bitcoin mining colocation renewable energy

Can Bitcoin Mining Colocation Reduce Renewable Energy Project Risk?

Renewable energy projects can add bitcoin mining colocation to their operations to monetize excess renewable energy capacity that would otherwise go to waste. 

Bitcoin mining colocation may increase solar plus storage project profitability by >200 basis points, while also making bitcoin greener, at a time when environmental impact is on the minds of crypto investors1and industry leaders alike. 

Luckily, new “mining as a service” firms are making it easier to capture stranded or wasted energy, mine bitcoin and create incremental value. 

What Is Bitcoin Mining?

Bitcoin mining is the process that makes it possible for bitcoin transactions to be validated in a decentralized way. 

Bitcoin mining not only secures the bitcoin system by enabling network-wide consensus without a central authority, it also rewards miners on the network with new bitcoins in return for investing energy (computational power) to verify blocks of transactions.

We will come back to that…

First, to understand how bitcoin mining works, it’s helpful to have a high level understanding of Bitcoin itself.

What Is Bitcoin?

Bitcoin is a decentralized, global digital payments network with its own native, digital currency (aka bitcoin or “BTC”)2 : 

The term “Bitcoin” can be confusing because it actually has two meanings:

  1. Bitcoin Network: Bitcoin (with an upper case “B”) is a decentralized, peer-to-peer payments system comprised of a globally distributed network of computers (aka nodes, or “miners“) that run the Bitcoin protocol. Anyone with a computer and Internet connection can download the free Bitcoin software and run a node on the network. Miners are nodes on the network that use special computational hardware and software that is used to mine bitcoin. Bitcoin was designed to be “permissionless” with no central authority, no CEO or employees… As such there is no “approval process” to use Bitcoin, be a node or a miner.3 However, miners are different than nodes in that they secure the network by investing large quantities of computing power to compete to win a computational lottery. This “proof of work” process is used to verify network transaction data (blocks) and reach consensus across the network to record the blocks on a shared digital ledger (the blockchain). A 1 megabyte block of transaction data is verified approximately every 10 minutes. In return for making this investment of computing power and energy to secure the network, miners are rewarded with…
  2. bitcoin: (bitcoin with a lower case “b”), aka “BTC” or “XBT” is the native digital token or cryptocurrency awarded to miners for securing the Bitcoin network. In return for investing energy and computing power, miners earn fees and BTC when a block is verified and sequentially added to the blockchain. The current block reward is 6.25 BTC per block (approximately $380,000 as of today).

So, Bitcoin mining is the process of using specialized hardware and software to keep the Bitcoin network secure and create new bitcoin.

Miners compete to verify 1 megabyte “blocks” of bitcoin transactions and record them on the Bitcoin blockchain approximately every 10 minutes. 

In return for securing the network, miners are awarded with bitcoins, aka “BTC”, the native digital cryptocurrency.

How Can Bitcoin Mining Colocation Help With Renewable Energy Oversupply?

When not enough renewable energy is supplied to the grid, fossil fuel power plants (coal, natural gas, etc.) must pick up the slack to deliver energy on demand. 

As such, to replace fossil fuels, we need renewable energy capacity that is greater than – or equal to – our energy demand at all times.

However, as more solar, wind and hydro are connected to the grid, too much renewable energy is produced at times… 

And it often ends up going to waste.

Indeed, in its effort to meet its aggressive decarbonization targets, the state of California wasted4 over a terawatt of renewable energy due to oversupply in 2020…5 

Continued over-development may lead to even more renewable energy going to waste. This creates a financial disincentive for developers and puts downward pressure on the market for solar, wind and hydro resources. 

However, adding bitcoin mining to a solar plus storage solution may allow overbuilding, and profiting, without wasting energy. 

Indeed, recent analysis by ARKInvest suggests a >200 basis point difference in annual return on capital between a C+I solar system that can offload power to a bitcoin miner, versus one that simply relies on solar plus energy storage.

ARK bitcoin solar plus storage chart
Source: ARK Investment Management LLC, 2021

As such, Bitcoin mining colocation can mitigate financial risk by creating additional demand for wasted or stranded renewable energy capacity. 

How Does Bitcoin Mining Colocation Work?

A decade ago, bitcoins could be mined anywhere with standard computer…

However, that is no longer the case.

