Written by: Margot Paez, Head of Sustainability, Kim Sandin, Head of Growth
Bitcoin Mining Is a Symbiotic Partner to the Green Energy Revolution
Global forces are putting pressure on the shift to green energy. Climate change is the biggest challenge of our time, as global emissions need to be halved every decade from now to reach net zero and the Paris Agreement by 2050.
We believe Bitcoin mining could operate as a symbiotic catalyst in the transition to a cleaner and more renewable grid. Serving as a dynamic collaborator that generates fresh revenue streams and improves the grid’s stability, it facilitates the economic viability of this energy transition. Like a reliable co-pilot guiding a spaceship through uncharted territories, Bitcoin miners provide invaluable support to propel the renewable energy revolution forward.
The economics of Bitcoin mining makes Bitcoin a unique energy consumer for solving significant challenges related to climate change, greenhouse gas emissions mitigation, and the energy transition from conventional fossil fuels to renewable energy generation. Integrating higher levels of variable renewable energy into the grid while reducing our reliance on conventional fossil fuel for baseload poses notable complexities, such as supply-side inflexibility and grid instability.
Bitcoin mining’s unique characteristics provide direct solutions to these challenges and offer promising opportunities for addressing them effectively. Grid congestion and negative pricing, due to a lack of transmission infrastructure and mismatch in supply and demand, can be alleviated by strategically locating Bitcoin miners in areas with an abundance of renewable energy. By tapping into the price sensitivity of mining operations, the overproduction of renewable energy can be effectively managed, providing a new revenue stream for underutilized wind and solar power. Plus, when strategically balancing flexibility with market contracts, Bitcoin mining can uniquely alleviate grid risks through participation in demand response programs.
Addressing methane emissions from high-emitting sectors like oil and gas and agriculture is expected to have a high impact. The monetization of flaring through methane combustion for mining creates a financial incentive to decarbonize. To mobilize efforts in reducing methane emissions, it is crucial to establish an economic engine that can accelerate these endeavors.
Considering the positive impact that Bitcoin miners can have in the green transition, we are confident in our ability to mirror the achievements of sustainable investments in the traditional finance sector. Block Green’s platform will give sustainable miners access to investors willing to pay a premium for green hashrate. We believe that with the introduction of our transparent, standard-driven, and industry-tailored sustainability framework, we will successfully utilize Bitcoin to decarbonize global emissions.
Bitcoin Mining Economics Incentivizes Sustainability
Bitcoin Mining Economics 101
Bitcoin mining economics plays a key role in the overall sustainability of the network’s energy use. Mining economics are subject to three major considerations:
i) the bitcoin price,
ii) the difficulty adjustment, and
iii) the block reward and–over time as the block reward approaches zero–the transaction fees
The difficulty adjustment maintains a competitive market for miners. It zeros out a miner’s advantage over time, generally until the Bitcoin price increases, allowing the network’s cumulative hashrate to grow until the difficulty adjusts again.
Every four years block reward is halved, an event known as the halving. The halving also puts pressure on Bitcoin mining profitability. In 2024, the block reward will be cut in half, from 6.25 to 3.125 bitcoin putting additional pressure on a miner’s profitability. To remain competitive, a Bitcoin miner (whether it’s using a single computer or tens of thousands) must find ways to increase efficiency. In previous Bitcoin halving epochs, miners with early access to more efficient mining computers had a competitive advantage. These days, chip efficiency variance has a diminished impact on the operational efficiency across the leading Bitcoin mining operators. As a result, miners must seek efficiencies elsewhere.
Operational Efficiency Promotes Sustainability
To maximize their chances of success, mining operations primarily focus on efficiency gains in OPEX, as minimal gains can be achieved in reducing CAPEX. Reducing energy costs stands as the most effective approach, and these improvements often align with incentivizing better sustainability practices, particularly due to the availability of stranded renewables.
