Square + ARK: Bitcoin is the key to unlocking abundant, clean energy in the future

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Today's owners of energy assets may become indispensable Bitcoin miners in the future.

Written by: Bitcoin Clean Energy Initiative
Translated by: Perry Wang

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How exactly does the "nauseating and antithetical to human civilization" impact of Bitcoin on the earth's energy structure play out? This is worth a thorough investigation and comprehensive consideration.

The Bitcoin Clean Energy Initiative, launched by payment company Square, released a brief research paper earlier this year, offering an insightful perspective: integrating Bitcoin mining with renewable energy production and storage could accelerate the energy transition.

As a supplement to this research effort, the renowned investment firm ARK Invest has contributed an open-source model demonstrating how Bitcoin mining further strengthens these renewable energy production + storage systems, providing a higher proportion of energy in the electricity grid's base load, thereby helping to usher in a future of abundant clean energy for all humanity.

Seeing the bigger picture, it's worth contemplating this issue from a longer-term perspective.

Key Findings of the Study

• Bitcoin mining, as a complementary technology for clean energy production and storage, represents an opportunity to accelerate the global transition to renewable energy.
• Solar and wind energy are currently the cheapest sources of energy globally, but their deployment bottleneck lies in their intermittent nature and grid congestion.
• Bitcoin miners serve as a flexible grid load option that may help address most of the intermittent and grid congestion issues, allowing the grid to deploy more renewable energy sources.
• The Bitcoin network can drive the deployment of more solar and wind energy, which may further reduce the cost curve of each, bringing them closer to zero marginal cost energy production.

We aim to explain through this report how the Bitcoin network, as a unique energy buyer, can help enable the full deployment of more solar and wind capacity across society. Deploying these capacities and storing this energy aims to facilitate the transition towards a cleaner, more resilient grid. We believe that owners of today's energy assets may become indispensable Bitcoin miners in the future.

Bitcoin Miners as Unique Energy Buyers

Bitcoin miners are unique energy buyers because they provide highly flexible and easily adjustable interruptible loads (interruptible loads refer to the end-use of electricity, such as Bitcoin mining, that can be easily turned on or off), and they offer payment in a globally liquid cryptocurrency without any geographical constraints, only requiring an internet connection.

These combined characteristics make them exceptional assets, the most stickable energy buyers, able to turn on or off demand at any location worldwide at any time.

Reference:

"Special Report: Energy Backed Money"

Renewable Energy is Currently the Cheapest Source of Energy

Over the past decade, the levelized cost of energy (LCOE) for solar and wind energy, which is the total cost over the lifetime of a power plant divided by the total energy produced, has decreased by 90% and 71% respectively. The unsubsidized cost of solar and wind energy is now around 3-4 cents per kilowatt-hour and 2-5 cents per kilowatt-hour, with some individual projects even lower.

Reference:

"Levelized Cost of Energy and Levelized Cost of Storage – 2020"

For comparison, the average levelized cost of energy for fossil fuels such as coal or natural gas is around 5-7 cents per kilowatt-hour. This means that solar and wind energy prices are now lower than coal and natural gas. Solar and wind energy have also just reached cost parity with geothermal and hydropower, which are about 3-5 cents per kilowatt-hour – a cost-effective but geographically restricted option.

Reference:

"U.S. Energy Information Administration"

While certain projects such as hydro or geothermal may be extremely cheap in certain locations, overall, solar and wind energy are now the lowest cost and most scalable generation options. Moreover, we believe that over time, they will only continue to become more affordable. We believe this is particularly true for solar (semiconductor technology), where as total installed capacity doubles, the price of solar power continues to drop by 20-40%.

Reference:

"Solar’s Future is Insanely Cheap 2020"

Temporary Supply-Demand Mismatch and Grid Congestion

Solar and wind energy, compared to more expensive baseload power sources like natural gas or nuclear, are hindered by major shortcomings: intermittency (intermittency refers to the variability of energy production. For example, in the case of a solar power plant, it only generates electricity when the sun is shining). This results in what is known as the "duck curve" in the energy industry.

Reference:

"The Solar-Bitcoin Convergence"

Essentially, during the day, there is abundant sunlight but no sun at night. Wind is even harder to predict but often blows stronger at night. As a result, energy supply is either abundant or non-existent. However, demand peaks in the late afternoon or evening when people return home and turn on their appliances, a time when solar and wind energy cannot fully meet the demand. The ultimate result is that these two sources of power overshoot society's needs for a few hours each day on average and fall far short during peak demand.

Similar challenges arise with seasonal variations: more sunlight in summer and stronger winds in winter.

Grid congestion further exacerbates these issues, akin to highway traffic jams, which occur frequently as solar and wind projects are often located in rural areas where sunlight and wind are plentiful but there is inadequate load and transmission capacity (i.e., end-use electricity consumers).

Reference:

"Transmission congestion & constraints: Market impediment or opportunity?"

Due to these challenges, over 200 GW of delayed solar and wind capacity are queued in three U.S. grid interconnection queues: these solar and wind projects have been fully developed and financed but the grid cannot accommodate them.

Reference:

"New data tool from Berkeley Lab tracks proposed projects in interconnection queues"

Increasing grid transmission capacity and energy storage are crucial to addressing these issues, especially as the cost curve of lithium-ion batteries continues to decline. However, at present, utility-scale batteries are still too expensive to be widely deployed, even with an 80% cost reduction, and face physical limits in terms of lifespan and energy storage without dissipation (dissipation refers to the loss of stored energy in the form of heat, also known as "heat loss"). Nevertheless, they could become key technologies for storing low-cost midday solar energy to meet evening peak demand.

Bitcoin Mining as an Ideal Complement to Power Production and Storage

On the other hand, Bitcoin mining is an ideal complementary technology to renewable energy and storage.

