Bitcoin Mining, Blockchain and Renewable Energy: Part 1

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This is a two part series on Bitcoin Mining, Blockchain and Renewable Energy. The first part covers the drivers & trend relation between bitcoin mining and the demandfor energy in key markets. In the second part we overview how the blockchain technology underlying bitcoin, and the concept of digital tokens, ICOs  can be used to drive more peer-to-peer finance for a higher supplyof renewable energy, especially across emerging markets.

 

As the bubble and daily drama around bitcoin prices unfolds, it is becoming more apparent that bitcoin mining will become a proxy and significant driver of energy  usage in the world if current trends continue. Lets unpack this!

Estimated energy consumption of bitcoin mining is closing in on 50 TWh / year, which is 15% of Italy's consumption of energy (Source: BECI, Digiconomist). As a reference, India consumes about 1400+ TWh (#4), China (#1 in the world, 5900+ TWh/year), and USA (#2, 3900+ TWh/year). If bitcoin mining were a country, it would very soon join the top 50 countries in energy consumption, passing Singapore (see figure below). That's beating more than over 150 countries in the world. This also means that a new country is being added every few months in terms of energy consumption seeking new sources of energy!

Please note that there are many challenges to the estimates of BECI's estimates Bloomberg New Energy Finance estimates lower numbers,but the overall message is one of high and growing energy numbers. An alternative analysis is at Zorinag by Marc Bevand.

 

Given that 75% of bitcoin miners are in China as of early 2018, this has a direct impact on energy consumption in China (Credit: Bloomberg New Energy Finance/BNEF). BNEF estimates that miners breakeven at bitcoin price of $6925, even at China's top power price ($0.13/kWh), at $3869 at discounted power prices ($0.03/kWh), and at $4756 ($0.06/kWh). So if bitcoin prices fall below $5000-6000, watchout below (it is ~$8540 as of this writing)! Note that this floor price ($3800-$6925 for 3 cents - 13 cents/kWh of electricity) will barely cover the energy cost, and not include the contribution margin necessary to pay for the miner hardware. And this floor is increasing given the difference between bitcoin generation complexity/computation adjusted for increased efficiency of miners. This means that there will be more energy needed to mine an new bitcoin.

So the entire economic edifice rests on whether the value of bitcoin will be larger than these floor prices. There is a non-trivial tail risk that captive energy assets are built up for bitcoin mining as the sole load, and if the edifice collapses, we will suddenly have a large amount of stranded energy assets in the world. That said, with Chicago Mercantile Exchange launching bitcoin futures in December 2017, and institutions potentially considering bitcoin as an asset class, these form new sources of demand in addition to individuals and the shadow economy sources. Morgan Stanley has warned that very few eCommerce companies accept bitcoin, and the value could drop to zero if it is not accepted by anyone legit, and governments progressively crackdown on exchanges and to track down money laundering. Recent falls in prices from ~$18,000 to $8500 are attributed in part to crackdowns by China and India. Hacks into bitcoin exchanges do not inspire confidence as well.

Given the crackdowns happening in China, India due to worries about instabilities and money laundering pathways, and the likely need for more energy, bitcoin miners are also diversifying to other locales of the earth with a combination of cold climates, governments willing to allow them in, and available ultra-low cost energy sources: Iceland, Canada, Russia/Siberia or in farming towns like Chelan in Washington state/USA etc. Interestingly these low-cost energy sources are often also renewable energy sources such as hydro, geothermal; but could be fossil sources. The cost of renewables in these cold locales may not fall fast enough once the initial capacity surpluses are consumed. The energy consumed in bitcoin will also drive up energy prices elsewhere since these lower cost energy supplies will get locally tied up for bitcoin mining rigs. Cloud data centers which are quite efficient, but trying to vie for cheaper, captive energy sourcesmay face more challenges going forward in securing such lower cost renewable energy facilities competing with bitcoin mining operations.

