Bitcoin & Energy, Part 2: The advantages of a delocalized consumption
This is the second part of the Bitcoin & Energy series, four articles dedicated to Bitcoin and its electricity consumption. The goal: that you can make up your own mind on its environmental impact, and on Bitcoin’s potential for society’s future.
Good reading 👇
The first part focused on the reasons behind Bitcoin’s power consumption and its essential role for the functioning of the network. The notion of energy mix, and the absence of a direct link between the amount of energy consumed and the impact on the environment were also discussed.
This second article will look at a singular aspect of Bitcoin network energy consumption and its consequences:
- The delocalized aspect mining
- The consumption of energy “surplus” first allowed by this relocation
A delocalized consumption
Bitcoin consumes energy in a very different way than our society does. The classic consumption of industries, means of transportation, or human beings must take place at specific times and places.
To do so, we bring energy from its source to where it will need to be consumed later on, usually in the form of electricity, oil, or gas. For example, a plane always need a sufficient reserve of oil available to be consumed during its flight.
On the contrary, Bitcoin mining energy consumption is fully delocalized. It can work anywhere on the planet where there is energy available that can be transformed into electricity, with no geographical constraint. It only needs an internet connection for the output of the consumption (the mined bitcoin) to be transferred.
This lets Bitcoin use energy that can’t be transported to where society needs it: untapped energy.
In addition to being delocalized, Bitcoin miners can relocate to new locations very easily.
Unique variable cost: the price of electricity
Another important aspect about mining is its cost structure. The only variable cost of a miner lies in the price of its electricity. Mining is financially sustainable only with access to cheap electricity. Additionally, mining is a very competitive activity happening around the globe. Using more expensive electricity is a disadvantage too big to be sustainable.
To sum up, Bitcoin miners:
- are nomadic: they can consume energy anywhere, notably at its source
- their main constraint is their electricity cost
As we’re about to see, these two aspects push miners to go to energy sources where there is an imbalance between supply of energy and human demand.
Consumption of untapped energy
We know now that every Bitcoin miner is looking, anywhere on the planet, for the cheapest energy available. It happens that humans activities need to consume energy locally, where they are based. Wouldn’t there be some places on the planet where energy available is superior to demand?
This is indeed the case. It is estimated that only 1 to 2 third of the energy produced around the world is actually consumed. This difference comes from physical constraint of energy generation and transmission, but also from our inability to exploit, stock and distribute efficiently all the potential energy. To this must be added many renewable energy sources that are still untapped, mainly due to their remote geographical locations.
We now know there is on one hand a “surplus” of energy produced, and on the other a significant amount untapped energy around the globe, due to various constraints. Additionally, Bitcoin miners can settle anywhere. Since their main objective is to minimize the price of their electricity, it is natural to see these Bitcoin miners heading towards these supply and demand imbalances in the first place. These situations mainly appear on renewable sources which are more remote (hydraulic, geothermal), the storage and distribution of their production being more complicated.
It is important to remember that Bitcoin miners will, in the long-run, always benefit from consuming untapped surplus, rather than pushing for new, higher cost production.
PS 1: wherever the electricity distribution network is well developed, such as in France, mining Bitcoin is only profitable in certain very specific cases because of the good balance between production and consumption.
PS 2: In any electrical network, the amount of electricity injected must be equal to what comes out. This is why the quantity of electricity in the network needs to be controlled in real time and limited by variations in consumption. Unfortunately the batteries are not efficient enough yet to overcome this problem. This is a case where Bitcoin can support the network, acting as a demand floor and smoothing the network’s average cost of production.
Hydraulic power station without local demand
Let’s look at the example of a hydraulic dam. If its power station produces 100 MW of electricity, and that nearby consumption and storage sit at 80MW, this power station will limit its production to 80MW. This is untapped energy available with no added financial or environmental cost. It is this type of cheap available electricity that miners naturally go to.
When extracting oil or gas from the ground, a huge amount of unusable gas (mainly methane) escapes. This gas is very polluting (x20 C02), and the main way to get rid of it today is to burn it to transform it into less polluting CO2. This is released into the atmosphere, and 100% of the energy of the original gas is lost. It is estimated that 30% of the annual European gas consumption is wasted every year in this way, additionally polluting the atmosphere.
In a lot of cases, methane can’t even be burned because of the cost of the required infrastructures.
In the United States, a large number of oil and gas producers have realized the financial and environmental opportunity that Bitcoin mining could represent by consuming this wasted energy. So they started mining Bitcoin, turning the heat from burning methane into electricity.
This has the effect of encouraging the combustion of methane into CO2 on all these sites, significantly reducing their impact on the environment. Mining revenue also lowers the overall energy production cost for society.
Due to different types of constraints, there are a lot of “surplus” of energy across the planet.
The delocalized aspect of Bitcoin mining makes it perfectly suited to consume this surplus. Its need for cheap electricity naturally pushes it towards those sources with an imbalance between supply and demand. By consuming this “leaking” energy first, miners have a very limited impact on the environment.
In the next part, we will see how these characteristics specific to Bitcoin mining even allow it to help the development of renewable projects.
Sources & resources:
Bitcoin mining on surplus:
- Bitcoin mining reducing methane emission
- Global Bitcoin Mining Data Review — October 2021
- Interview from a Wyoming oil & gas producer
Bitcoin mining as a generator for the grid: