HOW CRYPTO MINING

WILL TRANSFORM THE

ENERGY INDUSTRY
APRIL 2022

AUTHORS
Implications of the crypto economy
CHRISTINE VAUGHAN
Director
for the electric system
PIERRE SAMATIES The crypto economy is here to stay and crypto mining and staking
Partner is one of the main areas of interest for investment funds, corporates
BILL KEMP and governments.
Director
Crypto mining refers to the process of validating transactions and therefore securing
FEROZ SANAULLA and powering a blockchain protocol. The most famous protocol is Bitcoin – the current
Partner king of crypto since its genesis block in 2009. Bitcoin mining is energy intensive. At the
time of writing, the total annual power consumption of Bitcoin is 145 TWh1 (~0.32%
of the total global energy consumption). The energy intensity is rooted in the choice of
its consensus mechanism, commonly known as proof-of-work. However, the same
laborious consensus mechanism is also the main reason for Bitcoin's security – it is
too costly (or in other words requires too much "work") for malicious actors to rewrite
transactions. In a nutshell, a Bitcoin mining rig consists of specialized machines
dedicated to solving an algorithmic puzzle. The brute force approach and the

1
Feb 17, 2022, range of 55 to 361 TWh, Cambridge Bitcoin Electricity Consumption, University of Cambridge

1
 dynamically adjusted difficulty of mining so that a block is mined around every ten
minutes (an intelligent design feature built into the protocol) are two factors for the
high energy demand of Bitcoin mining.

How does Bitcoin mining work?

The Bitcoin mining process

Users generate Miners compete to solve a The new block Winning miners
transactions with cryptographic puzzle that is designed to is added to the (or pools of
Bitcoin. Pending be difficult to solve but easy to verify blockchain miners) are
transactions are rewarded with
grouped in a block Bitcoin

Miners

After the puzzle

is solved or
hashed, the
The puzzle uses significant computational miners verify the The Bitcoin supply is fixed at
power. The network difficulty is adjusted transaction 21 million and currently about
about every 2 weeks so that 1 block is 19 million has been mined.
verified every 10 minutes. The rewards for mining
Often miners pool together to solve the are predetermined and are
puzzle and any rewards are distributed currently 6.25 Bitcoin per
based on computational power. block or 900 per day.

Source Roland Berger

The answer to the much debated question of whether Bitcoin mining consumes too
much energy is in the eye of the beholder, e.g. it depends on what legacy systems Bitcoin
is replacing and what benefits it brings to society. While this is a highly interesting
debate that touches on philosophical, economic and philanthropic elements, this article
will focus on the impact and changes that Bitcoin mining (and proof-of-work based
mining in general) brings to the electrical system and how miners can form a symbiosis
with power and utility companies around the world.

Bitcoin mining growth

Bitcoin mining uses a tremendous amount of power. Some of the larger Bitcoin mines
are served by dedicated power plants. While the global energy mix used for mining is
now over 57% from clean energy sources,2 the demand it can create on the power grids
is immense.

In the past five years, the energy consumption has grown from 11.8 to 120.5 TWh3 per
year, which is the equivalent of adding 2,400 wind turbines every year. For context, the
US has installed on average about 3,000 wind turbines a year.4 On February 12, 2022,
the Bitcoin network hash rate (the aggregate volume of mining algorithm operations)

2
Bitcoin Mining Council Q3 2021 Report, defining clean sources as hydro, wind, solar, nuclear,
geothermal and carbon generation with carbon offsets
3
University of Cambridge
4
USGS

2
 reached a new all-time high of 248.11 million terahashes per second (TH/s).5 NYDIG,
a Bitcoin company, estimates that electricity consumption could rise to a peak of
706 TWh in 2027 under its high Bitcoin price scenario.6

Bitcoin energy consumption and network difficulty reached

new all-time highs
Development of global Bitcoin energy consumption and network difficulty

GLOBAL BITCOIN ENERGY CONSUMPTION NETWORK DIFFICULTY

[TWh] [t]
140 30t

120 A relative
25t
measure of how
difficult it is to mine
100
20t a new block for
the blockchain
80
15t
60

10t
40

20 5t

0 0t
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Estimated TWh per year

Source University of Cambridge, Blockchain.com, Roland Berger

After the Bitcoin mining ban in China in September 2021, and after some countries
began restricting mining due to concerns around the strain it causes in their utility grid,
global hash rates quickly found new homes and the United States has taken the leading
position in global Bitcoin mining.