Morgan Stanley estimates that bitcoin mining in 2018 could surpass Argentina, which is larger than electric vehicle loads expected in 2025! It was recently estimated that the total global banking system may be running on 100 TWh per year. This means that the bitcoin energy use could overtake the energy used in the entire banking system by 2018 end!

OK! A reality check is that these estimates do depend upon trend growth in bitcoin prices, and adoption of bitcoin for various applications. On the short run, pure speculative interest could drive prices up and down, and keep liquidity going. But in the medium term, uses of the currency will underpin demand.

Given the increasing amounts of computations needed for Proof of Work, and more unit energy per bitcoin, not fully offset by miner efficiencies, the energy cost will continue to drive a floor / bankruptcy cost for bitcoin mining to be profitable: this will drive the search for ever cheaper sources of energy, coupled with ever colder locales, and ever more efficient ASIC miners as long as demand for bitcoin remains robust and time passes forward. The combination of rising demand for energy from bitcoin mining, cloud data centres and electric vehicles will keep utilities in interesting times indeed.

A fascinating account of Bitmain miner farm visit in Inner Mongolia, China is here. Hardware for bitcoin mining involves custom-designed ASIC chips to run the hash function computation for proof-of-work. Bitmain’s Antminer S9 is 2.5 times from efficient in energy consumption than its predeccessor the S7 and you can run a 14TH/s machine with 1400 watts of power. Each building has 3000 machines, and 5 MW per building, with cooling assumed to be 20-30% of total power. The computers on the bitcoin network were doing 550,000 Terahashes per second. A measure of energy efficiency is energy per GigaHash, which is around 0.1 J per GH in 2017. While efficiencies are increasing, computation is increasing EVEN faster, driving a net increase in aggregate energy consumed.

Note that the energy supply comes from a mix of renewables and fossil fuels. How much is hotly debated. Note that most bitcoin operations are in colder locales; but the case for solar energy, and active cooling in hotter locales may see bitcoin mining showing up collocated with captive solar power in regions such as Sahara desert, Middle east, Western Australia, California, Texas and Arizona as well. But this will require the mining rigs to tolerate higher temperatures. Especially if the quantum of bitcoin mining is "flexible" and mining operations move workload globally as a function of energy market price, the bitcoin mining workload could serve as a form of "demand response" or "virtual energy storage" to balance renewables, and raise overall demand for renewable energy globally.

Summary

Bitcoin and energy consumption is a fascinating story, but is directly correlated to the complexity of the Proof of Work and attendant compute-related energy needed. In the current reward phase, 12.5 bitcoins are awarded per block and a new block is generated every 10 minutes. The network hash rate is at least 16.4 million TH/s, or 820 million TH to generate one bitcoin, which equates to 23 MWh of electricity to generate one bitcoin. 16.7 million bitcoins out of a maximum of 21 million bitcoins have been mined. But the remaining 4.3 million will require a huge amount of energy to be mined. Every reward period will halve the the number of bitcoins per block. BNEF estimates that while the difficulty of earning a bitcoin has gone up 48 fold in last three years, energy efficiency of mining rigs have improved 6 fold, and computational power 10 times. Global hash rate last year went up five fold, but attendant electricity consumption went up threefold.

The floor of electricity costs, efficiency of ASIC rigs, demand/uses for bitcoin, and overall bitcoin price will determine the rate of electricity demand growth. Despite a significant fall in price of bitcoin recently, its a good bet that bitcoin nation's energy growth will be 2-2.5X in 2018 from <50 TWh now to above 100-125 TWh by year end. As articulated above there is a significant risk of stranded renewable energy assets if bitcoin / alt coins crash in value, but at the same time, bitcoin mining can be a driver of both deployment of RE assets, and can potentially serve as a significant flexible load resource for the grid. Interesting times ahead, indeed!

Author: Mr. Shivkumar Kalyanaraman, CEO, Commercial & Industrial Solar at GE Power Conversion, GE Power Conversion

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