully employed either there or in smoothing out variable production.

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About J. M. Korhonen

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6 Responses to Bitcoin is not a good fit for renewable energy. Here’s why.

  1. davidgerard says:

    Thankfully – the shuttered coal plant reopening is very unlikely to happen – the plant was an economic failure at the time, it produced even more CO2 than most coal plants, a reopening is extremely unlikely to pass environmental requirements … and the whole thing appeared very like an attempted penny-stock pump. Writeup here: https://davidgerard.co.uk/blockchain/2018/04/12/australian-coal-fired-power-plant-to-mine-bitcoin-just-a-penny-stock-pump-with-corrupt-backers/

  2. As already mentioned on reddit: Bitcoin mining can help the environment as well. Take Greenland, for instance.

    It is ca. 70% powered by Hydroelectric. The 30% of Greenland that still uses fossil fuel is often too sparsely populated to justify the investment in a hydroelectric plant. With the addition of bitcoin mining this problem would be solved.

    As a bonus, Bitcoin mining could become to Greenland what oil is to Dubai. So if not for us libertarian nerds, at least support bitcoin for the greater good of greenland and the likes;)

    • As I noted above, if you can build hydroelectric power at competitive prices, then maybe. The problem is that with the exception of very few places in the world, building more hydro is very difficult.

      However, there are other drawbacks (as also noted in Reddit discussion). Low carbon power sources, particularly those that supply steady baseload power like nuclear or hydro, are capital intensive, long term investments that do not bring quick profits. Can Bitcoiners make, or convince others to make what is at a minimum a 20-year (and more likely 40+-year) investment? After following the energy discussion for 11 years, I have my doubts.

      So the characteristics of an energy source most attractive for Bitcoin mining are
      – cheap 24/7 electricity
      – low technical and political risks, at least in the short term
      – low investment costs (i.e. cost structure where O&M costs can be higher)

      The one energy source that ticks all the boxes is coal.

      If you can convince the Greenlanders to start digging, I’ll be happy to make an assessment as to what percentage of Bitcoin mining promotes low-carbon power and what percentage promotes coal power. Until then, it sounds very much like pie-in-the-sky greenwashing.

  3. I have no love for Proof of Work mining, but it doesn’t seem like BTC miners require 100% uptime.
    Unlike a steel or manufacturing plant, there’s no cost to shut down a miner when the sun is not shining or the wind is not blowing. The only real cost is equipment degradation and having your miners become obsolete, and I don’t think miners degrade much when powered off.

    Right now, prices are high, so people will want to mine 100% of the time at any reasonable electricity price, but as prices go down, and equipment innovation levels out, the prime factor for profitability is going to be electricity cost. If climate change is appropriately priced in (a big if, I know) then you could use miners to soak up cheap power created during optimal renewable times and turn them off when higher demand and less production makes it less economical. This could allow people to overproduce renewables and not have to worry about overloading the grid or having to build extra storage to store power during peak periods.

    I don’t actually think this will happen, but it does seem to be a reasonable argument.

    • You’re of course right that Bitcoin miners don’t *require* 100% uptime. However, assuming that the miners want to maximise their profits, the economics of mining strongly incentivise the miners to seek out energy sources that provide them with sufficient energy supply to operate as close to 100% uptime as possible.

      I don’t believe that equipment innovation levelling off will change the matters that much. The design of Bitcoin ensures that more hash rate is always better for the miners, and as equipment matures, what most likely happens is that profit-maximising miners buy more hash rate for the same price. (Remember that this is what happened with personal computers, even though there even wasn’t that much of an incentive to have more processing power as there are with Bitcoin.)

      And since there are always other fixed costs – the opportunity cost of investment at the very least, and floor space also costs something – a profit maximising miner will want to use their equipment as efficiently as possible. Yes, if electricity is very expensive, then it’s likely that miners will throttle down when electricity is rare and expensive. But since there are very few geographical barriers to Bitcoin mining and because Bitcoin miners and users do not seem to be what I’d call stellar paragons of societal responsibility anyway, what I believe far more likely is that mining will relocate to wherever there are cheap 24/7 supplies of power.

      Furthermore, because of high volatility of mining – there really isn’t a guarantee that Bitcoin even has any value in ten years – mining is highly unlikely to incentivise development of capital intensive (that is, high upfront cost) low carbon energy sources. Far more likely that power source of choice will be one that has low upfront costs: coal and gas.

      We already know that Bitcoin miners are located close to coal mines to benefit from cheap electricity there. In the future, we may even see cases where so-called stranded coal assets are rejuvenated by cryptocurrency mining: sites where coal mining would otherwise be unprofitable could very well gain a boost from slapping on a cryptomining operation close to old, existing coal mine and power station combo.

      Sure, some miners will obtain their electricity from relatively clean sources, but on balance, I at the very least don’t see a future where Bitcoin mining somehow “incentivises” clean energy buildup, as many people seem intent on claiming.

      • davidgerard says:

        Worth noting that during 2014-2015, when the Bitcoin price was flat, we did see miners going online and offline – the price of mining 1 BTC was close to 1 BTC, and at that point it was a very price-sensitive low-margin business.

        Right now we’re still coming off the bubble peak, so mining is profitable if you have the mining hardware. (And if you don’t, then Bitmain’s price for a AntMiner S9 has varied between $1000 and $3000 over the past year – Bitman are visibly charging whatever the market will bear.)

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