Miners can also improve operating conditions to minimize power loss, explore additional revenue streams like carbon credits, or repurpose low-grade waste heat from computers. However, the most significant impact stems from their ability to identify regions worldwide where electricity is underutilized and wasted, allowing them to capitalize on cheap power and inefficiencies.
In view of the inherent incentive of miners to minimize energy costs and the fact that clean energy in most locations is the cheapest source of energy, we expect the Bitcoin mining industry to continue to move quickly to clean energy. As of 2020, on-shore wind and solar electricity generation now have the lowest global weighted average levelized cost of energy. The International Renewable Energy Agency (IRENA) recently reported that not only is new capacity competitive with fossil fuel power generation but that variable renewable energy is increasingly less expensive than the marginal operating costs of fossil fuel electricity generators. There are now over a gigawatt of Bitcoin mining projects that are co-locating with renewable power generators.
Obstacles on the Path to Net Zero
The pressure to transition to green energy is intensifying among global decision-makers. Climate change stands as the greatest challenge of our time, requiring a reduction of global emissions by half every decade to achieve net zero and fulfill the commitments of the Paris Agreement by 2050. Accelerating the shift towards a sustainable future has a clear path to the reduction of 1.5°C, but it also presents a monumental challenge that must be overcome.
The Challenges Facing the Transition to Green Energy
Addressing the complexities of emissions reduction and achieving global climate goals necessitates a significant focus on the decarbonization of the electrical grid. This involves expanding renewable energy sources, increasing and upgrading transmission lines, phasing out coal power plants, and decreasing reliance on natural gas. However, integrating higher levels of variable renewable energy into the grid while reducing reliance on conventional fossil fuel base load generators presents notable challenges. The National Renewable Energy Laboratory reported that variable renewable energy levels at 30 percent or more of power generation create greater challenges due to supply-side inflexibility and limited alignment between solar and wind and demand.
Conventional fossil fuel generators, nuclear power plants, and hydropower plants are easily controlled and managed on the supply side. They also provide something called grid inertia which gives the grid operator a buffer when one generator goes offline and another is brought online, making the continuous delivery of electricity to off-takers smoother. Variable renewable energy generators do not provide the same kind of inertia. This puts the grid at risk.
Wind and solar power generators are intermittent, which means that they produce power whenever their energy source is available. As the percentage of variable renewable power generation is added to the grid, the more delicate grid stability becomes, and grid operators require a new way to control these challenges.
To maintain grid stability during periods of low renewable energy generation, it is often necessary to rely on backup power sources, such as natural gas or coal-fired power plants. However, the inclusion of these backup generators introduces complexities and higher costs, partially offsetting the environmental advantages of renewable energy. This can be observed in the 7 day-graph of estimated power demand in Germany, illustrating the need for supplementary power sources when wind and solar generation fluctuates.
Overproduction of Renewable Energy
The profitability of variable renewable energy sources, such as solar and wind, face downward pressure due to the uniformity of solar and wind production among all power producers in a given region. This creates a competitive market scenario, driving down the cost of wind and solar electricity. However, an oversupply presents revenue challenges for power plant operators due to curtailment, which arises when the amount of generated power exceeds the demand. In such cases, grid operators ask solar and wind generators to decrease their power production. To address curtailment, newly established wind or solar power plants incorporate estimates into their revenue and return on investment projections. Yet, these estimates occasionally fall short of the actual curtailment levels experienced. As a result, without a buyer willing to offset this unanticipated loss of revenue, the time required for these plants to recoup their investment is prolonged.
A tangential issue is the need to overbuild power production to meet seasonal demand. Earlier this year, Marathon Holdings and Zero Two announced a collaborative venture in Abu Dhabi to improve both grid baseload and sustainability. The partnership will build two data centers with 250 MW total energy capacity. These sites will utilize excess power on the grid when demand is lower in the winter season. This revenue floor will make it possible for Abu Dhabi to have a steady flow of waste heat for their water desalination plants. The joint venture also plans to purchase renewable energy certificates, which will incentivize additional renewable energy projects on the grid.
