Bitcoin advocates insist their energy-intensive digital “mining” is necessary to protect the cryptocurrency despite its power system impacts, which climate activists find unacceptable. But there may be a middle ground.
Many Bitcoin miners are discovering clean energy is a cost-cutting electricity source, cryptocurrency analysts said. And a growing regulatory backlash suggests miners should capitalize on it before potentially costly new regulations are imposed on them by the Biden administration and some state policymakers unconvinced of its economic benefits, environmentalists said.
Mining creates Bitcoins from algorithm-guided energy-intensive computations and digital transactions, the cryptocurrency’s foundational 2008 white paper acknowledged.
The white paper’s algorithm “will require increasing computing and electricity use, and the main variable miners can control is their electricity price,” Bitcoin Policy Institute, or BPI, Fellow Margot Paez said. “Bitcoin mining is being forced by its design toward low-cost renewables” and new strategies “that can reduce their costs and improve system reliability,” she added.
But that cannot be the whole solution, climate activists responded.
Bitcoin miners cannot “take existing renewables and impose dirty generation on others” or “take over new renewables needed for emerging electrification loads,” said Sierra Club Senior Advisor for Strategic Research and Development Jeremy Fisher. And large load tariffs are needed “to protect customers from stranded infrastructure costs when miners relocate for lower-priced power,” he added.
The easy solution is shifting Bitcoin from its computationally complex, energy-intensive transaction validation method to a method that can reduce energy use 99.99%, climate activists like Greenpeace argue. But Bitcoin miners insist they have the right to use their method to ensure transactional security.
There is, however, an emerging vision of Bitcoin mining data centers co-located with clean energy to power operations, support reliability, and protect the planet, some Bitcoin advocates and opponents agreed. But that will require scarce clean energy and transmission to be wisely allocated, others said.
A bit about Bitcoin
Today’s over 20,000 cryptocurrencies, called by some “digital gold,” have reached a combined $1.197 trillion market value, led by Bitcoin’s market capitalization of $512.4 billion and Ethereum’s over $221.5 billion market cap, Infinite Market Cap reported June 7. Real gold remains the world’s primary store of value, with an over $12.9 trillion market cap, Infinite Market Cap reported.
Bitcoin miners compete to create new Bitcoins using data center-scale computational power to solve a puzzle created by the white paper’s algorithm about every 10 minutes, according to vpnMentor. Solutions are validated by the mining community through a rigorous proof-of-work, or PoW, method considered vital to Bitcoin’s integrity and added to the encrypted chain of blocks in a secure online blockchain ledger.
Bitcoin miners reject Ethereum’s proof-of-stake, or PoS, method for solving the puzzles, through which the user who puts the most Ethereum at stake to validate the puzzle solution earns the reward, Wood Mackenzie Global Head of Grid Edge Ben Hertz-Shargel said. If the solution in the blockchain is proven wrong by other users, the stake is forfeited, he added.
Ethereum’s September 2022 transition to PoS was estimated to have reduced its electricity usage “by an astonishing 99.99%,” by almost completely eliminating Bitcoin’s rigorous repetitive computations, Cambridge University’s Judge Business School reported April 26.
But PoS cannot fully protect Bitcoin earnings because it gives the most affluent “stakers” too much leverage over decisions that are made by all participants in PoW, Bitcoin advocates agreed. “The Bitcoin world will never be convinced PoW is a problem compared to problems in the financial world that PoS replicates” by giving the most leverage to the most affluent, BPI’s Paez said.
Bitcoin mining’s impacts on renewables supply and power system reliability, likely to grow with algorithm-controlled inevitable Bitcoin scarcity, are the divisive questions in need of solutions that both protect cryptocurrency markets and address climate concerns if they are possible, those on both sides of the question said.
Reliability, renewables, polarization
In debates about Bitcoin mining’s power system and environmental impacts, polarized environmental and cryptocurrency advocates often seem to talk past one another.
Some environmental advocates seem convinced that Bitcoin mining “needs to be stopped in order to save the planet,” which “is a bit disingenuous,” a BPI January 2022 opinion piece argued.
