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Director Blockchain Assurance, PwC Switzerland
The electricity consumption of bitcoin mining calls for new approaches regarding the use of energy resources. Based on the hypothesis that Bitcoin is here to stay, we think it is worth discussing how bitcoin mining can support the transition to a more sustainable economic model and future and how an ESG strategy of building renewable energy power plants with the purpose of mining Bitcoins could deliver positive environmental results.
When bitcoin was created in 2009, the amount of energy required to mine a coin was equivalent to the electricity consumption of an average household for a few seconds; the value of one Bitcoin was practically nothing. Today, the equivalent of nine years’ electricity usage of a typical household is needed to mine one bitcoin, which currently trades at USD 20’000 – but this price can fluctuate strongly. Globally, the mining of bitcoin currently consumes more than 129 terawatt-hours of electricity per year – as much as Finland’s electricity consumption and a good 30 percent more than Switzerland’s. This usage, which accounts for almost half a percent of the world's total electricity consumption, has increased about tenfold in the last five years alone.
Simply put, bitcoin mining is the process by which more bitcoins are created. But bitcoin mining is also an essential part of how bitcoins work as a decentralised cryptocurrency. To verify transactions and maintain the ledger, bitcoin requires computers to solve increasingly complex mathematical problems. This is the basic concept known as a proof-of-work (PoW) system, and it consumes drastically more energy than verifying transactions on a centralised network. As we saw the value of bitcoin increase over the last years, there has been an incentive for ever more people to become miners. And as the difficulty of solving any cryptographic problem increases as the network grows, more and more energy is consumed by miners.
Its massive carbon footprint has cast bitcoin mining in a negative spotlight, and bitcoins seem to be totally at odds with the urgent transition to a greener and more sustainable economic model and future. Policymakers and regulators have responded; China, which used to be the world's largest bitcoin miner, banned bitcoin mining. The reasons for this ban may not only be energy-related, but also driven by concerns for the countries’ monetary system.
As a result, agile miners – mining infrastructure can be relocated easily – moved to countries such as Kazakhstan, which was soon responsible for 18 percent of global mining. However, the resulting power outages, which affected households and factories alike, prompted the Kazakh government to cut the amount of electricity that miners could call on by 95 % in mid-October. Therefore, the mining industry is again on the lookout for new destinations.
Average years of household-equivalent electricity to mine one bitcoin using the most efficient hardware available at the time
Against the backdrop of rising energy prices and a significant increase in expected shortages, the demand that scarce electricity be used for the real economy, and not for bitcoin mining, is justified. Also from an ESG (environment, social, governance) point of view, the bitcoin network’s exorbitant energy consumption is problematic. However, as the cryptocurrency offers specific and widely recognised benefits, it is safe to assume that bitcoin is here to stay, and that bitcoin mining will not be banned globally.
Looking at the social aspects, benefits of bitcoin include the fact that unbanked persons, especially in developing and emerging economies, can gain access to banking services. These persons can use bitcoin without having a “traditional” bank account. They may be able to transfer, receive and store money more easily and in a safe and secure way.
Therefore, it is imperative to think about how resources are best used, and which solutions are conceivable to meet these challenges – or even create a positive impact. In addition, the use of other, hardly energy-consuming validation concepts such as PoS (proof-of-stake) must be discussed on a broader basis.
It is often overlooked that bitcoin mining has the potential to support and accelerate the global energy transition towards renewable energies by serving as an additional technology for the generation and storage of clean energy. How can this be? The bitcoin network can serve as a flexible energy buyer of last resort to balance fluctuations in renewable power generation and demand.
Thanks to rapid technological progress, solar and wind farms can now provide the least expensive energy, but they suffer from grid bottlenecks due to their unstable energy supply. Even in industrialised countries with a highly developed grid infrastructure, such bottlenecks, overloads, and fluctuations occur – however, surplus energy could be used for bitcoin mining.
Bitcoin’s electricity usage compared with countries
Bitcoin miners could help mitigate intermittency and congestion and allow grids to use much more renewable energy. They are unique energy consumers in the sense that they offer a highly flexible and easily interruptible load, make a payout in a globally liquid cryptocurrency, and are completely location-independent. The only infrastructure they need, besides the mining equipment, is an internet connection. Bitcoin miners could therefore play an important role in the development and expansion of renewable energy generation: They use electricity when there is overcapacity and curb their own demand at peak times because they have the required flexibility. Bitcoin creates flexibility and predictability in renewable power generation and provides a price floor in the market.
Furthermore, energy companies that build renewable energy power plants (wind, water, solar) and use the energy generated to mine bitcoins achieve a higher profitability than if they were to sell the electricity at market prices. The "green" power plant could then invest these profits in further clean energy projects or other projects that meet ESG criteria. Bitcoin mining can thus support the shift to a more sustainable economy and be in line with climate goals.
