Beyond the FUD: Crypto’s Role in Clean Energy

Author: Taimur Ahmad (Twitter), Grad Student at Stanford.

FUD: Fear, Uncertainty, Doubt — usually not very well-informed takes by those outside the crypto community

The past couple of years have been rife with debates about cryptocurrencies. Booms in NFTs and DeFi have garnered a lot of interest, both from a policy perspective and an influx of capital. On the other hand, a major source of critique has been the environmental impact of cryptocurrencies, specifically Bitcoin and the proof-of-work consensus mechanism it employs. Just this week, Greenpeace teamed up with Ripple (a proof-of-stake crypto protocol) to launch the “Change the Code” campaign, aiming to put pressure on the Bitcoin community to change its current energy intensive consensus mechanism. While there are multiple technological inaccuracies in the campaign’s assumptions, this piece will primarily seek to explain how Bitcoin mining’s energy can be better understood.

These attacks aren’t new. Numerous estimates and analyses have been published over the past 5 years, including ones that have been wildly wrong (a WEF piece predicted that Bitcoin electricity consumption in 2020 would equal global electricity production in2017), all without sufficient understanding of how energy consumption in Bitcoin mining works.

Proof-of-work mining

First, some context about Bitcoin mining. There are two popular mechanisms in which a blockchain secures itself: proof-of-work (PoW) and proof-of-stake (PoS). Without going into the details, PoW protocols rely on a computer solving a mathematical puzzle in order to “mine” a block (which contains the ledger information being stored). Simply put, work done produces output. The miners get newly created bitcoin as a reward for expending this computational energy. The electricity consumption is largely driven by running computers, along with some ancillary services like heat management. As more miners come onto the network, the difficulty of the puzzles increases, which leads to increased computational capacity required to mine, which ultimately increases electricity consumption. It is critical to note that the mining process is what gives Bitcoin an arguably higher level of security and decentralization, features that are at the heart of the cryptocurrency philosophy, than the less energy-intensive alternatives.

(An excellent visualization of PoW mining and blockchains can be found here)

Bitcoin’s (high?) electricity consumption

So how much electricity does bitcoin really consume? The estimated electricity consumption for 2021 today was roughly 110 Terwatt hours — that is a lot! This is the point where people are usually aghast, and someone mentions that this is more than the electricity consumption of Argentina or Finland and so on. However, there are multiple nuances to explore before this number can actually be used for meaningful insights. What electricity is being consumed? Is it crowding out other demand centers and/or increasing tariffs? Where is this electricity being consumed and what were the alternative outcomes? How will electricity consumption scale? How does it compare to similar technologies/services?

Nic Carter — a leading voice in the space — wrote in a piece for Harvard Business Review that electricity consumption does not equal carbon emissions, nor does it equal competition with sources of demand. Firstly, various estimates out there, including one from the Bitcoin Mining Council, put the renewable energy share of Bitcoin mining at upwards of 35%, which is significantly higher than any other industry. Secondly, the Bitcoin miners are moving to regions where there is abundant or surplus energy in order to have lower electricity costs. This is because the core driver of profitability is cheap electricity, which is increasingly found in areas with high renewable penetration since they now have lower marginal costs.

Similarly, locations with wasted energy, either in the form of surplus renewable energy or underutilized hydro plants or methane leakage sites, are attracting these miners as they push for lower costs. Therefore, there are limited incentives for these miners to compete with high demand centers for electricity, and so the electricity being consumed is not always increasing the load on the grid — in a way that requires more fossil fuels to be combusted — nor could it have been diverted for more productive uses.

A unique energy consumer?

Beyond bitcoin mining trying to minimize its environmental footprint through what I described above, there are also specific services that this industry is providing to support the clean energy transition. There are four main features of BTC mining that make it a unique electricity consumer.

• Modular: mining rigs are essentially small CPU-like machines of varying computational capacity. They are easy to set up and move around.
• Flexible: rigs do not need to always be operating at full capacity and can scale electricity consumption up or down easily, and almost instantly
• Intermittent: rigs do not need to be run 24/7 to be profitable
• Scalable: Rigs can be stacked to create large mining operations without substantial additional complexity. A mining operation can be 2 miners in your basement or a farm with 1000s of devices.

