Why mining Bitcoin might be good for the Environment
Intro
The main critique of bitcoin by many skeptics is its mining process and the amount of energy used on it, in this post I want to make the point that this mining process creates a massive incentive to move away from fossil fuels towards renewable energy.
A quick look at mining
Bitcoin in mined by guessing a valid block, the number of valid blocks is adjusted every 2016 blocks to ensure blocks are being found in a 10-minute interval. The optimal way to mine bitcoin is to let dedicated hardware make a lot of guesses, this introduces the main two cost points: hardware costs and energy costs. Due to the high demand the chance of acquiring hardware way below list price is very slim, leaving the cost of energy as the main factor, determining whether your mining operation will be profitable or not.
Looking at data for commonly used mining hardware, most models a mining at loss once the power price exceeds $0.10/kWh. Factoring other costs associated with mining Bitcoin like the buying hardware, renting the data center space and the cost of selling Bitcoin, getting extremely cheap energy (<$0.05/kWh) is required to run a successful mining operation.
On the Cost of Electricity
If we take a look at a study comparing the costs of different energy types (Page 17) for 2021 in Germany, we can see that the only methods of producing energy below $0.05/kWh are from renewable sources. Since the companies producing and delivering the electricity want also want to make a profit and (depending on the country) the electricity will be also taxed, Bitcoin miners are in most cases not able to buy “regular” electricity on the open market, if they wish to turn a profit. For this reason, mining companies in the US tend to run their own solar farms.
On surplus renewable Energy
The main issue of renewable energy it’s unpredictability: If there is a lot of wind, a lot of electricity will be produced, if there is no wind, no electricity will be produced. This wind issue often occurs during the night when very little electricity is needed, but a lot is being produced. The logical solution would be to install a gigantic battery in order to store the excess energy and release it later, sadly, batteries this large are not economically viable. As a result of this, wind farms usually get turned off during those periods. This limits the profitability of renewable electricity and leads to fewer investments in new power plants.
Bitcoin + Renewables
In the past three chapters I presented a source of electricity that tends to overproduce and a way of turning cheap electricity into goods. In a perfect world, bitcoin miners would be dynamically added and removed from the grid depending on the amount of electricity available. Not only would this increase the stability of the grid, it would also add a price floor for energy, essentially guarantying that renewable electricity will never be produced at a loss. In reality, this is not happening due to government intervention: During times of low demand, electricity producers are being paid to take their generators off the grid, eliminating any need to sell their product. If policy was changed to encourage the sale of excess electricity to miners, the issue of overproduced electricity would be resolved by the free market, allowing the subsides to be used for other projects.
Pricing out fossil fuels
Miners being able to get extremely cheap energy will continue to shrink the margins on mining Bitcoin. If we take a look the development of the production cost of renewable energy (Page 15), we can see that the levelized cost of electricity (LCOE) for photo voltaic projects has decreased by 85% between 2010 and 2020, this implies that there is still a lot of room for improvement in this field of technology. Price targets from the US Department of energy for 2030 tell a similar story: the LCOE for PV systems is projected to drop by another 50% until 2030 reaching a cost point of only $0.02/kWh. On the opposite deposits of fossil fuels are getting harder to reach thus more expensive to exploit, while technological advancements in this field will potentially offset the cost increases they will not be able to reduce the price of fossil fuels by 50%. Once the mining market has adapted to the cheaper LCOE from PV systems, the margins for energy prices will drop and slowly price out miner using fossil fuels from mining at a profit.
Summary
Renewable energy systems tend to produce excess energy which is currently not utilized. Bitcoin mining provides a good way to use excess electricity for in order to generate a profit for both the miners and the power companies, this will lower the risk of investing in renewable energy production and research since investors can be sure the energy is being sold no matter what. Further investments in renewable energy research will bring down the LCOE of renewables and thus make fossil fuels less and less relevant.