Musk criticizes mining using coal: What does the paper he supports saying about Bitcoin being the key to clean energy say?

Author | Bitcoin Clean Energy Initiative Memorandum

Editor | Colin Wu

Translation | Rebecca

Introduction: Although Musk criticized Bitcoin's use of fossil energy, especially coal, on the 13th and suspended Tesla's acceptance of Bitcoin payments, causing the currency price to plummet, his support for Bitcoin and clean energy is consistent and did not change suddenly.

The paper, which was praised by Musk on April 22, believes that due to the instability of clean energy, Bitcoin mining, as a flexible load option, can utilize excess clean energy and help the power grid deploy more renewable energy. Bitcoin mining can help renewable energy have better resilience.

In fact, China's use of abandoned water and electricity in the southwest region also proves this point. The development of renewable energy will inevitably lead to the abandonment of wind, water, and light. Bitcoin mining makes use of abandoned electricity in a way that no other industry can match.

But it is undeniable that thermal power still accounts for a relatively high proportion of Bitcoin mining. Musk has single-handedly brought the cryptocurrency market into the next stage of the bull market, and now he is firmly standing on the position of criticizing Bitcoin for wasting energy. In the future, the entire industry will inevitably have more discussions and variables around this issue.

Title: Bitcoin is the key to a clean energy future

In this paper, we aim to explain how the Bitcoin network can act as a unique energy purchaser, enabling society to fully utilize more solar and wind power generation capacity. This deployment, along with energy storage, is intended to facilitate the transition to a cleaner, more resilient grid. We argue that today’s energy asset owners can become tomorrow’s essential Bitcoin miners.

Key points

As a complementary technology for clean energy production and storage, Bitcoin mining offers the opportunity to accelerate the global energy transition to renewable energy.

Solar and wind power are now the world's cheapest energy sources, but they are suffering from deployment bottlenecks due to their intermittent power consumption.

Bitcoin miners, as a flexible load option, can potentially help solve many of these intermittency and congestion issues, allowing the grid to deploy more renewable energy.

By deploying more solar and wind, these generation technologies could fall further back onto their respective cost curves, bringing their marginal costs closer to zero.

About this article

The Bitcoin Clean Energy Initiative has written this short research paper as a starting point to share our view of how Bitcoin mining (combined with renewables and storage) fits in to accelerate the energy transition. To complement this work, ARK Invest has provided an open-source model that demonstrates how Bitcoin mining can increase the capacity of these renewable + storage systems to provide a larger proportion of grid baseload energy needs for comparable or lower cost unit economics. This work is just the beginning of what we hope will be a fruitful exploration of solutions to help usher in an abundant, clean energy future.

Unique Energy Buyers

Bitcoin miners are unique energy buyers because they offer highly flexible and easily interruptible load, are paid in a globally liquid cryptocurrency, and are completely location independent, requiring only an internet connection. These combined qualities create an extraordinary asset that energy buyers[1] can turn on or off at any time, from anywhere in the world.

Renewable energy is now the cheapest energy

Over the past decade, the levelized cost of energy (LCOE) for solar and wind has fallen by 90% and 71%, respectively[2]. The unsubsidized cost of solar and wind is now 3–4 cents/kWh and 2–5 cents/kWh, respectively. Some individual projects can cost even less. For context, the levelized cost of energy (LCOE) for fossil fuels, such as coal or natural gas, is 5–7 cents/kWh. This means that solar and wind are already cheaper than coal and natural gas. Solar and wind are also right on par with geothermal and hydroelectric power[3], which cost around 3–5 cents/kWh, making them cheaper but geographically limited.

There will always be cheaper individual sites for different power sources, such as hydroelectric or geothermal, but in general, solar and wind are now the lowest cost and most scalable sites. More importantly, we believe they will only continue to get cheaper over time. We believe that, especially for solar, a semiconductor technology, prices will continue to fall by 20-40% for every doubling of cumulative capacity[4].

Temporal supply-demand mismatch and grid congestion

However, both solar and wind have a major drawback compared to more expensive baseload electricity like natural gas or nuclear power: intermittency. In the energy industry, this leads to what is known as the “duck curve”[5].

By nature, sunlight shines more during the day than at night. Wind is more unpredictable, but tends to be stronger at night. As a result, energy supply is either plentiful or absent. However, demand peaks in the afternoon or evening when people return home and turn on appliances, at which time neither solar nor wind is available. The end result is far more electricity than society needs during the hours of the day, and far less when demand peaks. The same challenges occur with the seasons, as there is more sunlight in the summer and more wind in the winter. These deficiencies are further exacerbated by grid congestion[6], which is similar to highway traffic and often occurs because solar and wind projects are often built in rural areas where the sun and wind are abundant but nearby loads (i.e., end users) and transmission capacity are small. Due to these challenges, there is currently more than 200 GW6[7] of delayed solar and wind generation in just three US grid interconnection queues. These are solar and wind projects that have developers and access to financing, but that the grid cannot physically accommodate.

Increased transmission capacity and energy storage are critical to solving these problems, especially as the cost curve for lithium-ion batteries continues to decline. But general-purpose batteries are still too expensive to be widely deployed today. Even after their costs fall by another 80%, there are still physical limits on their lifespan and how long they can store energy without losing it. This will become the most critical technology to store cheap midday solar energy to meet peak demand.

