11 Sep 2022

Bitcoin mining improves the economics of renewable energy

Wind and solar are variable energy sources that sometimes produce more energy than the grid needs, leading to energy waste. This article explains how the unique flexibility of bitcoin mining allows it to monetize previously wasted wind and solar energy.
Source: IEA (Sustainable Development Scenario)
This article is an excerpt from our research report titled "How Bitcoin Mining Can Transform the Energy Industry". The research report lays out five characteristics of bitcoin miners, which make them uniquely flexible energy consumers, and explains four energy problems bitcoin miners can help solve. This article explains one of these problems: How bitcoin mining improves the economics of renewable energy. Let's get into it.The global generation capacities of wind and solar power have seen massive growth over the past years. In its Sustainable Development Scenario, the IEA estimates that wind and solar generation capacities will need to keep growing and reach 2,800 GW and 4,200 GW by 2040 to limit global warming to well under 2॰C above pre-industrial levels.The growing share of wind and solar power will lead to more wasted energy due to the variable nature of renewable energy production. Energy waste is an economic challenge that, if left unmitigated, can threaten renewable energy economics, thus limiting its growth.We use Texas as a case study. The state has some of the best wind and solar resources globally, but most of them are in West Texas, far away from the population centers in the southeast. West Texas has 24 GW of wind and 7 GW of solar generation capacity but an average load of only 6 GW, meaning that most of this energy can't be consumed locally and must be transported southeastward to where the demand is.The capacity of the transmission lines connecting West Texas with the rest of the state is only 12 GW, far from enough to transport all the energy at peak wind and solar generation. This is called the West Texas Export Constraint. The low local demand combined with the West Texas Export Constraint means that a massive amount of renewable energy is stranded in West Texas, leading to energy waste and less revenue for wind and solar projects.
Source: ERCOT, Potomac Economics
The stranded renewable energy problem will only worsen in West Texas as ERCOT expects the wind and solar generation capacities to grow to a combined 71 G.W. in 2023 without a corresponding increase in transmission capacity.The main driving force behind the surge in wind and solar development is that these energy sources have become very cost-competitive. The Levelized Cost of Electricity (LCOE) for solar and wind in the United States is currently $36 and $40, lower than all alternatives. Also, the economics of wind and solar consists almost entirely of capital expenditures. They have no fuel costs, meaning their marginal production cost is $0.
Source: The U.S. Energy Information Administration
Energy waste threatens the economics of renewable energy
Since wind and solar have marginal production costs of $0, they will always bid their energy into the market for $0 per MWh. Therefore, we often see high price volatility in electricity markets with high shares of wind and solar. The electricity price is very low or even negative at times of high wind and solar production and very high when wind and solar don't produce.This problem is exacerbated by production tax credits that allow certain renewable energy generators to sell power at a negative price and still make a profit. In the United States, wind farms receive federal production tax credits of up to $25 per MWh produced. A wind producer receiving such tax credits is incentivized to bid the energy to the grid at -$24 per MWh. These production tax credits have increased the prevalence of negative power prices in the United States, especially in Texas. This federal subsidy has played a major role in incentivizing the buildout of stranded renewable energy in West Texas.During the past years, the prevalence of negative electricity prices has grown dramatically in many regions where wind and solar have become significant parts of the electricity generation capacity. This is especially true for West Texas, where about 10% of real-time power prices were negative in 2021.
Source: EMP at Berkeley Lab
The map above shows how the frequency of negative prices has increased in the central part of the United States from 2015 to 2021, as this windy region has seen a massive development of wind power. The increased prevalence of negative power prices has a devastating impact on the revenues of wind and solar projects.In a deregulated power market like ERCOT, the negative price is a price signal telling the generation owners to shut down production because there is too much energy supply relative to the demand. This phenomenon is called economic curtailment and means that wind and solar farms periodically must reduce their output below what they could have produced. There are two types of economic curtailment, depending on its cause: systemwide curtailment and local curtailment.
Source: Arcane Research
Systemwide curtailment is when weather conditions allow a renewable energy plant to produce a certain amount, but the plant must refrain from sending this electricity to the grid since there is insufficient demand. Local curtailment is caused by not enough transmission capacity to transport the electricity to where the demand is.The problem in West Texas is local curtailment. The population centers in the southeast would like to tap into all the renewable energy produced in the west but can't due to the limited transmission capacity.Both types of economic curtailment waste energy, hurting renewable energy economics since the plants don't get paid for curtailed energy. Since the economics of wind and solar are heavily skewed towards CAPEX with little to no OPEX, the profitability of these projects depends upon maximizing the amount of electricity the plant can sell during its lifetime. Therefore, being forced to curtail a significant part of production is terrible for wind and solar economics.
