Bitcoin-Energy Resources
I’ve decided to start accumulating informative pieces about the Bitcoin-energy nexus. In fact, his post might serve as an occasionally-updated clearinghouse for this particular subject.
Feel free to message me or leave a comment below with your own recommendations.
Bitcoin is Key to an Abundant, Clean Energy Future, by ARK Invest
Bitcoin Mining and the Case for More Energy, by Drew Armstrong
Bitcoin Mining & the Grid, Part I — Generators, by Blake King
Bitcoin Mining & the Grid, Part II — Transmission, Curtailment, and Behind-the-Meter, by Blake King
Bitcoin’s Potential to Drive Massive Investments in Green Energy, by Amy Wilson
Electric Money — Flywheel for the Neo-Atomic Age, by @BrettMaverick_
Energy Producers Can Lead the Transition to a Bitcoin Standard, by Marty Bent
How to Turn Nuclear Reactors into Clean, Green, Money-Printing Machines by David DeCaires Watson
Nuclear Energy Plants and Bitcoin Miners Have an Immense Opportunity to Work Together, by Lumerin Protocol
The Frustrating, Maddening, All-Consuming Bitcoin Energy Debate, by Nic Carter
The Signal and the Nonce (methodology for determining the market share of every major Bitcoin mining machine, or ASIC, by analyzing nonce patterns and incorporating data sourced from real-world ASICs) by Coin Metrics
The Single Most Important Truth About Bitcoin Mining, Energy & the Environment by Troy Cross
Twitter Thread on Energy Transition, Batteries, and Bitcoin as Flexible Load by Shaun Connell
Below are synopses of some of the above pieces.
Bitcoin Mining and the Case for More Energy, by Drew Armstrong
This piece has a good summary of how to describe Bitcoin, i.e.,
Bitcoin can be understood as a distributed machine that automates the issuance of scarce monetary units and the settlement of financial transactions. The system achieves these ends by demanding that certain network participants — namely, miners — provably consume electricity, which allows the network to order transactions and assure final settlement in the absence of a trusted third party. Perhaps more profoundly, this proof of work creates a connection between the physical and digital worlds that cannot be falsified. The nonce used to create a valid block is the residue of a physical process which must consume energy.
The piece also has an impressively grand vision of how the worlds of Bitcoin mining and energy might converge (I realize not everyone is so bullish on the nexus but I love this kind of Big Idea):
Economic incentives will impel bitcoin mining to completely saturate the energy sector in the coming decades. The gradual convergence of these two sectors has already begun, and will continue from both directions. Energy producers will monetize surplus power that would otherwise be sold at low or negative rates to the grid (or wasted altogether) by selling it to the Bitcoin network. And bitcoin miners will vertically integrate, owning their own power generation and infrastructure to improve their margins and thereby their competitiveness. It stands to reason, then, that in the future, the most efficient miners will also be energy producers.
And I like the piece’s description of how Bitcoin mining provides a “bounty” scenario for those who pursue energy-efficient generation:
Bitcoin mining directly incentivizes new and more efficient forms of energy generation by offering a “bounty” to anyone, anywhere, at any time, who finds a cheaper way to produce energy at scale. This direct financial incentive for more efficient generation and the newfound viability of previously uneconomical sources of energy will cause a general decline in the price of energy worldwide.
We may well see bitcoin mining operations bootstrap new human settlements into existence. Whereas in the past, generation was only economically viable in locales that were relatively close to the ultimate site of consumption (i.e., population centers), bitcoin mining allows us to develop power generation infrastructure in remote, energy-rich locations and monetize it via the Bitcoin network. After recovering the initial capital cost, the mining profits can be used to fund additional infrastructure build-out to support residential or commercial human settlements that will benefit from the cheap, abundant energy resources.
And finally the piece also theorizes how Bitcoin can help rebirth the nuclear power industry:
In the future, behind-the-meter bitcoin mining operations will serve as a “captive customer” for new nuclear power projects, providing stable, predictable demand for electricity. This captive demand will shorten payback periods and make underwriting new nuclear projects less risky for potential investors, reducing their cost of capital and leading to more nuclear generation. This in turn will increase both electricity supply and competition among producers, driving down electricity prices to the benefit of consumers.
Nuclear power plants typically function as a baseload source of power, as they are slower to ramp up and down generation than other energy resources. As a flexible load, bitcoin mining operations can increase or decrease power consumption on short notice, providing demand response services. This would allow nuclear energy to absorb a larger share of any grid’s generation portfolio, thereby reducing the need for costly supplementary peaker plants.
Braiins has an excellent two-part essay called “Bitcoin Mining & the Grid,” detailed below.
Bitcoin Mining & The Grid (Part 1): Generators, by Blake King
This two-part piece is extremely detailed and well worth the time to get through. There is a very straightforward description of what it means for Bitcoin to act as a grid resource:
Bitcoin’s place as a grid resource is pretty clear. Large flexible loads that have the ability to pay themselves to be online and respond immediately to frequency events is a new asset class for the power system. So what exactly does this look like? Besides just responding to acute events by dropping load, in ERCOT, Ancillary Services are currently sold in the "day ahead", meaning the day before operations. Miners who can qualify to provide these types of services (by proving that they can ramp up or down and follow instructions quickly) will sell their capacity in an auction. The Grid Operator will buy the services, which forces the miner to reserve those megawatts during their operation the following day. During real-time, the miner may be called upon to ramp up or down to fulfill their obligation, depending on which type of service they sold.
