The Biden White House issued an Executive Order on Ensuring Responsible Development of Digital Assets on March 9, 2022. The Executive Order (E.O.) focused primarily on financial stability, monetary policy, national security, and consumer protection, but it also mentioned energy demand and climate change consequences. The E.O. directed a number of agencies, including the Department of Energy and the Environmental Protection Agency, to submit a report to the President within 180 days addressing “the connections between distributed ledger technology and short-, medium-, and long-term economic and energy transitions; the potential for these technologies to impede or advance efforts to combat climate change at home and abroad; and the impacts these technologies have on the environment.”
Bitcoin companies based in the United States have been warned that their mining operations would be scrutinized more closely in terms of environmental and climate implications.
If it is wise, the Bitcoin sector will respond by proactively getting ahead of the curve – in ways that many of its actors have yet to do – determining how the industry can best minimize its negative impacts while potentially becoming a force for positive change (hint: coal-based Bitcoin miners make the entire industry look bad and invite justified criticism).
Can Bitcoin Mining Help to Reduce Carbon Emissions in a Carbon-Constrained World?
Many sectors, including Bitcoin, are facing increasing ESG (environmental, social, and governance) challenges. Perhaps the most significant difference between it and other industries is that it has grown so quickly that it hasn’t yet matured in terms of ESG in the same way that other sectors (such as its datacenter counterparts) have. Because it is a new industry, it may be given a pass for a while while it establishes itself. However, the E.O. sends a clear message that any such honeymoon will be short-lived. It shouldn’t, either.
The Bitcoin mining sector has risen significantly in scale and worldwide breadth in recent years, and its accompanying electric energy usage has also increased dramatically. In such a dynamic economy, it’s difficult to determine exact electricity use, but the best end-of-year 2021 projections – from the University of Cambridge Center for Alternative Finance (CCAF) – put overall 2021 energy consumption at around 104 TWh. The amount of producing capacity dedicated to the industry is on the order of 14,000 MW, which is roughly equivalent to the output of 14 single-unit nuclear power reactors. The CCAF estimates its overall energy use at 0.58 percent of worldwide electricity consumption, which is similar to one-third of that used to make cement and one-tenth of that used to make steel (or all of the electric power used in the world).
The United States has experienced rapid expansion in recent years.
Last year, China slammed the brakes on its domestic Bitcoin mining business, forcing miners to scramble for new places. A significant percentage of the sector relocated to the United States, drawn by a less volatile regulatory environment and lower electricity rates. In a couple of months, the domestic Bitcoin mining business in the United States jumped from 16.8 percent to 35.4 percent of total worldwide mining activity (the ability to perform complex computations, known as the “hashrate”).
Hashrate in China is declining, whereas Hashrate in the United States is increasing.
Cambridge University’s Center for Alternative Finance
Bitcoin mining consumes a significant amount of energy and is the fastest rising electrical load in the US. It will have an effect on our power grids, as well as the carbon mitigation strategies for which we will spend hundreds of billions of dollars in the long run. As a result, it’s critical to consider what this industry could do to become more environmentally friendly at this time. To put it another way, how should a perfect Bitcoin mining facility look, and what standards should the industry adhere to?
A power-hungry sector of the economy
Bitcoin’s electricity usage
A power-hungry sector of the economy Bitcoin electricity use, month by month and over time – Cambridge Centre for Alternative Finance is a non-profit organization based in Cambridge,
A recipe for success is provided.
Here are three tried-and-true tactics from other sectors that Bitcoin miners can implement quickly and cheaply:
1) Maximize energy efficiency: One simple principle is that the mining facility should use the most energy-efficient equipment available, resulting in the best possible results for the amount of electricity consumed. Miners are incentivised to become more efficient in theory, because electricity costs effect the majority of the economics and profitability, aside from the initial capital investment in the mining rigs. Some miners in the business are already employing the most efficient mining rigs on the market, which provide 29.5 watts per terahash (W/TH). However, some of the top 30 machines on the market now consume more than twice as much energy, therefore there is still room for improvement with many miners.
2) Support the energy grid by utilizing operational flexibility: Cryptocurrency mining activities have a unique and significant feature within the framework of the electric power grid: they may be shut off at a moment’s notice. They have an elastic pricing response that no other resource at that scale can match, and are thus very similar to massive 100+ megawatt-scale batteries in that regard. Any electric consuming asset’s capacity to shut down in seconds is nearly identical to its ability to ramp up and provide power to the grid in that timeframe.
Cryptocurrency miners, on the other hand, have three major benefits over batteries:
a) Unlike a battery, this adaptable capability comes with no significant additional capital expenses. The facility has already been funded, and just a little amount of extra funding is necessary to provide that quick-response resource.
b) the duration of the flexibility service provided is not constrained by the technological limit of the asset. Today’s lithium-ion battery installation has a fixed capacity and duration constraint, with most batteries not offering services beyond four hours (future technology, such as rust-based batteries, may change that equation, but they are not yet being commercially deployed in the market). By contrast, if the need and the economics are there, a Bitcoin mining facility can shut down for as long as is required. Its only real cost is the foregone revenues that result from not participating in mining activities. The early February 2022 cold snap in Texas provide a demonstration of that potential value, as several Bitcoin miners voluntarily powered down as much as 98% or more of their normal consumption (of course, they were able to avoid unusually high prices as a consequence).
c) If market pricing are acceptable, a mining facility can deliver these services as often as they are required. It does not require recharging, unlike a battery. Mining facilities, on the other hand, are theoretically more flexible than most other demand response resources, which are often constrained in terms of both the frequency and duration of prospective occurrences. Miners can provide significant grid services if they are adequately compensated, whether through compensation for supplying capacity and ancillary reliability services to the grid, or simply by turning down their computers to avoid paying exorbitant energy costs.
