Energy Procurement & Profitability: Exploring Bitcoin Mining Economics

Bitcoin mining has become an increasingly popular topic of interest across North America, garnering the interest of energy companies. While it has gained a lot of attention, some energy industry players may not know how miners procure energy and maintain profitability.

Authored by Brittany W. & Christopher O'Donnell.

How do miners earn revenue and maintain profitability?

As discussed in our previous article, Bitcoin mining is the process in which new transactions (blocks) are validated and added to the blockchain. This is accomplished through Bitcoin’s proof-of-work consensus mechanism, which rewards miners for using compute power (requiring energy) to settle transactions.

Bitcoin rewards are paid to the miner who successfully discovers a solution to a computational puzzle. The probability that a miner will be the one to find the solution is related to the portion of the network’s total mining power (the more mining power, the higher the probability that the miner finds the solution).

However, while they receive bitcoin rewards for validating transactions, miners also have to navigate shifts in energy prices and BTC price volatility in order to maximize their profitability. In short, mining is profitable when the cost of mining and its energy procurement is less than the market value of the awarded bitcoin. As a result of this, Bitcoin miners are incentivized to seek out low-cost energy sources to remain profitable and can do so in remote areas with solar, wind, and hydro production.

How do miners procure energy?

Traditionally, miners purchased energy directly from utility companies at fixed rates. While this was profitable in the early 2020s, challenges emerged in 2022 when a decline in the market value of Bitcoin coincided with a rapid rise in energy costs.

Miners have used both behind-the-meter (BTM) power purchased directly from generators, and front-of-the-meter (FTM) procurement of wholesale market power. While both models have inherent risk profiles, they also take advantage of the Bitcoin miner’s ability to rapidly change consumption, creating additional revenue opportunities outside of solely mining Bitcoin.

What does this mean for energy companies?

In addition to solely mining Bitcoin, energy companies can generate new revenue through baseload monetization and responsive demand.

Monetizing Baseload

• By mining Bitcoin directly from the facility, there is an opportunity to turn produced energy into an additional revenue source.
• Due to changing demand curves, baseload producers can use mining to keep plants on and running during times when intermittent resources are eating into their production.
• Allows for the ability to monetize wasted/stranded energy such as oil, natural gas, curtailed renewable energy, and areas under transmission constraint.

Responsive Demand

• The grid operators can use Bitcoin mining as a tool to manage the demand curve.
• Mining can be used as a dispatchable asset. During peak times, miners can be curtailed to add capacity back to the grid.
• Instead of responding to the daily demand curve, producers can operate a flat or consistent block of power to be utilized where demand requires it, and can monetize it on the Bitcoin network.

Even with new revenue opportunities, some energy companies have hesitated to engage in the Bitcoin mining space, however, the continued maturation of both industries is curving that trend.

After a long association with risk, why are energy companies getting involved in mining now?

When the mining industry was less mature, some miners defaulted, causing energy companies to view the industry as risky. Consequentially, energy companies enacted large collateral requirements when entering contracts with mining companies — however, to address risk and take advantage of mining’s revenue opportunities, the issuance of Letters of Credit as well as efficient capital posting has facilitated deals that would otherwise be viewed as infeasible.

Even further, some miners are accepting longer payback periods that better align with the offtake profile desired by sellers of electricity, and sellers of electricity are co-locating mining facilities. Co-location enables sellers of electricity to provide a price floor on energy revenue from Bitcoin miners for renewable projects — projects that need to produce power in order to generate renewable energy credits and fulfill investment tax credits.

Both industries are finding middle ground to maximize profitability and contribute to the grid.

Conclusion

While miners and energy companies have come a long way in how they work together, there will undoubtedly be changes in the mining space that will influence its economics and alter how energy companies engage with Bitcoin mining. Advancements in and further maturation of the mining space, like having a liquid hash rate derivatives market — a tool that would unlock de-risking — could open the door to new methods of financing projects and provide additional opportunities for energy companies to see new forms of incremental revenue. We’ll dive deeper into mining advancements as part of the Foundry and CWP content series.

Disclaimer

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