Problems in the energy industry have become more acute recently as crude oil prices have plummeted due to incredible increases in supply, cratering demand, and the limits of our storage capacity being tested.
Bitcoin and other PoW blockchains offer the energy industry 24/7 demand and an opportunity to monetize their energy sources directly onsite. PoW blockchains run even when national economies are shut down, providing much needed revenue in a time of plummeting demand.
It’s well known that Bitcoin and other proof of work (PoW) blockchains use a lot of energy to secure the history of their networks and build consensus around the order of their transactions. The protocols are agnostic as to who is mining, where they’re mining, and what energy they use.
To incentivize miners to do the work, miners get paid with new units of Bitcoin and transaction fees paid by users of the network. Energy costs are the most important cost of any mining operation, so securing reliable, low cost sources of energy is imperative. Miners that secure low energy costs can make decent returns on their investment fairly quickly, and can sustain those returns if their energy costs stay low compared to their mining competitors. As a result, miners have been busy securing low cost energy that is either stranded or would be wasted if not for Bitcoin’s consumption.
Bitcoin is the best customer the energy industry could ever ask for.
Stranded Gas and Flaring
Stranded gas is natural gas that is wasted or unused.
A lot of natural gas produced today is called “associated” natural gas, a byproduct that flows out with crude oil and is then separated from the crude oil and sold as its own product. Unlike crude oil, natural gas requires pipeline infrastructure to transport because it’s unprofitable to move it via truck. Unfortunately some oil wells don’t have pipeline infrastructure in place because of economic or regulatory reasons.
Producers with stranded wells such as these can only sell the oil because they can’t transport the gas. This has become a huge problem in the hydrocarbon industry. A popular way to handle this issue is to cut their losses and “flare” the gas.
Flared gas is natural gas that is burned into the air. This burning is actually less expensive than trying to move it and sell it in the market. In other words, they lose less money by burning the natural gas than by trying to get the gas to market. Producers flare or burn the gas to prevent any risk of explosions in the field by combusting the gas in a controlled environment. Not only is the gas wasted when flared, but the flaring can produce harmful emissions such as NOx, CO, and other Volatile Organic Compounds (VOCs).
The United States alone flares over 497 billion cubic feet of gas per year. This amount of energy is enough to power millions of homes every year. Flared natural gas is an economic and environmental problem not only in the United States, but in hydrocarbon producing countries all over the world.
There are a few companies in the US and Canada that have already set up mining operations for producers or are in the process of setting up producers with the ability to mine. This gas is close to free or insanely cheap which makes the producers very competitive miners. In a time when revenue is collapsing, associated gas producers now have a way to monetize what was once wasted, and producers reduce any harmful emissions considerably while doing it.
Renewable Curtailment and ECC
Curtailment refers to energy that is rejected by an energy grid because the energy supplied will overload the grid, risking a grid shutdown. Because of an immense amount of renewable energy investment and the subsequent overcapacity of this energy, in many places around the world, energy systems often have to reject large flows of energy produced by renewable operators.
This issue is most acute in places like China, California, and Germany, but as more jurisdictions bring on more and more renewables as a part of their energy portfolio, curtailment will be a big issue in more places.
The curtailment of renewable generation is a revenue crisis for suppliers and thus the economic sustainability of the suppliers. Governments have been heavily subsidising these suppliers all around the world, passing off the bill to tax payers in the form of higher rates for energy they don’t use and/or higher tax burdens. In order for renewables to continue growing, independent profitability, rather than dependence on government subsidies, must be established in a sustainable and permanent manner.
In addition to the issue of oversupply, renewables have high variability in their supply, whereas demand for electricity usually has much lower variability. And peak supply and peak demand are often exactly inverted.
According to the National Renewable Energy Lab (NREL), the inability of renewable energy to balance supply and demand imposes a limit on how valuable renewables can be for society. Variable renewable energy (VRE) can be effective up to a point, but there are diminishing returns to scaling up renewable sources of energy.
There is a point on the supply curve at which VRE essentially becomes economic waste. VRE mandates set by governments can become very bad policy and bad economics very quickly if it becomes too much of the grid’s energy portfolio.
“This limit can be expressed as economic carrying capacity (ECC), or the point of which VRE is no longer economically competitive or desirable for the system or society”– National Renewable Energy Laboratory
Policy makers usually tout a few solutions such as shifting demand schedules — i.e. nudging customer behavior, building out long range transmission cables, and optimizing energy storage.
Shifting demand schedules can be done slightly but there are limits and these issues are mostly supply oriented. Building out long range transmission infrastructure is very expensive and is often a regulatory nightmare, and energy storage technology is expensive and very immature.
We have an economic problem in search of an economic solution. Instead of manipulating the demand curve of the population or charging them for energy they don’t use, VRE producers could sell their excesses to PoW miners or even set up mining operations themselves.
PoW miners can provide consistent and reliable demand since networks like Bitcoin run 24/7 with no down time. Bringing in miners or mining themselves could help suppliers become more economically sustainable, reducing their dependence on governments for sustainability.
This has already happened in regions of China with large renewable producers and a few other places around the world like California, Norway, Paraguay, and Morocco, with different mining firms setting up shop and using renewable sources to power their operations.
This trend should continue as the economics are overwhelmingly positive for renewable suppliers who are looking for great customers and governments who want to have a renewable energy industry that is financially sustainable without the need for large perpetual subsidies.
Bitcoin uses the expenditure of energy as a way to secure the network and as a costly unforgeable signal to build consensus.
As a side effect of the inextricable link between Bitcoin and energy, Bitcoin can be used by different players in the energy industry to become more efficient and economically sustainable, transforming the energy industry and our grids forever.