But cryptocurrency mining “could hinder broader efforts to achieve net-zero carbon,” a September 2022 White House Office of Science and Technology Policy report concluded. If that happens, it could impede renewables funding by 2022’s Inflation Reduction Act and 2021’s bipartisan infrastructure law from enabling clean energy to electrify the transportation, buildings and industrial sectors, it added.
A key point of disagreement is over cryptocurrency mining data centers’ ability to act as demand response to support power system reliability.
While Bitcoin mining requires a significant amount of energy, its operational flexibility can support system reliability through demand response programs that compensate large loads for shutting down during critical peak periods, the White House report acknowledged.
But that value has been overpaid by tens of millions of dollars in Texas demand response programs, the Tech Transparency Project reported.
Unlike many large loads, Bitcoin miners can shut down their data centers quickly to earn the programs’ compensation and often don’t want to run when electricity prices are high anyway, climate activists said.
And many miners are astute market traders with legal hedge contracts that allow profitable electricity price arbitrage during high-priced demand spikes, Bitcoin analysts acknowledged.
“Demand response is critical,” but its compensation can be rethought to prevent rewarding large loads like Bitcoin mining data centers that would in any case shut down when prices spike, Sierra Club’s Fisher said. Those rewards enable Bitcoin miners to continue operating at other times dominated fossil fuels, he added.
Any large load can be paid “for curtailing peak energy usage and the costs are shared” by electricity customers because clean energy advocates agree it supports reliability, an April 11 CoinDesk opinion piece responded. That is not “nefarious manipulation.”
Regulations that give miners an incentive to use clean energies “when it is good for them and for the planet” can be a middle ground by allowing mining without generating climate crisis-inducing greenhouse gas emissions, BPI’s Paez said.
Policy solutions
Policymakers are working on a range of laws and regulations that could be costly for miners.
The Biden administration’s Fiscal Year 2024 budget includes a proposed excise tax on digital asset mining’s electricity usage. Bitcoin mining’s “negative environmental effects” can increase energy prices and “uncertainty and risks” for others on the same electricity system, said a Treasury Department explanation of its proposal to phase in a 30% tax on digital mining’s electricity costs to protect other customers.
But the proposed tax and other administration efforts show the Biden administration does not recognize the importance of using the electricity to secure cryptocurrencies through the PoW approach, Bitcoin advocates responded.
Testimony in support of legislation like Senate Bill 661 from Senator Edward Markey, D-Mass., which would require stricter reporting of emissions by miners, showed the same prejudice, Paez said. Witnesses said “Bitcoin mining is wasteful by design” without recognizing the algorithm’s “economic incentive to move to low-cost renewables,” she added.
But the bill is “a good first step” because “it would begin to show the scope of the lack of energy use and emissions disclosure by almost a third of miners,” said Earthjustice Deputy Managing Attorney Mandy DeRoche.
Draft bipartisan House legislation just introduced amid new turmoil and controversies over cryptocurrency markets would create a framework for stronger regulation, Forbes contributor Billy Bambrough wrote June 5.
Given the wide partisan divides in the current Congress, near-term action on the legislation, the proposed excise tax, or financial regulation of digital assets is unlikely, analysts on both sides of the issues agreed.
But some state-level work has already been effective, said DeRoche. New York’s legislatively-imposed moratorium on Bitcoin miners’ fossil fuel use to power data center operations “is a piece of the bigger puzzle,” as are the Oregon and Washington climate laws “with specific emissions reductions requirements for cryptocurrency miners,” she added.
“There aren’t many Bitcoin mining operations as harmful as the behind-the-meter natural gas plants that led to the New York moratorium, but most mining operations tap into dirty grids,” DeRoche said.
In other states, the Bitcoin mining energy usage debate is being addressed by regulators.
“A traditional regulatory principle is to protect non-discriminatory customer access to electricity with a just and reasonable price,” said Regulatory Assistance Project, or RAP, Senior Associate Mark LeBel. Moral judgments will differ about the value of different energy uses, but rates and demand response programs “should require all customers to pay their costs.”