By combining power production and storage with mining, the overall value proposition is likely to be more effective than building generation and storage separately. There are always physical limits to how much power can be stored economically without dissipation.

By integrating miners with renewable energy production + storage, we believe it will:

• Enhance returns for project investors and developers, pushing more solar and wind projects into profitability.
• Make the construction of solar and wind projects feasible even before lengthy grid interconnection studies are completed, as Bitcoin miners can utilize this energy before selling it to the grid.
• Provide the grid with "surplus" energy available at all times to address increasingly common black swan events like extreme high or low-temperature weather conditions (e.g., the widespread power outages in Texas in early 2021).

It is worth noting that with the proliferation of electric vehicles and the electrification of all devices, as society's demand for electricity continues to rise, this "surplus" energy will prove to be extremely valuable. In a way, the miners' insatiable appetite allows them to consume the "belly" of the duck curve described above.

Given these benefits, we believe it is logical for developers of utility-scale storage to collaborate with Bitcoin miners to enhance their current battery products.

Long-Term Implications

We believe that if Bitcoin mining becomes the most stickable energy buyer, two major impacts will emerge.

Firstly, the amount of solar and wind supply during periods of low grid demand will increase significantly. As mentioned, there are currently over 200 GW of delayed solar and wind capacity in queue in just three U.S. power markets. This is roughly equivalent to twice the current installed solar and wind capacity.

As society begins to deploy more solar and wind, we believe this should further lower their levelized cost of energy, making future solar and wind energy even more affordable.

If the levelized cost of energy decreases, it could unlock profitable new use cases for solar power, such as desalinating water, removing carbon from the environment, or producing green hydrogen. Some experts in the field expect that the marginal cost of producing new electricity will actually approach zero.

The second major potential impact could be the large-scale transformation and green transition of the Bitcoin mining industry.

Currently, global Bitcoin mining capacity is estimated at only 10-20 GW. As mentioned, there are over 200 GW of delayed solar and wind projects in queue in just the U.S. grid interconnection queues, where only 20% could bring 40 GW of new mining power to miners, dwarfing the current global Bitcoin mining market.

It is worth noting that many of these new mining projects may be "behind the meter" (behind the meter refers to directly consuming the electricity at the power production site without the need for grid transmission. They consume power and make use of otherwise wasted solar and wind energy. Of course, they may still draw power from the grid during other profitable periods, so they are not entirely green from day one. However, if solar and wind energy become cheaper and occupy a larger share of baseload power, the trend will continue to rapidly shift towards hash power dominated by renewable energy.

We believe that deploying such a large and geographically diverse new hash power will also generate secondary benefits for enhancing the security of the Bitcoin network, potentially further solidifying Bitcoin's position as sound money for everyone.

If not for Bitcoin mining, solar energy as an intermittent source can only provide 40% of grid power, causing utility companies to face the need for massive investments that would subsequently raise electricity prices. However, if the Bitcoin mining industry is integrated into solar systems, energy suppliers – whether utilities or independent entities – will be able to arbitrage between electricity prices and Bitcoin prices, potentially selling "surplus" solar energy and meeting almost all grid power demands without compromising profitability.

Why is Bitcoin crucial for achieving a future abundant with clean energy? Bitcoin mining can incentivize investment in solar systems, increase the proportion of electricity generated in the grid, and keep power costs stable.

The figure above demonstrates the impact that Bitcoin mining could have on the proliferation of solar systems. Assuming electricity costs remain unchanged, the chart shows the percentage of power that solar can provide to the grid. The y-axis represents solar power generation, and the x-axis represents battery capacity. The size of each circle is proportional to the scale of Bitcoin mining operations.

At each point, solar systems provide different proportions of grid demand. With the expansion of Bitcoin mining capacity, solar systems increase and the percentage of energy supplied to the grid steadily rises. Increasing Bitcoin mining capacity allows energy suppliers to "overbuild" solar without wasting energy. For example, in the lower left corner of the chart, without Bitcoin mining, renewable energy can only meet 40% of grid demand. In the upper right corner of the chart, including solar, batteries, and Bitcoin mining can meet 99% of grid demand.

Our model demonstrates that integrating Bitcoin mining into solar systems can transform intermittent power resources into baseload-capable power plants. It suggests that adding Bitcoin mining to the toolbox of power developers should boost the overall potential market for renewable and intermittent power sources.

Under the same conditions, through Bitcoin mining, renewable energy can provide a significant proportion of power supply at a low cost for any location. As a follow-on effect, the cost reductions associated with the scaling up of renewable energy are likely to accelerate, making them more economically competitive.

Future Developments

There are still some significant questions to consider for realizing the above vision. We see at least three meaningful business opportunities:

Energy Management Software and Services

Energy management companies focusing on storage and mining can build software to make real-time decisions on the optimal use of newly produced power: whether to use it, store it, or use it for mining. They can also provide critical asset management tools and analytics to monitor project performance.

Energy / Mining Markets

Hosted markets may emerge to connect project developers, miners, and financiers. A key challenge is addressing the current credit threshold requirements of existing miners.

ASIC Mining Production

New chip fabrication plants may be built to meet the expected surge in demand. Samsung and TSMC's recent announcements of new North American factory construction plans have positioned them as leaders in this field. Continued hardware and firmware improvements are likely to be seen in the future to enhance the durability of mining equipment optimized for using interruptible energy.

Take Action

Bitcoin and the energy market are converging, and we believe that today's energy asset owners may become Bitcoin miners in the future. By adjusting their strategic roadmaps, executives of power companies, sustainable infrastructure investment funds, and grid-scale storage developers can accelerate the deployment of massive investments into the emerging synergy between Bitcoin mining and clean energy production.