This large growth in energy use will affect decarbonization objectives if fossil fuel is used
as the source of power. We expect a continued movement towards using clean energy
given the increasing spotlight being placed on sustainability by regulators and investors
and the influence of economic concerns. In view of the inherent incentive of miners to
minimize energy costs, and the fact that clean energy in most locations is the cheapest
source of energy,7 we expect the Bitcoin mining industry to continue to move quickly to
clean energy. This is especially true in countries with a strong policy push for decarboni-
zation. We are also seeing a continued movement towards better energy efficiency,
partially offsetting the growing energy use. For instance, Intel claims that its recent circuit
innovations have 1,000 times better performance per watt than mainstream circuits.8

Without a doubt, even with the tremendous efficiency improvements, the exponential
expansion of crypto mining operations will add to global power generation demand,
especially in the US. This new surge in demand will amplify the needs of the electricity

5
 hash is the computation run by specialized mining computers in support of the blockchain.
A
A terahash is a trillion hashes
6
NYDIG, Bitcoin Net Zero, September 2021
7
"As available" energy
8
https://www.intel.com/content/www/us/en/newsroom/opinion/thoughts-blockchain-custom-compute-
group.html#gs.qb4u05

3
 sector, which already faces the challenge of meeting long-term electrification demands
from weaning the transportation and building sectors off fossil fuels to move towards
net zero goals.

The efficiency of ASIC1 mining machines improved

tremendously over recent years
Improvement in ASIC mining machine efficiency [J/Th]
9,351
Huge
1,474 efficiency
1,250
gains

500

316
187 181 140 98 97 92 59 40 30

Avalon B1 Jupiter U1 BF864C55 Rocker Box BE3000 BM13850 PickAxe0 S9 R4 Ebit 10 S15 S17 S19

2013 2014 2015 2016 2017 2018 2019 2020

1 ASIC stands for Application-Specific Integrated Circuit, machines specialized just for mining cryptocurrency
Source Bitcoin Mining Council, Roland Berger

Special attributes of Bitcoin mining

While crypto mining operations share the same flat, very high load factor9 usage
characteristics as other types of data centers, their business model and the nature of
their output create a distinctive set of customer attributes when compared to other
types of electricity users.

•E
 nergy price sensitive: With the cost of power representing over 80% of Bitcoin's
operating costs, miners are extremely sensitive to the cost of power and are highly
incentivized to find the best deal globally. In the search for the lowest power price,
miners often seek to strike deals with utilities and power plants to be directly located
onsite (and circumvent grid costs) or utilize excess energy (e.g. flared gas). At the time
of writing this article, most of the Bitcoin mining facilities globally operate with power
costs between 3 cents and 8 cents USD per MWh, with mining profits that can pay
off the cost of the mining equipment in a little over a year.

•A
 gnostic to location and flexible: Mining rigs are often organized in modular
containers, making them very flexible to deploy and move. They prefer locations with
stable regulatory regimes that offer accommodating relationships with the utilities
and that ideally have colder climates to reduce cooling requirements. Hotter locales
such as Texas and the Middle East are viable with new technology such as hydro

9
Load factor is the actual amount of energy used in a period of time divided by the total peak energy in that
same period of time. It is used as a measure of efficiency.