Firmware that allows the mining machines to be ramped up and down while minimizing long term harm to the machines would be an incredible tool for the power system. But the extent to which ASIC mining machines can or will incorporate this type of ramping capability is unclear.
The piece also has a fascinating section about partially underwriting new generation development via Bitcoin mining as a co-located buyer:
…what if new generation development could be underwritten in part with bitcoin as a colocated offtaker (buyer of some amount of energy)?
Instead of having to solely rely on grid pricing for revenue, new generators could buy “offtake insurance” that enables them to contract with a bitcoin miner if their grid pricing forecasts turned out to be a bust. This would present an incredibly novel tool for derisking generation development, allowing generators to bring their offtaker (their buyer of energy, a bitcoin miner) with them to a new site.
For renewable generators this is especially enticing. A 200 MW nameplate solar or wind farm could see large gains by colocating with a much smaller bitcoin mine (e.g., 30 - 40 MW) who just pulls grid energy whenever the solar or wind farm are not generating enough to meet their needs. This colocated mine could produce enough revenue for the generator to shore up financing while still allowing for 160 - 170 MW of nameplate capacity to the grid during peak hours, all while still bidding $0.
The economics are slightly different for thermal generation (e.g., natural gas), since per the current “marginal cost” paradigm, the marginal cost of the thermally produced megawatt supplied to the grid after serving the colocated mine would technically be more expensive than those megawatts first supplied to the mine. Recall how the normal bid curve is up and to the right, as thermals require more fuel to produce more power. This isn't to say that renewables are better, as all generation types have their tradeoffs, but rather a highlighting of the implications of flat $0 marginal cost generation.
Current financing paradigms for generation asset development aren't ready for this type of underwriting — most companies developing generation have a rigid and conservative set of requirements, and bitcoin is just too novel of a technology to fit this hole as of now. However, the paradigm shift is here, and generation developers that are willing to be the first to leverage this model will certainly reap the rewards. I expect that this model of colocation to improve financing will hit existing generators first, since they have no downside to trying something new if they are already missing revenue targets.
Bitcoin Mining & The Grid (Part 2): Transmission, Curtailment, and Behind-the-Meter by Blake King
In Part 2, King describes the aspects that make Bitcoin a unique behind-the-meter load:
Bitcoin is a special behind-the-meter load because it:
…is fast to stand-up. There are no special permitting regimes to navigate and there are few geographic or civil constraints to consider.
…is transportable with a fungible footprint. What happens when the contract term expires? Some bitcoin miners can pack up and leave without a trace, leaving behind similar electrical infrastructure needed to do on-site storage. Or, if the colocated miner was a permanent host, the datacenter’s rackspace can be RFP’d and filled with other processing customers, or maybe even storage.
…is location agnostic. Unlike other industrial processes that require inputs like water, proximity to offtakers, or pipe infrastructure, bitcoin mining can take place anywhere with a satellite internet connection.
…liquidates the energy immediately on-site. There's no overhead to process, store, transport, or offload product before getting paid for energy.
…is flexible. Are the wholesale electricity market prices high? Bitcoin miners can coordinate with the grid operator and curtail indefinitely to take part in that pricing. Other behind-the-meter loads that have sequential industrial processes (smelting to finish) or offtakers of their own (hydrogen contract to fulfill), have more complicated planning and misaligned incentives during these events.
…is sensitive to electrical cost input. The bitcoin difficulty adjustment mechanism and $0 marginal cost nature of renewables can be strategically leveraged to ensure colocated bitcoin miner profitability. Bitcoin miners are very sensitive to electrical input cost. Surviving bitcoin price bear markets is a primary goal of bitcoin miners, and thus they always try to source the cheapest electricity. Because of the network difficulty adjustment mechanism, miners with the lowest input electricity cost will best survive a bear market, since miners with more expensive input cost will quit mining before another miner with cheaper power does. When those miners with more expensive costs quit, difficulty readjusts downward. Since renewables are used to taking $0 marginal pricing, sometimes for a large share of their production, if they gave bitcoin miners even two months of $0 floor pricing to ensure that they survive bear markets, bitcoin miners could be willing to give good upside for this security. It’s a perfect symbiotic relationship.
…performs a societal good. While this series of explainer articles tries to primarily focus on what is rather than ought to be, the argument around bitcoin versus other types of load normally carries some sort of moral or usefulness judgment (e.g., “We should do hydrogen instead of mining, because at least it’s useful”). But this author wants to be clear: mining bitcoin is an incredible good for society. The network safeguards the savings of millions of individuals and contributes to the first open, free, and immutable ledger in the history of the world. It is a good thing, and power producers should feel empowered to provide this service.
More to come soon.