Grid Congestion and Negative Pricing
Grid congestion is an energy transition issue that can also lead to reduced revenue for wind and solar generators. Lack of transmission build-out means that power that is needed in another region of the grid is trapped at its location of generation. This causes an oversupply of zero marginal cost wind and solar electricity. Similarly, peak production hours for wind and solar can lead to negative pricing in the electricity market.
The prevalence of negative prices in certain regions, such as the Central US ( “Wind Belt” ) and parts of California, highlights a significant challenge in the energy market. While energy scarcity typically grabs headlines, the occurrence of negative prices underscores the issue of energy abundance in specific areas. This phenomenon can be attributed to the successful deployment of wind and solar projects, resulting in occasional surpluses that outweigh the local demand necessitating effective strategies to manage supply-demand imbalances and ensure the overall stability of the energy market.
Delays in connecting renewable energy projects to grids worldwide are posing a significant threat to greenhouse gas reduction efforts. The shift towards renewable power generation requires a major revamp of existing grids designed for fossil fuel-based plants. To keep the 1.5°C target alive, the renewable power generated must more than triple from 3,000 GW today to more than 10,000 GW in 2030. Grid operators are already struggling to handle the surge in connection requests, highlighting a critical bottleneck. Europe alone requires an estimated €400 billion for grid investments to prepare for the green energy sources.
Recently, the Intergovernmental Panel on Climate Change published a report that found that methane emissions played a much higher role in global warming than initially predicted. Methane emissions are 86 times as potent as carbon dioxide emissions over 20 years and about 28 times more potent over a hundred years. Anthropogenic methane emissions include agriculture, waste, and the extraction and use of fossil fuels. Currently, anthropogenic methane emissions make up two-thirds of global methane emissions. Reducing these methane emissions is the best way to slow the effects of climate change.
Oil and gas methane emissions contribute 33 percent of global anthropogenic methane emissions. Some of this is due to inefficient flaring and leaks from orphaned or uneconomical wells. Flaring methane accounts for about 4–10 percent of US oil and gas methane emissions. Recent studies found that flaring is less efficient at burning methane, with around a 91 percent efficiency compared to combusting methane in an engine which is at least 98 percent efficient. Addressing these emissions is more nuanced than with agriculture and waste emissions. However, discovering alternative solutions that surpass the efficiency of flaring methane gas can significantly contribute to the short-term mitigation of methane emissions.
Agriculture and waste industries are paramount because their methane emissions can be utilized as a form of renewable energy. Waste, such as at landfills, accounts for around 15 percent of global human-sourced methane emissions while agriculture accounts for 48 percent. Tackling these emissions could lead to a reduction in 63 percent of global methane emissions.
Bitcoin Mining Is the Solution
Given the increasing intermittency and variability of electricity supply along with the emergence of volatile electricity demand (e.g. EV charging), the need for adaptable tools to effectively manage both supply and demand has become increasingly crucial and valuable.
Bitcoin mining has the potential to revolutionize demand response. Forbes describes these highly flexible data centers as a “shock absorber for this new green power”. Mining loads that participate in demand response programs are paid for their swift curtailment in response to grid needs, others power down based on spot price. As the share of inflexible renewable energy sources on the grid increases and the demand for electricity continues to rise, flexible tools like Bitcoin mining are becoming increasingly important. Demand response becomes particularly valuable in regions with hot climates and increased seasonal demand.
A notable instance happened last summer when Bitcoin miner Riot Platforms shut down its Whinstone operation when a statewide heatwave hit the Texas grid and pushed power consumption to a record high 78.2 GW. Riot participates in Texas’ demand response program and is paid for shutting down when the grid reaches blackout levels. During this heatwave, Bitcoin miners returned over 1 GW of power back to the Texan grid.