3) consume a cleaner energy mix (and eschew potential greenwashing): While the creation of flexible and responsive cryptocurrency mining facilities may help develop a more resilient grid, that alone is not enough for the industry to claim socially responsible behavior. It still doesn’t address the critical issue of associated carbon emissions from electricity consumption.
While some miners are committed to coal and gas-fired power, others are increasingly relying on low-cost renewable energy sources. Bitcoin facilities are frequently purchasing power from existing merchant renewable plants that do not have power purchase agreements with utilities or C&I customers. These renewables are frequently sold into extremely volatile hourly spot electricity markets. In such instances, both the renewable facility owner and the miner may find the possibility to engage into a fixed-price contract appealing. Bitcoin miners have access to a source of low-cost electricity from a clean power resource, while renewable asset owners receive a hedge against market volatility and soft pricing.
A lot of mining facilities appear to be going that route. In fact, the Bitcoin Mining Council (representing 46% of the global industry’s capacity) claims that the global industry’s sustainable energy mix was up to 58.5% in the fourth quarter of 2021.
However, there is an important nuance here that must be grasped and addressed. Every megawatthour (MWh) generated by a renewable energy facility earns a renewable energy credit (REC) that certifies its “greenness.” When a big firm announces that it will engage into a power purchase agreement with a renewable plant owner/operator, the buyer often pays for both the energy and the RECs linked with the facility, which it subsequently retires. These RECs have become quite valuable in recent months, and in some markets, they may be worth as much as 25% of the associated energy. As a result, they’ve become a crucial part of the total profitability equation. Unfortunately, they don’t appear to be included in the miners’ power purchases in many cases.
This past January, for example, the Bitcoin Mining Council – which represents a large number of miners – announced it “has excluded renewable energy credits…from the definition going forward.” What this can be interpreted to mean – in the absence of proof to the contrary – is that its members are potentially claiming credit for purchases from renewables facilities that have sold their carbon-free RECs to another entity. The implication here is simple: without the RECs, these miners are buying low-priced power from the grid, with the same carbon mix as every other entity buying power from that grid. In that case, there is indeed nothing green about such purchases. Without ownership and retirement of the associated RECs, a buyer of any type cannot claim credit for purchases from renewables.
Even if – in a best case – they are buying lower priced carbon offsets or RECs from some other location, this approach is misleading and does not reflect well on the actors involved. If Bitcoin miners are claiming credit for renewables purchases, they should subscribe to the logic governing all of the other players in a system that has evolved for over a decade.
And if miners are buying low-cost energy from renewable assets without retiring RECs, they should be explicit about their activities. An increased level of transparency is absolutely essential for an industry that is already struggling to gain societal acceptance and trust.
The Need for Better Self-Regulation and a Superior RoadMap
To address the growing level of criticism and scrutiny leveled at the industry, miners would be advised to take the high road and do a better job of self-policing, finding ways to differentiate responsible miners from those actors who are not fully embracing ESG measures.
To date, many players in the industry appeared to have largely sidestepped many of these critical questions, but as the climate imperative grows stronger, these issues will become increasingly difficult to ignore. This is the right time for Bitcoin miners to begin to display a clearer vision, a higher level of business maturity, and a more responsible social profile.
They would do well to emulate the strategies being adopted by many of their data-processing brethren – the Googles, Apples, Microsofts, and Equinixes of the world. Those companies (and many others) have made serious commitments in recent years to reducing their carbon footprints and set examples the Bitcoin industry would be advised to follow. Google, for example, is focused on matching its energy consumption with clean energy on a one-for-one basis, 24 X 7 (and, of course, retiring the RECs). Apple is carbon neutral today, and plans to make every one of its products carbon neutral by 2030. Microsoft has committed to being carbon negative by 2030. And Equinix has also set a science-based target of global carbon neutrality by 2030. That’s what responsible leadership in the data world looks like these days.
Bitcoin Miners: What They Could and Should Do
The Bitcoin sector should quickly take a leaf from their playbook and pledge to help with the continuing transition to a carbon-free grid. Bitcoin miners that want to be responsible should use their natural operating and financial characteristics to take the following steps:
1) Commit to higher standards of energy efficiency, and maybe get certification.
2) Commit to interruptible contracts in writing.
3) Adopt carbon reduction objectives based on scientific evidence.
4) Do not enter into any new contracts with gas or coal-fired power plants.
5) Only claim credit for purchases from renewable energy suppliers if the accompanying green energy credits are publicly committed to be retired.
Bitcoin miners should pay attention to BlackRock CEO Larry Fink’s warning about climate change and business actions. BlackRock manages $10 trillion in assets. “Most stakeholders – from shareholders to workers, to consumers, to communities, and regulators – increasingly expect enterprises to play a role in decarbonizing the global economy,” Fink said in his most recent annual letter to the CEOs of companies in which it invests. Few factors will have a greater impact on capital allocation decisions – and hence your company’s long-term worth – than how well you handle the global energy transformation in the coming years.”
Bitcoin has recently climbed to previously inconceivable heights, making it today’s darling new industry. However, it is subject to the same challenges as any other business on our carbon-constrained globe. The Executive Order issued by the Biden Administration makes this very obvious. If the Bitcoin mining business is to continue to expand and flourish, it must acknowledge this truth and begin to take a far higher route than it looks to be on right now.