Bitcoin mining is an ideal complement to generation + storage

Bitcoin miners, on the other hand, are an ideal complementary technology to renewable energy and storage. Combining power generation with storage and miners has a higher overall value than building power generation and storage separately. As mentioned above, there will always be a physical limit to how much energy can be effectively stored without dissipating it. However, with just a few hours of storage capacity, the problem of daily intermittency can be almost completely solved.

By combining miners with the renewable energy + storage project, we believe it can:

1. Improve the returns of project investors and developers, and shift more solar and wind projects to profitable areas.

2. Allowing solar and wind projects to be built before lengthy grid interconnection studies are completed (because Bitcoin miners can consume energy until it can be sold to the grid).

3. Provide the grid with readily available “excess” energy to respond to increasingly common black swan events, such as excessive heat or cold weather during peak demand (such as the blackouts in Texas in early 2021).

This “surplus” energy will also be very useful as society’s demand for electricity continues to increase with the popularity of electric vehicles and the electrification of all devices. In a sense, miners have an uncapped appetite, allowing them to eat whatever is left in the “duck stomach”. Given these benefits, we think it is logical for utility-scale storage developers to use Bitcoin miners to expand their current battery products.

As society begins to deploy more solar and wind power, we believe it will move the LCOE further down its cost curve, making the next wave of solar and wind power even more affordable. If the LCOE falls, it could open up profitable new uses for electricity, such as desalinating seawater, removing CO2 from the atmosphere, or producing green hydrogen. Some experts in the field expect the marginal cost of producing new electricity to actually approach zero[8].

A second potential major impact could be a massive transformation and greening of the Bitcoin mining industry. It is estimated that there is only 10-20 GW2 of mining capacity in the world today[9]. The 2 GW of solar and wind projects that have been deferred on the US grid alone, even if miners were deployed at 20% of capacity, could result in 40 GW of new mining capacity, effectively dwarfing the entire existing global market. Note that while many of these projects will likely be built “behind the meter” to take advantage of curtailed solar and wind power as much as possible, they may still mine using grid power during other profitable periods and thus will not be fully green from day one. However, if solar and wind power become cheaper and constitute an increasing portion of baseload power, then the ultimate trend will continue towards a majority renewable energy-based total hashrate. We believe that the deployment of such large amounts of new and geographically diverse total hashrate would also enhance the security of the Bitcoin network, potentially further solidifying Bitcoin’s position as sound money.

Using real data, we (ARK Invest) have demonstrated that Bitcoin mining can encourage investment in solar energy systems (solar grid + batteries), allowing renewable energy to generate a higher proportion of grid electricity, while the cost of electricity may not change.

Without Bitcoin mining, solar energy (an intermittent energy source) would only provide 40% of grid power, and utilities would then be faced with the need to finance significant investments with higher electricity prices. However, by integrating Bitcoin mining into solar systems, energy providers (whether utilities or independent entities) would have the ability to arbitrage between electricity prices and Bitcoin prices and potentially sell “excess” solar energy and provide nearly all grid power needs without sacrificing profitability.

The above chart shows the impact that Bitcoin mining may have on the adoption of solar energy systems. It tracks the percentage of solar energy that can be supplied to the grid, assuming a constant cost of electricity. The y-axis is the power generated by solar energy, and the x-axis is the battery capacity. The size of each circle is proportional to the size of the Bitcoin mining operation. At each point in time, the solar energy system meets a different percentage of the grid's demand. As Bitcoin mining scales up, the solar energy system grows in size and meets a higher percentage of the grid's demand. The increase in Bitcoin mining capacity allows energy suppliers to generate "excess" solar energy without wasting energy. In the lower left of the chart, without Bitcoin mining, renewable energy can only meet 40% of the grid's demand. In the upper right of the chart, including solar, batteries, and Bitcoin mining, 99% of the grid's demand can be met.

Our model shows that integrating Bitcoin mining can transform intermittent power resources into power stations with baseload. It suggests that adding Bitcoin mining to the power developer's toolbox should increase the overall addressable market for both renewable and intermittent energy sources. All other things being equal with Bitcoin mining, renewable energy can more economically provide a large portion of electricity anywhere. As a follow-on effect, the cost declines associated with scaling renewable energy sources are likely to accelerate, making them more economically competitive in equilibrium.

We make this model and its assumptions available in open source here [10].

Next steps

There are still some important questions about how this vision will play out. We see at least three interesting business opportunities:

1. Energy management software and services

Energy management companies that specialize in storage and mining can build software to determine in real time the best use of newly created electrons: use, storage, or mining. They can also provide key asset management tools and analytics to monitor project performance.

2. Energy/Mineral Market

A hosting market may emerge to connect project developers, miners, and financiers. One of the key challenges will be addressing the current reputation threshold requirements for existing miners.

3. ASIC Manufacturing

New chip foundries could be built to meet the expected surge in demand. Samsung and TSMC are leading the way with recently announced new North American factories. We also expect to see continued improvements in hardware and firmware to increase the durability of mining equipment optimized for interrupted power usage.

A call to action

Bitcoin and energy markets are converging, and we believe today’s energy asset owners will likely become tomorrow’s miners. Utility executives, sustainable infrastructure funds, and grid-scale storage developers are well-positioned to accelerate future growth by aligning strategic roadmaps and deploying large-scale investments into the emerging synergies between Bitcoin mining and clean energy production.

We plan to follow up with more research and focus more resources on the intersection of Bitcoin and clean energy.