To lead with the usual disclaimer – I really have no axe to grind with cryptocurrencies per se, and they may well be some next generation pseudo-anarchic way to bypass governments that will usher in the next wave of social reorganization. Fine. Nor do I speculate in them, because they are not boring enough. This focus here rather is on their energy use aspects, especially in light of our amazing recent advances in Levelized Costs of Electricity (LCOE) for renewables and their intermittent and wacky impact on daily power prices.

It all comes back to the duck

From the viewpoint of responsibly matching energy production and use, it’s worth compiling some thoughts on how renewables and consumption avenues such as cryptocurrencies might complement each other (or not). These may have implications for our investment philosophies – be it time or capital. Let’s start with two seemingly unrelated problems, and then discuss a myriad of opportunities.

Energy Consumption

First, the energy consumption, indeed the very structure of Bitcoin, seems counterproductive. As you are probably aware cryptocurrency “mining” requires performing increasingly more complex computations in order for the miners to be rewarded with currency. Not dissimilar to real resource extraction, where efforts to extract gold, petroleum or other subsurface resources are subject to laws of diminishing returns as the lowest-hanging fruit is first harvested. More detailed discussions on the energy economics of Bitcoin can be found here and here. Just to pull out some salient observations:

  • The bitcoin network consumed around 32 TWh per year as of the time of the writing of the Ars Technica article (Dec 2017). At a 100% capacity factor, this would equate to over 3600 MW of power.
  • This may go up, or fall, depending on where prices and miner’s attention go.
  • At the time I looked at the Digiconomist page (Feb 2018), the country most comparable to Bitcoin in terms of estimated annual energy consumption (47 TWh) was Singapore.
  • Each bitcoin (when I viewed this in Feb 18) consumed 553kWh and that implied production of about 271 kg of CO2. Roughly, this looks like an assumption of 50/50 coal/renewables, or alternatively natural gas combined cycle, which has a footprint about half that of coal (for which 1 kWh ~ 1 kg of CO2). Of course depending on the mix of generation types used for mining, this number could vary widely.

So to an engineer these numbers are staggering – given the freedom and latitude to engineer systems of global currency, the architects here have managed to develop systems which deliberately are increasingly energy-inefficient, and have grown to sizes that are no longer insignificant on a global scale. Apart from the political and environmental implications, from a “systems engineering” perspective where in theory over the past millennia we as engineers are trying to refine and streamline processes to maximize efficiency, this has to qualify as a something of a fail, or at minimum a signature example of the Law of Unintended Consequences.

Energy Producer Opportunities

Given the energy intensity and geographic flexibility of these mining operations, this might be seen as an opportunity to harness low LCOE generation options. Relocate your mining operations around the world to locations such as the northwest U.S., Canada or Iceland that have low cost baseload hydropower. The same logic that has driven relocation of energy-intensive industries such as ore smelting or data centers to those areas might apply to mining. Another option, since the equipment required for cryptocurrency generation would seem to be shorter lead time to set up and thus easier to relocate, would seem to be to flow processing units into regions where high solar or wind penetration has led to distortions in the energy markets.

In some circumstances spot market pricing for power can turn very low or even negative (you are paid to consume power), and that has helped drive the latest wave of Energy Storage System (ESS) projects, chief among them those that rely on batteries (BESS). Now I don’t mind the concept of ESS as a means to smooth the power production and consumption profiles, and this helps bring more renewables on to the grid. However, one has to acknowledge that there are ESS capital costs (which are becoming increasingly competitive) and round trip losses (also admittedly improving). It is also true that the economics of ESS projects rely in part on market inefficiencies, to store when power prices are low and deliver when they are high. As the penetration of ESS increases, the motivations to use it may decrease as they increase the efficiency of the very market they are trying to exploit. Bogleheads would appreciate this.

If instead one could find a time-flexible way to ramp energy consumption alone up or down, presumably used directly for a useful purpose, then one could skip the ESS intermediary. It seems that cryptocurrencies could be one such very flexible demand. Let’s say there is a producer has the capability of generating more power than it is currently contracted for at no incremental cost. Perhaps a geothermal plant, which has a set power purchase agreement or dispatch arrangement but in theory can generate additional power above that level at zero marginal cost to sell either to the spot market or to consume it internally in some fashion. That’s a potential value stream that could be put to use.

Virtuous Consumption

Perhaps cryptocurrencies will have enduring virtuous value. One could envision container-mounted mining units that are easily shipped and set up, flowing to regions where they can take best advantage of low energy costs. If I were an Energy Overlord I would have a bias towards the production of more old fashioned tangible and directly beneficial types of flexible consumption, like  desalination, CO2 recovery, charging electric vehicles or energy-intensive processing of essential materials like the aforementioned smelting or lithium. Yet, clearly processes that involve materials are usually more capital- and lead time-intensive and require more handling. Cryptocurrencies seem more easily transmissible, and might be a good short-term candidate to get the most out of one’s generation project potential, depending on the setting.

Your Flexible Friend, the Container

Summary for your Projects and Career

For much of my work and teaching the focus has been on developing renewable energy projects (or engineers), without much thought to the consumption side. Now, with historically low power prices achievable from these technologies which in many cases have significant diurnal or seasonal variations, engineers have options to turn their skills and attention to creative energy intensive harnessing processes. Let’s face it, if your past decades have been spent engineering conventional fossil power plants, there are many regions now where those make less and less economic sense compared to lower cost alternatives. Take those process and project development skills and turn them around to the consumption side of the table, and you may have career-broadening opportunities.

I do put out there as a challenge that the architects of next generation cryptocurrencies or similar computational-based sources of social value should find ways to make them increasingly energy-efficient, maximizing the benefit per kWh. Good “Future Work” task.

**For a short CNN video showing a Bitcoin farm at work in Iceland, tap here.

***Here is an interesting postscript – an initial coin offering that promises to be fueled exclusively by renewable energy.