We recently came across an article written in March 2022 by economist Severin Borenstein in the Energy Institute at Hass which made the case that crypto mining does not help stabilize energy grids. It argues against the validity of two of the most commonly cited potential benefits of bitcoin mining to the grid: (1) that it will incentivize new energy generation projects to be built and (2) that miners will help stabilize energy grids by participating in demand response programs which incentivize them to shut off during peak demand periods when there are other sources of demand for most or all of the energy being produced.
According to his bio, Borenstein’s research “focuses on the economics of renewable energy, economic policies for reducing greenhouse gases, and alternative models of retail electricity pricing.” Indeed, one can see that he has a good understanding of these things from the energy side of the equation by reading the article. However, there are a few large gaps in knowledge about the other side of the equation, bitcoin mining, which make his arguments less compelling when corrected.
In this article, we will address what Borenstein gets wrong in his piece and why he (and you) shouldn’t be so quick to write off the claims that crypto / bitcoin mining can help improve the capacity and reliability of our power grids.
We recently came across an article written in March 2022 by economist Severin Borenstein in the Energy Institute at Hass which made the case that crypto mining does not help stabilize energy grids. It argues against the validity of two of the most commonly cited potential benefits of bitcoin mining to the grid: (1) that it will incentivize new energy generation projects to be built and (2) that miners will help stabilize energy grids by participating in demand response programs which incentivize them to shut off during peak demand periods when there are other sources of demand for most or all of the energy being produced.
According to his bio, Borenstein’s research “focuses on the economics of renewable energy, economic policies for reducing greenhouse gases, and alternative models of retail electricity pricing.” Indeed, one can see that he has a good understanding of these things from the energy side of the equation by reading the article. However, there are a few large gaps in knowledge about the other side of the equation, bitcoin mining, which make his arguments less compelling when corrected.
In this article, we will address what Borenstein gets wrong in his piece and why he (and you) shouldn’t be so quick to write off the claims that crypto / bitcoin mining can help improve the capacity and reliability of our power grids.
In order to understand another important impact of bitcoin miners on energy grids and the environment, we should consider grids from a holistic perspective. Since it’s a grid operator’s job to match energy supply with demand for the entire system, all of the different sources of generation in a grid will be impacted by each other.
In a paper from the National Renewable Energy Laboratory, Impacts of Wind and Solar on Fossil Fuel Generators, the authors summarize:
“Regional integration studies have shown that wind and solar may cause fossil-fueled generators to cycle on and off and ramp down to part load more frequently and potentially more rapidly. Increased cycling, deeper load following, and rapid ramping may result in wear and tear impacts on fossil-fueled generators that lead to increased capital and maintenance costs, increased equivalent forced outage rates, and degraded performance over time. Heat rates and emissions from fossil fueled generators may be higher during cycling and ramping than during steady-state operation.”
As the proportion of intermittent renewables increases in our energy grids, so does the variability of supply needed from more reliable and stable energy sources like natural gas. These generators that turn on or ramp up their supply during high-demand periods are often called peaker plants, and they have different emission profiles per Watt of energy produced than an equivalent generator that runs steady, 24/7.
Bitcoin miners who collocate with these would-be peaker plants and purchase electricity during off-peak times can improve the energy efficiency and lifespan of the plants by reducing the variability in the amount of energy they generate. This too is an important role to play in the transition to a more renewable-heavy energy mix, as described in a recent report from Goldman Sachs in which they say,
“In our view, there needs to be an appropriate balance between renewable and fossil fuel energy sources in order to ensure safe, reliable, and affordable energy for decades to come. We believe the recent global energy crisis may have shed light on this reality.”
Just as bitcoin miners can set up next to renewables sites and make them less risky investments, they can also improve the efficiency, lifespan, and economics for fossil fuel plants, leading to more reliable and cheap energy for everybody.
In the latter half of his article, Borenstein turns his attention towards critiquing the argument that bitcoin miners improve grid stability by acting as demand response resources, also known as controllable load resources.
For those who aren’t familiar, “demand response” refers to an energy consumer who adjusts the amount that they consume based on the amount of demand elsewhere in the power grid. For example, during a peak demand period, a miner who acts as a demand response resource would reduce or fully power off their operations so that the energy they would have consumed can be used to meet demand elsewhere in the grid.
In a 2021 report, the International Energy Agency (IEA) stated:
“…faster progress is needed: 500 GW of demand response should be brought onto the market by 2030 to meet the pace of expansion required in the Net Zero Emissions by 2050 Scenario (NZE), a tenfold increase on deployment levels in 2020.”