Source: Potomac Economics
Curtailment is a growing problem globally, particularly in Texas. In 2021, 6% of wind and 8% of solar production were curtailed in ERCOT, corresponding to a total curtailment of 7.4 TWh. Industry insiders assume that Texas hosts 8% of the 10 GW global bitcoin mining capacity, equivalent to an annualized electricity consumption of 7 TWh. This means that more renewable energy was wasted in Texas in 2021 than the electricity consumption of all the state's bitcoin miners.
Source: Cambridge's Bitcoin Mining Map, Hashrate Index
There are mainly three ways to mitigate local curtailment: transmission lines, batteries, and moving the demand closer to the supply. Transmission lines are arguably the most impactful long-term solution, but they are generally costly and time-consuming to build. ERCOT is studying the potential for increasing the transmission capacity. These lines' estimated breakeven cost is $13.8 billion, and they will be operational earliest in 2030 and 2035.Batteries could become part of the solution, but the technology has still not reached a sufficiently low cost that they are economically viable to deploy at the scale required. In addition, batteries have limited storage capacity, so they should ideally be coupled with flexible electricity consumers that can consume excess energy when the battery is full.
Bitcoin miners can adjust their consumption after renewable energy production
Bitcoin miners can help reduce curtailment and mitigate the frequency of negative electricity prices by strategically locating themselves close to the wind and solar plants to offtake their excess energy. This is achieved by exploiting the interruptibility of bitcoin mining, so that wind and solar producers can alternate between delivering power to the grid and bitcoin miners depending on the power prices. The caveat for the bitcoin miners is that they must accept that they will not be able to run their machines 100% of the time, but that is an acceptable tradeoff if the mean electricity price is low enough.To understand how bitcoin miners operating in grids with a high share of wind and solar accept reduced uptime for lower electricity costs, we can look at the cumulative distribution of electricity prices in West Texas in 2021. In February this year, Texas suffered a devastating winter storm that led to even more volatile power prices than usual.
Source: ERCOT, Lancium
We see that electricity prices were mostly low, with 85% of prices being below $40 per MWh and negative prices 10% of the time. On the right side of the distribution sits a small number of extremely high prices that occurred when peak demand coincided with low wind and solar output.If a bitcoin miner ran its machines 100% of the time in West Texas in 2021, the miner's mean power price would be $148 per MWh, which is close to the cash flow breakeven of an energy-efficient machine. Had the miner turned off its machines during the 5% highest-priced periods, the miner would have reduced its mean power price from $148 per MWh to $24 per MWh, which would have massively improved the profitability. These possibilities for lowering power prices by avoiding the price peaks show that bitcoin miners are incentivized to adjust their power consumption depending on power prices, making them the perfect loads in volatile electricity markets with a high share of renewable energy.Many incorrectly assume that reducing their uptime is not in the best interests of bitcoin miners. This assumption is wrong, particularly in markets with a high share of wind and solar, which often corresponds to volatile electricity prices. This is proved by the table below, showing how various uptime reductions impacted bitcoin mining economics in West Texas in 2021.
Source: ERCOT, Hashrate Index, Luxor ASIC Trading Desk, Ebay
We see that for the Antminer S19 – a new generation machine – the ideal uptime was 95%, while the Antminer S9 – an old generation machine – should ideally be up and running 85% of the time. Do you see the connection here? Older machines have less uptime because they need lower energy prices to be cash-flow positive due to being less energy efficient. Consequently, older machines are cheaper and can have a better return on investment under the right circumstances than newer machines.
Three bitcoin mining operational models in high wind and solar grids
Miners can utilize three main operational models to help offtake excess energy in high wind and solar grids, where the type of hardware used is of utmost importance. The models are: Grid-connected with high uptime, behind-the-meter with high uptime, and behind-the-meter with low uptime.