Riot CEO Jason Les summarizes how bitcoin miners are uniquely able to provide these benefits to grid demand response programs, “The Company has consistently and proactively pursued low-cost, large-scale access to power under its long-term fixed-rate power contracts, providing it with a unique ability to support ERCOT and release capacity back into the grid when power demand in Texas is high”.
Price Response Mechanism vs Incentivized Demand Response
Integrating demand response strategies offers a solution to effectively address the intermittency of renewable energy sources. In this context, Bitcoin miners play a crucial role as demand response providers, participating in either price response mechanisms or incentivized demand response programs. This synergy allows Bitcoin mining to deliver both flexibility and stability to the energy grid while maximizing the utilization of renewable resources.
In an unregulated grid where electricity prices are determined by wholesale spot prices, there exists a favorable setting for implementing price response power curtailment. This particular form of demand response does not necessitate participation in a demand response program. Instead, demand response happens when Bitcoin miners power down when the price of electricity is higher than the miner’s breakeven price. When demand is low, electricity spot price is usually lower than the breakeven price, so miners will turn on and consume this power, providing a steady source of revenue for the power generators that are online at that time. This kind of responsiveness allows Bitcoin miners to fill the price valleys and prevent price peaks from worsening.
With an incentivized demand response program, Bitcoin miners sell their service into the ancillary market. If selected, they are required to be operating for a certain time. If during this period the grid operator signals to the mining operator that they must power down their operation, then the Bitcoin miners return power to the grid. This often happens when demand is high and there is a risk to grid stability as a result. In this case, the Bitcoin miner would be financially compensated for the amount of time they stayed offline.
Last winter, Bitcoin miners powered down during an Arctic storm that hit large parts of North America. Their power curtailment was so high that it resulted in a significant drop in the Bitcoin network’s hashrate, which fell by 40 percent over a period of three days at the end of December. During the same storm, Bitcoin miners were able to return up to 1.5 GW of power to the Texas grid, enough to power 1.5 million homes. During Winter Storm Uri, Texan grid operators required Bitcoin miners that were participating in their demand response program to power down for several days, returning much needed power to meet demand for heating and essential services.
Bridging Future Demand
Given the acknowledged volatility and the long-term volatility, miners are generally hesitant to enter into long-term contractual commitments for power. They prefer shorter commitments, typically not extending beyond three years. Mining equipment older than three years is commonly utilized in regions where miners benefit from exceptionally low energy costs or even free energy sources. From the perspective of utilities, miners can be considered short-term users of the overall power system. They can serve as a temporary solution to bridge gaps of oversupply and gridlock until further economic development takes place.
Enabling Dispatchable Generation
Bitcoin mining has the unique capability to transform an inflexible nuclear power plant into dispatchable generation. It achieves this by efficiently absorbing standby power during periods of low demand when no other entities require it. Furthermore, Bitcoin mining can instantaneously reduce its power consumption when the grid necessitates additional power supply. This rapid responsiveness between Bitcoin mining and the electricity grid could turn an inflexible conventional base load into a flexible baseload that is ready to meet the challenges of the twenty-first century.
Harnessing Locational Arbitrage
Bitcoin miners can alleviate negative pricing if they geographically locate their operations in regions with high levels of wind and solar power. This benefits the mining operation because very low or negative electricity prices reduce operational costs and increase revenue. One side effect here is that the increased demand will likely raise prices, increasing revenue for the power generators in the region. The price response nature of Bitcoin mining can set a cap on how much demand comes from Bitcoin miners. The increased demand could also stimulate the buildout of more renewable energy sources.
“An interesting externality of PoW coins — they are always-willing energy buyers at 3–5 cents/kWH. And some of the best energy assets are off the grid. This global energy net liberates stranded assets and makes new ones viable.
Imagine a 3D topographic map of the world with cheap energy hotspots being lower and expensive energy being higher. I imagine Bitcoin mining being akin to a glass of water poured over the surface, settling in the nooks and crannies, and smoothing it out.”
