The Dynamics of Bitcoin Mining and Energy Consumption, Part I: A Problem in the Here and Now

I’ve written quite a bit about use cases for blockchain, the technology that supports applications like Bitcoin, outside the world of digital currencies. I have spent much less time diving into the impacts of digital currencies themselves. This is because the most exciting and potentially transformative applications for blockchain in the energy world have little to do with them, or with the proof of work consensus algorithm.

The downside of taking a future-focused view, however, is that it tends to gloss over the real challenges faced by utilities and other energy stakeholders today. The rapid rise in the valuation of proof of work-based digital currencies like Bitcoin and Ethereum has created a new, power-hungry digital mining industry that utilities have to confront.

Digital Currency Farms Require Huge Amounts of Power

Take the example of this bitcoin farm in inner Mongolia, which demands 40 MW of electricity per hour and, at the time Digiconomist's article was written, earns the equivalent of $250,000 per day in bitcoin. At $0.09 per kWh, that’s about $86,000 per day in electricity costs. Even after taking hardware, maintenance, oversight, and facilities costs into account, the farm is turning a substantial profit, and a percentage goes back to the power provider. This farm is one of many around the world that collectively accounts for 65 TWh of electricity consumption annually.

At first glance, this might not seem like a bad deal for power providers. If the deal is structured properly, they get a cut of a profitable and fast-growing business, provided they can support the miner’s power needs. That’s likely why the Chinese government offered them a rate discount as an incentive for setting up shop.

But mining farms aren’t a typical client. The value of digital currencies like bitcoin in real money is highly volatile, which makes continued profits uncertain in the future—and that has serious implications for utilities that are considering developing new capacity to account for a surge of new facilities like the one in Mongolia. If the bubble bursts and mining becomes unsustainable, these farms could disappear as quickly as they sprang up.

A Rock and a Hard Place

Utilities with decades-long planning horizons revolving around rate cases should want little to do with an industry that thrives on short-term volatility, and whose loads could be here today and gone tomorrow. But in the short term, the energy consumption associated with proof of work gives them little choice. Worse yet, not all mining companies bother to speak with utilities directly. Some simply truck in their equipment, plug in, and get to work. They’ve been blamed for rate spikes and other problems in distribution networks around the country.

Examining the Cost of Digital Currencies

Over the next several weeks, look for my blog series on energy consumption associated with bitcoin and other digital currencies and its impacts on utilities and energy systems. The series will build off of work by others in this area—notably the folks over at Digiconomist and the recent paper (no paywall) published by Alex de Vries in the peer-reviewed journal Joule earlier this May.

My intent is to add a systems-level perspective to the conversation that will help build an understanding of the main drivers of mining activity, how it might change in the future, and what utilities can do to make the best of a bad situation that many analysts expect to get worse. The second part of this series will look at the situation from the miner’s perspective, exploring why farms like the one in Mongolia arise, what determines where those facilities pop up, and what causes them to move or shut down.