Bitcoin mining today requires investing in specialized hardware and software. Bitcoin mining hardware is dominated by high-powered, energy intensive, but highly efficient miners called Application Specific Integrated Circuits, or ASICs.6 

ASICs are designed with custom microchips for the sole purpose of bitcoin mining and start at around $5,000 per machine.

Because of the business income potential and cost of replacement, Bitcoin mining hardware must be housed in special, secure facilities to protect the expensive machines and also maintain a constant, conditioned environment. Bitcoin mining facilities should be insured accordingly

Bitcoin mining colocation is the process of building a commercial grade bitcoin mining facility at the point of energy generation, such as a sub-station. Facilities housing hundreds or thousands of miners can connect directly to waste energy or stranded energy sources.

Mining rigs are connected over the Internet to a Bitcoin mining pool, such as slushpoolDMG Blockchain or Luxor.

Once a block is verified, participants in the mining pool share in the bitcoin reward in an amount that is proportionate to the energy, or work, that they contributed to the process. 

During times of excess supply, as opposed to dumping the electricity, selling it at a loss, or storing the energy for later use, bitcoin can be mined, earned, transmitted and stored in a digital wallet for later use or reinvestment in future renewable energy projects.

This concept is akin to a money battery because it transforms energy into into monetary value to be stored for later use.

Indeed, sending bitcoin to a wallet for storage may be a more efficient, less expensive process than conventional energy storage because it avoids transmission line losses, which may be as much as 11%.

 

Can Mining Colocation Make Bitcoin Greener?

Bitcoin’s energy use is not inherently dirty or wasteful…

While Bitcoin uses a lot of energy,7 it can be mined with clean, renewable energy just as easily as with coal, nuclear, or natural gas.

Indeed, just like electric vehicle owners rely on a mix of energy sources, Bitcoin mining facilities are agnostic as to where the energy comes from – except that it must be low cost.

Shift to Renewables

Renewable energy is becoming the lowest cost provider for crypto-mining facilities.

Also the decentralized nature of Bitcoin’s network means that mining facilities may be located anywhere – even in hard to reach, off grid locations.

As a corollary, renewable energy project developers may be able to consider and monetize a wider range of surplus or otherwise stranded renewable energy resources than would be possible without Bitcoin mining. 

Distributed energy projects that do not have to be connected to the central grid, such as microgrids, may also be developed to mine bitcoin. 

To make the process easier, crypto mining as a service companies and crypto mining/energy consulting firms, such as these below, are working to help owners capture value from otherwise stranded or wasted energy assets:

UK based Argo and Canadian DMG Blockchain Solutions recently announced Terrapool, a 100% renewable energy powered bitcoin mining operation.

Sangha Systems is partnering with AEP OnSite to develop a fully renewable, 5MW behind the meter solar system to power crypto mining and help transition bitcoin to clean energy.

Calculating the return on investment (ROI) from capturing stranded renewable energy is based on many factors including the cost of hardware, electricity and/or energy and other resources needed for bitcoin mining.

These factors must be considered along with the timelines for crypto mining PPAs which are likely structured over shorter terms of three to five years… The shorter PPA terms reflect the expected life of the mining hardware, compared to the 25-30 year life expectancy of solar equipment with conventional renewable energy offtakers.

The good news is that Bitoin’s energy use is increasingly generated from renewables8 because they are becoming the cheapest option.

The Global Cryptoasset Benchmarking Study (3rd Edition) estimates that 39% of Proof of Work mining power consumption comes from renewables, primarily hydro-electric power, and the portion from renewables is increasing. However, some estimates of renewable energy used in bitcoin mining are as high as 76%.

Bitcoin Mining Insurance

Bitcoin mining facilities and renewable energy projects are unique enough from a risk perspective that underwriters will consider bitcoin mining insurance and renewable energy insurance separately. 

Regardless, bitcoin mining operations and renewable energy projects need real property and casualty insurance to protect their businesses from liability, property losses and loss of income. 