Miners are particularly well suited to being demand response resources because they are location independent (you can set up miners right next to generators in remote locations), can rapidly adjust their power consumption (powering fully on/off in ~15 seconds), and electricity is the main operating expense for miners so they are naturally incentivized to reduce load when electricity gets more expensive during peak demand periods.
Borenstein doesn’t directly refute these ideas, but he takes issue with miners receiving payments for the times when they turn off because he believes that miners will game the system to receive larger payments by artificially increasing their baseline energy consumption leading up to demand response events in order to receive larger payments when they shut off. He sees these payments as unnecessary given that miners don’t want to be online when electricity prices are high anyway.
However, the stat that Borenstein cites to justify this position is outdated and extremely inaccurate. He states, “30% to 40% of crypto mining electricity usage is for fans and other cooling technologies that can suck up power on demand,” a stat which he pulled from a 2017 article by Digiconomist.
In reality, mining data centers are optimized to use as little energy as possible for cooling, as electricity costs typically account for the majority of their operating expenses. The best metric for measuring this is Power Usage Effectiveness (PUE), which measures the ratio of energy used to power actual servers (in this case, mining machines) relative to all other sources of electricity consumption in the data center. According to the University of Cambridge,
“Conversations with miners support the hypothesis that mining facilities generally have significantly lower PUE than traditional data centres. In a best-case scenario, mining facilities have optimised data centre operations to a point where there is nearly zero overhead. This scenario is represented by assuming a PUE of 1.01.”
We can isolate the energy consumption for non-mining loads from the PUE value with the equation: Cooling Power = (PUE – 1) * Power Consumed. In other words, a PUE of 1.01 indicates that the power consumption of cooling technologies would account for only 1% of total consumption. Even if we are extremely conservative and assume that the PUE of 1.01 is an entire order of magnitude off and the true amount of consumption for cooling is 10% (a very inefficient and likely uncompetitive mining operation), it’s still 3-4x lower than the figure cited by Borenstein via Digiconimist.
On top of that, we would be remiss not to mention that Digiconimist is not a credible source of information. The site is run by Alex de Vreis, an employee of the Dutch Central Bank whose methodologies for estimating bitcoin’s energy consumption have been thoroughly discredited and whose original focus for the site was actually to blog about Dogecoin, an alternative cryptocurrency to bitcoin which ironically also uses proof of work.
In summary, Borenstein’s point that miners will manipulate their energy consumption to maximize demand response payments is based on an extremely flawed statistic from an unobjective source.
However, he didn’t get everything wrong. Borenstein finishes by saying that “paying crypto mining for demand response is likely to encourage more crypto mining,” and that part does make sense. Considering the IEA’s report that we need 500 GW of additional demand response brought to market by 2030 (34.5x the total estimated consumption of the bitcoin network today), we don’t think that encouraging more crypto mining is such a bad idea.
Bitcoin mining’s energy consumption has been the focus of great criticism for most of the cryptocurrency’s existence. Whether it’s central banker and Dogecoin enthusiast Alex de Vreis or the supposedly undergraduate-written and oft-cited Mora et. all paper in Nature claiming that bitcoin mining alone would lead to 2oC of global warming (which has also been discredited), it seems that bitcoin mining detractors care more about painting the cryptocurrency in a negative light than getting the facts straight about its energy consumption, environmental impact, and usefulness in building out generation and stabilizing grids.
When large corporatist organizations like the World Economic Forum put out (already disproven) fear mongering pieces claiming bitcoin mining will eventually consume all the world’s energy, it’s hard to give them the benefit of the doubt that they have good intentions. But for those who have taken the time to read this, we can say a few things.
Bitcoin is not easy to understand, nor is bitcoin mining. It takes a lot of patience and countless hours of study to start grasping the importance of proof of work to having a decentralized monetary network, as well as the benefits of that decentralized network to society at large. But it is worth it to make the effort and to learn with an open mind. You might just find that bitcoin is about much more than money.
Source: Antminer S9 Profitability
Even with $0.06/kWh—a very cheap electricity rate—the S9 daily profit is still just $1/day as shown above*. And if your electricity price is $0.10/kWh or higher, you’ll be in the red due to the S9’s poor efficiency.
So, if you want to mine at home and learn the ropes without breaking the bank, the S9 from Bitmain is probably the way to go. But if you want to really make money mining bitcoin in 2022, you should look to more efficient hardware.
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