Source: ERCOT, Shaun Connell and Ray Cline (Lancium), Rich Goodwin (Cormint)
Model 1: Grid-connected – high uptimeThe first model is the traditional one, where the bitcoin miner is grid-connected and focuses on maximizing uptime with new generation machines. As outlined in the previous chapter, these miners can often lower their overall electricity costs by participating in demand response programs that help strengthen the electricity grid. An example of such a facility is Riot's Rockdale, Texas facility, with a developed capacity of 400 MW.Model 2: Behind the meter – high uptimeThis second model is a hybrid model where a bitcoin miner is co-located with a wind or solar plant and uses new generation machines. The miner switches between pulling electricity from the power plant and the grid to achieve the uptime required to amortize the expensive new generation machines. This setup is advantageous for the renewable energy plant since it now has two options: selling its electricity to the grid or the bitcoin miner, depending on what is the most profitable. The additional bitcoin mining option can increase the prices renewable energy producers receive for their electricity. It also de-risks development since the power plant has a behind-the-meter customer that is always ready to buy electricity no matter what happens on the grid.In addition, as we explained previously, many wind and solar plants struggle with curtailment. Wind and solar projects often presell a large part of their future electricity production through a power purchase agreement (PPA) as part of the project financing. Because of how PPAs are structured, curtailment means that the wind or solar plant must bid higher for a PPA, making the PPA less competitive, and the project might not get the required financing. By having a bitcoin miner behind the meter to eat up all the previously curtailed energy, the wind or solar plant can eliminate curtailment, making the plant more competitive in the power market.Model 3: Behind the meter – low uptimeThe third model is entirely off-grid, and the miner only uses power generated by the co-located renewable energy plant. Since the average capacity factors for wind and solar in the United States are only 35% and 25%, the behind-the-meter bitcoin mining load should have a lower capacity than the nameplate capacity of the power plant. In the case of a wind farm with a nameplate capacity of 100 MW and a 35% capacity factor, a behind-the-meter bitcoin mining load of 35 MW can expect close to 100% uptime. Still, operators generally aim for a lower uptime since the power plant will also sell power to the grid, so older machines with lower CAPEX should ideally be used here.Wind and solar plants must apply for a grid connection, a process that can take many years and involves risks. In ERCOT alone, 107 GW of solar and 20 GW of wind are waiting in the grid interconnection queue. Many of these waiting projects could bootstrap themselves with bitcoin mining while waiting for a grid connection. This will require the project to match its nameplate capacity with bitcoin mining capacity, which means that the off-grid bitcoin mining operation will have a less than ideal uptime due to the low-capacity factors of wind and solar. Still, as shown in the table above, an uptime of 35-40% with an old generation miner is not the end of the world and can be viewed as a development cost, as the power plant can be connected to the grid later.
How bitcoin mining impacts the power market
Common for all three operating models is that they stabilize electricity prices. By buying electricity when renewable energy is abundant, and prices are low, bitcoin miners provide a demand pressure that can lift the lowest electricity prices, improving the economics of renewable energy plants.
Source: Shaun Connell (Lancium)
The figure above illustrates the load distribution of an electricity system and six different ways we can manipulate it. Bitcoin miners impact the system through a mechanism called "valley filling," which lifts the baseload without lifting the peak load since bitcoin miners are highly incentivized to turn off their machines when electricity is scarce and prices are high. A higher baseload improves the economics of renewable energy and incentivizes the buildout of additional capacity.
Bitcoin mining compared to batteries and hydrogen
While many energy professionals acknowledge that bitcoin mining helps stabilize power prices in electricity systems with a high share of renewable energy, some raise a valid point: "Why not use batteries or hydrogen production instead?"Let's start with comparing bitcoin mining to batteries. First, bitcoin mining has a fundamentally different role in an energy system than a battery since bitcoin mining is a load while a battery is an energy storage technology. The battery has an advantage over the bitcoin miner since it can store energy and supply it to the grid later. Still, this feature can also be a disadvantage since the battery has a limited storage capacity.The largest battery in Texas has a nameplate capacity of 260 MW and a storage capacity of 260 MWh, meaning it only takes one hour to charge and discharge. Compare that to a bitcoin mining facility, which can soak up energy for unlimited hours. Because of their differences, batteries and bitcoin mining could be complementary technologies. Block, Blockstream, and Tesla are currently developing an energy system that combines a solar plant, a bitcoin mining facility, and batteries, where the solar plant sends electricity to the grid or the battery, depending on economics.Since bitcoin mining and batteries have two different roles in energy systems, we should compare bitcoin mining to other power-to-x technologies like hydrogen production. Still, there are some differences. Firstly, while bitcoin miners are completely location agnostic, hydrogen production requires access to a market to sell the hydrogen, which means the production process should be located close to a logistical network. In addition, hydrogen production is not a fully interruptible process since the producers have contracts to fulfill and physical products to ship.Also, hydrogen production's supply chain considerations mean that electricity will likely be a less critical part of the cost structure for hydrogen producers than for bitcoin miners. Because of this, hydrogen producers will most likely outcompete bitcoin miners on power prices alone, forcing them to seek out the most stranded energy resources that hydrogen producers can't harness due to their limited location agnosticism. This means that both bitcoin mining and hydrogen production can play essential roles in offtaking excess renewable energy in the future, as one doesn't exclude the other.
Bitcoin mining improves the economics of renewable energy
Bitcoin mining's combination of location agnosticism, interruptibility, and modularity makes it the perfect purchaser of stranded renewable energy. Bitcoin miners can seek out areas with excess wind and solar and build a data center of the exact size needed to consume the excess energy. Having a bitcoin mining load right next to remotely located wind and solar farms prevents curtailment and negative power prices and improves the economics of these projects.Bitcoin mining can become more integral to the energy transition than most people realize since the future economics of wind and solar projects depends on flexible consumers like bitcoin miners who can purchase excess energy.
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