Nic Carter, Caste Island Ventures
Besides the pricing aspect, Bitcoin mining also has the potential to support local utilities with distribution management. Leveraging the inherent locational flexibility of miners, utilities can strategically position mining operations in areas where they can optimize system performance. By absorbing surplus power, Bitcoin mining assists in balancing distributed generation and contributes to the overall smoother operation of the grid.
New Revenue Stream
Co-locating Bitcoin mining with a struggling power generator can provide a revenue floor. In particular, renewable energy like wind and solar are projected to increasingly suffer from curtailment as more variable renewable power comes online. As previously discussed, increased curtailment reduces the value of these power generators. Dedicating a percentage of the operation to Bitcoin mining reduces the need to curtail and increases revenue, making it easier to meet timelines for return on investment. Companies like Soluna and ACDC are using Bitcoin mining specifically for addressing the revenue shortfalls of the renewable energy industry.
Flaring: Monetizing Decarbonization
Small-scale mining operations can co-locate on landfills and agriculture sites where methane is being vented or inefficiently flared. Many smaller landfill sites (one megawatt or less) do not have capture and flaring systems already in place. Monetizing these sites with Bitcoin mining can help pay back the investment and reduce emissions. A startup called Vespene Energy is currently running a Bitcoin mining pilot at a landfill site.
Crusoe Energy and Mockingbird are two notable companies pioneering the co-location of Bitcoin miners at flared gas sites in oil and gas fields, thereby offering a promising solution to mitigate methane emissions. By utilizing the combusted methane gas in electricity generators for mining purposes, these companies are able to achieve greater efficiency compared to conventional flaring methods, effectively reducing the environmental impact of methane release.
According to a UN report, concerted effort to reduce methane from the fossil fuel, waste, and agricultural sectors could slash methane emissions by as much as 45 percent by 2030, helping to avoid nearly 0.3 degrees Celsius of global warming as early as the 2040s. By transforming methane mitigation into a profitable business venture, Bitcoin mining can play a pivotal role in accelerating this process and driving its success.
ESG in Capital Markets
As the Bitcoin mining industry matures, industry participants are comprehending the importance of adhering to ESG standards and aligning with climate goals.
Industry forecasts show that ESG-focused institutional investment is set to rise from $18.4 trillion in 2021 to an estimated $33.9 trillion by 2026. This represents a projected compound annual growth rate of 12.9 percent over the next five years. By 2026, 21.5 percent of today’s total assets under management will have an ESG mandate.
Financial incentives are highly effective at driving meaningful change in capital markets when guided by ESG considerations. These incentives align investments with sustainable objectives and have led to a significant allocation of capital into renewable energy projects, resulting in both environmental benefits and financial returns.
There is compelling evidence of the positive impact of financial incentives on ESG-driven investments in the renewable energy sector. Globally, an average of $339 billion per year was dedicated to renewable power generation, while fossil fuels received an average of $135 billion per year. These investment figures align with the capacity addition trends observed over the past decade. During the period from 2011 to 2021, renewable energy capacity witnessed an impressive growth of 130%, surpassing the growth rate of fossil fuels, which stood at 24%.
In 2020, the global market for ESG assets expanded to an impressive $35 trillion and is projected to surpass $50 trillion by 2025, representing around one-third of the total projected assets under management globally. This remarkable surge in investments reflects the escalating interest in ESG-supported opportunities, particularly in renewable energy projects. Yet, despite this substantial growth, significant challenges persist in aligning with the 1.5°C Paris Agreement Scenario, to achieve a successful global energy transition, an estimated cumulative investment of approximately $150 trillion will be required from 2023 to 2050.
Growth of Green Bonds
Green bonds are an ESG product that is showing strong growth. These bonds are fixed-income financial instruments specifically designed to finance environmentally friendly projects. From 2015 to 2020, the issuance of green bonds experienced substantial growth, with an annual average growth rate of over 50 percent. These bonds provide investors with an avenue to invest in renewable energy and other environmentally sustainable projects while generating financial returns.