The following are examples of common types of insurance for sustainable bitcoin and/or cryptomining operations to consider:

  • Property and Business Income Insurance: Protects your business property from losses such as fire, theft, wind, hail, flood and other common perils. First party losses may happen to commercial solar systems due to weather, such as hail. This can also interrupt the income stream it produces. Bitcoin mining facilities are expensive to replace as the cost of ASICs today range from $10,000-$15,000… Some facilities have thousands of ASIC miners on-site worth millions of dollars that would be hard to replace in a catastrophe. Business property insurance covers business personal property (BPP) and business interruption (BI), tenant improvements and other first party property. Property insurance is sometimes packaged together with general liability insurance in a business owner’s policy (BOP).
  • Commercial General Liability (CGL) Insurance: The standard CGL policy is the lynchpin of a business insurance program. The CGL protects the company from claims of bodily injury or property damage to third parties that are caused by your company’s operations. If a person walks onto a jobsite and is burned or electrocuted, or slips and falls or is hit by falling debris caused by your workers in the course of your business your CGL policy would protect you in a lawsuit. Your CGL should also provide protection for products and completed operations and liabilities you assume when entering into a contract that contains a hold harmless. Products and completed ops covers damage caused by products your company sells, such as solar panels or the construction of the system. However, products or property owned by others that are in your care, custody and control of an insured – such as mining equipment of others – are usually excluded under the standard ISO CGL policy form. This gap in coverage can be addressed by inland marine coverage or bailees coverage.
  • Hired and Non-Owned Auto Insurance: Auto insurance protects your business from liabilities and physical damage to the vehicles that your business owns… However, hired and non-owned auto insurance protects companies when their employees use their own vehicles for work. Hired and non-owned auto (aka “HNOA”) protects your business from liability claims related to the use of vehicles you hire or do not own, such as a rented vehicle or your employees’ vehicles.
  • Builder’s Risk: Builder’s risk, also called “course of construction” insurance, is a type of property insurance that protects real property assets, such as homes or buildings, while under construction. Builder’s risk insurance is important because it protects property being built while the job site is active. A builder’s risk policy may be paid for by the general contractor, developer or project owner. Builder’s risk is often broader than inland marine coverage, or a property floater, or construction floater. 
  • Inland Marine: Inland marine is a type of property insurance that covers the tools and equipment that may be used in the construction of a bitcoin mining facility… Inland marine covers property while in transit and also at jobsites, even if it stored remotely (be sure to read your policy location coverages and exclusions). If equipment is stolen from a jobsite, or damaged, its value can be covered by an inland marine policy. Inland marine may also be referred to as a “floater” policy and may be required for distributors by companies such as SunPower or by lenders.
  • Cyber Liability: 1st and/or 3rd party protection from damage, or exposure of personally identifiable information (PII), electronic property, digital assets, valuable data and other non-physical assets. May cover ransomware, named and unnamed malware, social engineering/phishing, invoice tampering, hacking and services related to cleanup after a breach. Bitcoin mining facilities that earn bitcoin from renewable energy projects, or manage payment distributions and collect revenue from offtakers are exposed to systems being hacked or taken offline by a cyber attack. In the spring of 2019, hackers hit Sustainable Power Group, (aka “sPower”) one of the largest renewable energy developers in the U.S., with a denial of service attack. Hackers gained access to sPower’s infrastructure through a low-level attack on an unpatched firewall from Cisco Systems.
  • Parametric Insurance For Cloud Service Downtime: Mining operation uptime is money. If your business relies on a central cloud storage provider, such as AWS, Google Cloud, Microsoft Azure, etc. your business income may be interrupted if the provider experiences downtime. Certain cloud service regions are more reliable than others. Parametric business interruption insures your hourly earnings and can pay you if you experience downtime, with no deductible. For instance, if your mining operation earns $240,000 per day, you can insure $10,000 per hour of business income, per hour, up to $1,000,000 as the result of a cloud service downtime.
  • Professional Liability: Also known as technology errors and omissions, or E&O, professional liability (aka “errors and omissions”, or E&O) protects you if your firm provides bitcoin or crypto-mining consulting or mining integration services. If you design renewable energy mining systems you may need professional liability. E&O covers 3rd party claims related to professional consulting services and the providing of expertise, advice or counsel. Some engineering, procurement and construction (EPC) contractors have full-time installation and engineering crews on staff – whereas others sub-out everything and act more like a general contractor. If your company provides design or consulting services, such as electrical line drawings or structural plans for solar projects, you have some professional liability exposure.
  • Workers Compensation: Workers compensation covers injuries to employees who are injured while in the course of their employment. Workers compensation is mandatory in most states. If work related injuries fall outside of workers compensation, they may be covered by your employer’s liability policy. Solar companies have had challenges with workers compensation because underwriters often misunderstand the actual exposures in different types of solar EPCs, virtual GCs, solar sales organizations and sub-contractors.
  • Umbrella: Umbrella or excess coverage provides an extra layer of protection to the insured if the primary layers of coverage are exhausted by a large claim. Be sure to have your umbrella insurance be “follow form”. Umbrella insurance is often less expensive than general liability because the underlying general liability limits must be exhausted before the umbrella will kick in. $1,000,000 of umbrella coverage is common. However, limits of $5,000,000 and up are common for large renewable energy projects.