Such new power plants could even – or especially – be built in remote locations, for example in Iceland with its geothermal resources or in the Sahara with its limitless solar energy. It should be noted that the further cost reduction potential is particularly high for solar energy, as it is a semiconductor technology, whose price has consistently fallen by 20-40 percent with each doubling of cumulative capacity.
NREL Duck Curve (net load in megawatts)
Intermittency results in the “duck curve”: In essence, the sun shines during the day, but not at night. Wind is more unpredictable but tends to blow more heavily at night. Energy supply, therefore, is either abundant or non-existent. Demand, however, peaks around the late afternoon or early evening when people come home and turn on appliances and neither solar nor wind are abundantly available. For a few hours per day this results in significantly more power than typically needed and not nearly enough when demand spikes.
Green power plants could be connected to the grid earlier and become profitable sooner thanks to bitcoin mining. The reason is that such projects could be built before lengthy grid connection studies are completed, since bitcoin miners can use the energy until it becomes possible to sell it to the grid. Thereby, these green power plants become more attractive to investors looking for sustainable investment opportunities. In Texas, for example, with its large wind farms and deregulated electricity grid, 60 percent of bitcoin production is mined with renewable energy, allowing for very high investment returns with margins of 60 to 80 percent . Furthermore, listed bitcoin miners must meet both regulatory requirements and investor preferences on ESG and sustainability issues.
Advocating for the construction of green power plants with the purpose of mining bitcoin and promoting other clean energy projects and initiatives would require a high degree of accountability and measurability of the respective value chains.
To validate green bitcoins – or green cryptocurrencies in general – a system similar to the one used to combat money laundering could be introduced. While opaque internet addresses are blacklisted to avoid transactions related to possible criminal activity, bitcoins generated exclusively with clean energy could be greenlisted. This is possible because every step of the mining process and every resulting transaction can be traced seamlessly on the blockchain and is therefore transparent.
Initiatives like the Bitcoin Clean Energy Initiative and the ideas presented in this article do not answer the fundamental question of whether scarce and valuable energy should be used for mining cryptocurrencies instead of flowing into the real economy, for example to heat or cool buildings or to produce food and everyday products. But since there may well be more and more synergies between bitcoin mining and clean energy production, we think it worth discussing.
A blockchain is a decentralised ledger of all transactions across a peer-to-peer network. Using this technology, participants can confirm transactions without a need for a central clearing authority. Potential applications can include fund transfers, settling trades, voting, and many other issues.
How blockchain works
Blockchain is the technology that enables the existence of cryptocurrency (among other things). Bitcoin is the name of the best-known cryptocurrency, the one for which blockchain technology was invented. A cryptocurrency is a medium of exchange, such as the US dollar, but is digital and uses encryption techniques to control the creation of monetary units and to verify the transfer of funds.
PoW is the original consensus algorithm in a Blockchain network. this algorithm is used to confirm transactions and produce new blocks to the chain. With PoW, miners compete against each other to complete transactions on the network and get rewarded.
Put simply, proof-of-stake (PoS) requires miners to front a small amount of cryptocurrency to be entered into a lottery for the chance to verify transactions. The thought is that if you’re putting up some amount of value as collateral, you’re less likely to approve fraudulent transactions that would devalue the currency and cost your stake. Because the proof-of-stake system removes the competitive computational element of proof-of-work, it saves energy and allows each machine in a PoS to work on one problem at a time, as opposed to a PoW system, in which an array of machines are rushing to solve the same problem – thus wasting energy.
Bitcoin mining entails a massive carbon footprint and seems to be at odds with any environmental goals. Against the backdrop of rising energy prices and shortages, the demand that scarce electricity be used for the real economy and not for bitcoin mining, is justified. However, as the cryptocurrency offers widely recognised benefits – also social benefits – and it is safe to assume that bitcoin is here to stay, new approaches for an optimal use of resources need to be developed: bitcoin mining has the potential to accelerate the global energy transition by serving as a highly flexible energy buyer of last resort to balance fluctuations in renewable power generation and demand. In addition, energy power plants that are built with the purpose of mining bitcoins can achieve a higher profitability than if they were to sell the electricity at market prices – especially when built in remote locations with easy access to green energy sources but lacking ways of integrating them into the grid. Plant operators could invest these profits in further clean energy projects that are in line with climate goals, ESG strategies, and serve the growing electricity needs. However, these initiatives would require a high degree of accountability and measurability of bitcoin generation and the respective value chains.
Director, Blockchain Assurance, PwC Switzerland
Tel: +41 58 792 6877