Supporting the renewable electricity buildout

Concurrently, the introduction of renewable energy into the electricity resource mix has changed the dynamics of the grid. Solar and wind energy are inherently intermittent — they have certain peak hours and then taper off or are completely off at other times. This has led to a situation where there is an oversupply of renewable energy in certain hours, leading to negative prices (yes, electricity generators pay the grid to take their energy!) or wasted/curtailed energy, where the solar panels or wind turbines are simply shut off during high generation hours. The map below shows the frequency of negative pricing across the US (Locational Marginal Pricing — LMP).

Source: Seel, Joachim, et al. “Plentiful electricity turns wholesale prices negative.” Advances in Applied Energy 4 (2021): 100073.

Therefore, the grid faces the problem of an oversupply of electricity, which hurts the business model and financial sustainability of generators. Given the special characteristics of Bitcoin mining, it can serve as a buyer of last resort, soaking up the excess energy and creating an additional revenue stream for the grid, while also improving grid reliability (curtailing energy can have additional costs) by ensuring that demand and supply match. In fact, this has already been tested this year in Texas, where large-scale bitcoin miners have been integrated into ERCOT to provide exactly this service.

Additionally, since Bitcoin mining can perpetually absorb electricity, Texas has been able to economically build additional renewable energy capacity to avoid the blackouts that occurred in 2021. In this situation, miners sign up for the demand-response program (DRP), whereby they agree to switch off their operations when there is a supply shortage, redirecting electricity to more critical load centers. For all other hours, they can consume that electricity and help recover the capital cost of the investment. This has arguably helped Texas avoid tragic blackouts resulting from extreme weather events this year.

This is just one of many such examples where Bitcoin mining can and is reducing electricity waste and improving reliability. Other examples include using hydropower facilities in NorthEast US that are old (and fully depreciated) but are not being used anymore, leading to economic activity moving away from those towns. There are also entities that are capturing methane leaking from old oil and gas wells and using it to generate electricity to mine bitcoin — methane has 80x more warming potential as compared to CO2 so arguably burning methane and releasing CO2 is an environmental benefit.

Conclusion

It is important to realize that energy consumption at a macro level is not sufficient to make a judgement on an industry’s footprint, given the unique features described above. A useful analogy here is food waste. While there is a significant food shortage and hunger around the world, there is also considerable food waste. However, matching surpluses and shortages isn’t always possible because of location dependence. Same with energy; surplus energy in one place simply can’t be transported to cover the shortfall in another location. Bitcoin mining is, therefore, an easy and revenue generating way to absorb electricity on the spot, improving reliability and cost efficiency, while contributing to the decentralization and security of an alternative financial system.

Afterthoughts

I unfortunately could not incorporate substantial myth debunking in this piece but would like to quickly note certain things.

Firstly, the value proposition of Bitcoin specifically (not all of crypto — the ecosystem is large and diverse now) should be a separate conversation, especially given its utility in the wake of the Ukraine-Russia crisis. We need to debate its merits as digital gold, p2p payments, base layer for a new internet, etc.

Secondly, electricity consumption is a feature, not a bug. It creates a decentralized system that is secure, something that other non-PoW protocols arguably do not provide.

Thirdly, there are outlandish analyses out there talking about increased bitcoin usage will exponentially scale up electricity consumption and wreak climate chaos. These are categorically wrong because they reflect a complete misunderstanding of how bitcoin mining actually works (detailed discussion on this here).

Lastly, if we are going to evaluate the utility of each technology relative to its energy consumption, then we should probably start with gold mining. Not only does it consume more than double the electricity than the bitcoin network, it also has tremendous ecological and human costs. All to get our hands on a shiny rock that doesn’t do anything and needs considerable additional energy to be moved around. Lots more can be said about other industries like data centers and even the fiat system, but more on those at another time.

In a future piece, I hope to expand on how mining can potentially help close the electrification gap in the Global South, where rural areas in particular are deprived of electricity because they are small, dispersed load centers that are not economically feasible for the utility to serve. The unique features of crypto mining make it an interesting technology to explore as a part of the renewable energy buildout, especially given the important role flexible loads will play in a net zero system. Mining may not be the right option for all circumstances, but it definitely warrants a deeper discussion, one that is divorced from the general preconceived notions about the crypto ecosystem.