Regardless of the exposures in your specific project, you should work with an insurance broker who understands the renewable energy and crypto mining business.

Summary

As the percentage of renewable energy grows as a percentage of total energy consumed, the problem of wasted renewable energy will grow in tandem.9 

Stranded renewable energy assets also have potential that could be put to use when considering Bitcoin mining as a strategy.

Rather than viewing Bitcoin as antithetical to environmental progress10renewable energy developers can help build a greener future for themselves, and Bitcoin, while reducing financial risk, creating incremental revenue streams and incentives to new renewable energy project development. 

Footnotes

  1. Insurance companies like Liberty Mutual and Mass Mutual are adding bitcoin to their balance sheets.
  2. Satoshi Nakamoto's original concept for bitcoin was for a peer to peer electronic cash system. However, Bitcoin is broadly viewed as a store of value, akin to a first-layer, hard money, because Bitcoin's monetary policy is deflationary. The amount of bitcoin that is awarded per block is reduced by half every four years and more than 80% of the bitcoin that will ever be created has already been mined. The last bitcoin will be mined around the year 2140. As such, it is viewed by some mainstream investors as a more culturally and economically salient inflation hedge than gold.
  3. However, this is still beyond the ability of most people who are not programmers or very comfortable with computers. Companies like "Umbrel" are attempting to make it easier for people to create and run a Bitcoin node on their own.
  4. According to The Interchange podcast by Greentech Media
  5. According to Climate Central this is not a problem in California alone, nor purely a temporary COVID phenomenon... Renewable energy oversupply is a global problemA terawatt of renewable energy is enough energy to power 10 billion 100 watt light bulbs.
  6. To earn bitcoin, Bitcoin miners compete with one another in a global, decentralized race to rapidly perform mathematical calculations (hashing functions) in an attempt to find a specific number. This is akin to a computational lottery that adjusts itself automatically and becomes more difficult as more miners join the network. As Bitcoin mining difficulty increases, more computing power and energy  is needed... As difficulty increases, more energy is needed, and so on, and so on... ASICs perform hashing functions at an incredible frequency of up to 110 trillion calculations per second.
  7. Bitcoin's energy use is often criticized by comparing it to Visa using "transactions" as a metric. This is an inchoate argument akin to comparing apples to mailboxes. Bitcoin is a full-stack, first-layer financial infrastructure whereas Visa is a second or third layer payments network. Visa's operation relies the entire underlying international dollar system to function whereas Bitcoin transactions themselves require little or no energy. 80-90% of Bitcoin's energy use is due to new bitcoin (little "b" - digital asset) issuance, not transactions themselves. Transactions are embedded in blocks which are constrained by default at around 300,000 per day. For a detailed description of Bitcoin's energy use refer to Nic Carter's recent posts here and here
  8. Bitcoin's energy use is generated per block, not per transaction. As such Bitcoin is more analogous to the operation of Fedwire than to a retail payments network like Visa or PayPal.
  9. Cryptocurrency mining could become the new face of energy storage: World Economic Forum, September 16th, 2018.
  10. Like climate change, Bitcoin is a decentralized, global phenomenon. However, Bitcoin has societal merit because it addresses important issues and realities in traditional financial and monetary systems. As such, outright dismissal or criticisms of Bitcoin based solely on its energy use tend toward casuistry... Instead we should engage with it as a topic of great interest in order to understand the subject matter, consider how to best coexist with Bitcoin and how to educate others about how it may be useful to the world. Bitcoin's applications are still emerging, but are clearly valuable in many local monetary contexts not just through the lens of first world investments and environmental concerns. Other opportunities for leveraging bitcoin's energy use in sustainable ways include capturing waste heat for agricultural applications and revitalizing small town economies that have lost their industry.
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