After Texas demand response programs during 2021’s Winter Storm Uri and other emergency events led to high payouts to Bitcoin mining operations, Texas began considering more cost-effective reliability programs. ***A performance credit mechanism compensating dispatchable resources was approved May 28. A capacity market, Senate Bill 624, which would slow renewables growth, and Senate Bill 1751 to increase compensation for critical peak shut downs remain under consideration.***
But while some states are working to limit the impacts of Bitcoin operations, others want to attract Bitcoin mining data centers’ jobs and economic benefits with special electricity rates. Opponents say Bitcoin advocates exaggerate those benefits and are studying protections against the high costs their utilities could incur to accommodate the large loads of such data centers.
Economic development rates or special contracts to large load customers can attract them, RAP’s LeBel said. Such rates need to be low to interest those customers but should not unreasonably harm other ratepayers, he added.
There is a legitimate concern with large loads requiring new long-term amortized infrastructure investments that could be stranded and increase rates if those loads relocate, LeBel said. But “utilities also may use a new large load to secure financing for infrastructure that can serve future customers if the large load exits,” he said.
Protective tariffs can require large loads like Bitcoin data centers to commit to exit fees or penalties if they relocate, suggested Earthjustice’s DeRoche.
But Arkansas legislators rejected an Entergy-proposed protective tariff imposing penalties on large load customers for exiting service before utility costs were recovered. Intead, they passed House Bill 1799 along with a special tariff to attract miners and protect their rights and costs, DeRoche said. And Kentucky’s lawmakers approved special taxes for Bitcoin mining that Applachian climate activists estimate will reduce state revenues $9 million annually, she added.
When Idaho Power reported approximately 2,000 MW of potential new Bitcoin mining data center load, its regulators approved a protective tariff, Sierra Club’s Fisher said. A new regulatory docket will allow regulators and stakeholders to develop the non-discriminatory tariff, he added.
Climate activists continue to fight state by state and proceeding by proceeding to make their concerns known. But Bitcoin miners are seeing electricity market price signals that could have a bigger impact sooner on when they use electricity and the types of generation they choose to support, some advocates said.
Real-world solutions
Scarce new and existing renewables and transmission capacity is being absorbed by Bitcoin mining data centers, moving them from other uses, Sierra Club’s Fisher and Wood Mackenzie’s Hertz-Shargel insisted.
And the only magic bullet is miners moving from PoW to PoS, “which does not seem likely,” added Natural Resources Defense Council Senior Advocate, Climate and Clean Energy Program, Cullen Howe. “They are profit-driven companies acting within their rights.”
But Satoshi Energy is an example of Bitcoin mining’s future, according to Brock Petersen, its CEO. Its data center was co-located at an existing wind project, which bypassed project financing complexities and reduced costs by using existing infrastructure, he said. Fitting the renewables project size with the data center load has allowed the operating project to use 100% renewables about 50% of its hours, he added.
TeraWulf’s different business model, which focuses on existing clean energy sources, has a similar goal, said Kerri Langlais, its chief strategy officer. A 60 MW upstate New York Bitcoin mining data center runs on 91% clean energy from nearby Niagara Falls hydropower and the Fitzpatrick Nuclear Power Station, and its 200 MW Pennsylvania mining data center runs on 100% clean energy through a direct connection to the 2.5 GW Susquehanna Nuclear plant, Langlais said.
“Location is everything,” she said. The clean energy going to TeraWulf Bitcoin mining data centers cannot easily reach other demand pockets “due to transmission constraints,” she added. The rest of the mining sector “cannot move to zero carbon overnight,” but many miners are “evolving” to recognize the economic opportunity in clean energy, she said.
Bitcoin mining’s claims of a trend toward renewables “is greenwashing because it is largely about small early projects ad future aspirations,” Earthjustice’s DeRoche responded. And “it is not clear the total stranded clean energy and congested transmission locations will come close to offsetting the burden that PoW mining is adding,” she said.
BPI’s Paez disagrees. “Bitcoin mining’s energy use will continue to grow, but emissions will drop as miners feel the pressure of valid concerns about the climate,” and economics drives them to the best clean energy locations, she said. “It has taken time,” but companies are starting to react “because Bitcoin mining is energy agnostic and clean energy is the lowest cost option,” she added.