Willingness to Pay a Premium for ESG Funds
With the prospect of higher returns, surveyed investors are willing to pay for ESG performance–78 percent say they would pay higher fees for ESG funds. Over half of the investors polled are willing to build ESG into performance-related fees–two-thirds of those would accept a 3–5% ESG premium. Additionally, 57 percent of asset managers are looking at charging ESG-based performance fees, with 60 percent of them saying a range of 3–5% would be acceptable.
Companies are now developing their own ESG strategies to meet the demands of investors and clients. This includes greater transparency and reporting of total emissions, energy efficiency, and social impact of a company’s operations. Governments are helping make ESG investment more attractive with incentives like tax credits, feed-in tariffs, and renewable energy portfolios. The Inflation Reduction Act is one example of this kind of policy-based incentive.
Deloitte’s Renewable Energy Outlook for 2023 report found that US investment in renewable energy reached $10 billion in 2022. Globally, IRENA reported that investments in energy transition-related technologies reached 1.3 trillion in the same year. However, IRENA also notes that while ESG investments are growing, they are not yet at the levels needed to meet Paris Climate goals. We need better solutions to attract investment toward sustainable climate technologies like Bitcoin mining.
The Sustainability Framework
Block Green’s mission is to replicate the resounding success of ESG-driven investments with the development of a new sustainability framework for Bitcoin mining. This framework aims to incentivize miners by offering a premium for their operations if they are powered by clean and/or renewable energy sources. We strive to create a positive impact through our sustainability framework which aligns the financial interests of miners with the goal of reducing the carbon footprint of mining operations. By rewarding miners who prioritize clean energy, we contribute to the global efforts towards mitigating climate change and promoting a sustainable future.
One of the challenges with ESG is a lack of transparency in rating methodologies and a lack of focus on useful information that encourages ESG-driven investment. We are building a framework that is based on existing international standards that are tailored to the Bitcoin mining industry and which will set the bar for transparency, adopt universal benchmarks, and report useful metrics and information that will inform and drive capital toward sustainable green hashrate.
We aim to bring about a paradigm shift in mining profitability by introducing a sustainability framework that aligns financial incentives with our commitment to promoting environmental responsibility. Overall, Block Green’s sustainability framework represents a significant step forward in incentivizing and promoting environmentally conscious mining practices, ultimately driving positive change in the Bitcoin industry.
Change Through Incentives
Building upon the remarkable success of ESG-driven investments, Block Green is determined to replicate this dynamic by offering a market with financial incentives for green miners. Block Green’s platform grants access to cheaper cost of capital and as a result is an attractive destination for investors who prioritize sustainable mining operations and actively seek to acquire bitcoin mined with green hashrate. This sets in motion a market-driven mechanism where sustainable miners receive increased financial support, driven by the increasing demand from investors who are specifically interested in environmentally friendly practices.
Through this replicating dynamic, Block Green aims to create a shift in the allocation of funding within the Bitcoin mining industry. Verified green miners, who meet our stringent sustainability criteria and operate using sustainable energy sources, will have a competitive advantage in attracting buyers for their bitcoin. This advantage encourages other miners to transition to sustainable practices in order to access the growing market of investors specifically seeking out green hashrate. As a result, the market dynamics will gradually allocate more funding to sustainable miners, driving the overall adoption of sustainable mining practices in the industry.
As we gear up for takeoff on this journey, we firmly believe in harnessing the power of Bitcoin mining as a catalyst to bridge the gap in the green energy transition, aligning with the objectives established by the Paris Agreement. Energy stands as both a challenge and a profound solution to our pressing issues. Our mission is to amplify existing incentives within regulatory frameworks and capital markets, shepherding the decarbonization of global emissions hand in hand with Bitcoin mining. Together, we strive to pave the way toward a sustainable future.