4
 cooling and immersion cooling – note the UAE's announcement that it will deploy
500+ MW of mining capacity. They can operate anywhere in the world, creating a
global market. Besides the cooling infrastructure, miners only need a stable internet
connection. In addition, Bitcoin miners try to maximize the use of their assets,
including utilization of the heat for other purposes (e.g. greenhouses).

"The crypto • Focused on the short term: Miners use specialized computers designed to mine as
fast as possible. Those with faster machines earn more. The lifetime value of the
economy will
mining machines is less than three years, driven both by rapid technological
transform many developments and by the intense use of the machines given their high profit margins
industries, the (on average north of 30%). Combined with the acknowledged volatility of crypto-
energy industry currency markets, this means that miners are generally unwilling to make contractual
commitments for power that extend more than three years or so. Mining equipment
being one of them. that is older than 3 years is often used only in regions where miners have very low
Miners and utilities (or nearly free) energy costs. From a utility's point of view, miners can therefore be
can form a seen as short-term users of the overall power system that can help bridge gaps of
oversupply until further economic development. On the other hand, based on the
symbiosis in the potential short-term time horizon of the mining operations (if miners don't decide to
energy system of continuously upgrade the technology and commit to long-term operations), utilities
the future." will not be keen to invest in additional infrastructure to accommodate them if they
do not pay the full costs over time of the infrastructure upgrades.

• Demand response ready: Miners can form a perfect symbiosis with utilities with
regard to balancing supply and demand on a short-term basis within the overall
system. While a miner would prefer to run as much as possible, there are no adverse
impacts, other than lost revenue, if they are shut down. Mining rewards are gained in
sprints, not marathons, and they are not bound by a time of day. They verify a block
PIERRE SAMATIES
of transactions in the blockchain, in the example of Bitcoin, every ten minutes on
Partner
average. The miners can control the pace and degree of their shutdown and hence
can be very scalable as demand response resources. Of course, utilities or market
operators would have to make it worthwhile for miners to interrupt their revenue-
producing operations. There are very few energy users that are this large and have
this degree of flexibility to ramp up and down in a matter of minutes – with some
miners claiming they can shut down in seconds.

Given these distinctive attributes, and a large amount of fast interruptible power,
crypto mining can serve the electric system in three beneficial ways: (1) New revenue
streams and asset optimization, (2) Demand response and load balancing and (3)
System control and planning. The potential negative issues are explored below, after
the following section.

Crypto mining's impact on the electric system

1 New revenue streams and asset optimization
Due to the geographic flexibility of crypto, this load can be easily situated near the
point of generation. Typically, the system works the other way round, with generation
situated as close as possible to load centers or large transmission systems carrying load
from further away. This provides a unique opportunity to obtain value from under-
utilized generation capacity.

5
 Crypto mining offers an entirely new way to monetize power generation. It can basically
convert power into a globally accepted cryptocurrency. Generators anywhere with
excess power can earn from that power instead of curtailing energy or finding and
connecting to other users. Bitcoin can unlock new uses for energy that otherwise
wouldn't be used. For instance, hydro dams can generate more power in the rainy
season than can be absorbed, oil & gas companies can utilize flare gas, etc. Generators
constrained by transmission availability can find new outlets for their power, potentially
enabling more solar and wind in rural areas. Locating mining containers near this
generation can help improve the utilization of the assets and will extend their marketable
lives. Nuclear facilities in the US are beginning to use cryptocurrency mining to increase
their revenues and improve their economics as they compete with lower priced
generation. This may even impact community solar or other virtual power plants with
the new revenue streams, making them less dependent on regulatory subsidies.

What influence does electricity cost have on the Bitcoin price?

Bitcoin and electricity pricing connection
(US example with wholesale energy purchase)

February 16, 2022

Hash spreadTM USD 162/MWh hash spread Price of
Indicative amount to for S19 machines in the US
Bitcoin
cover fixed cost of with average cost of wholesale
power USD 69.62/MWh and
machine and profits
Bitcoin price of USD 43,622

Cost of Spark spread

wholesale Indicative amount to
cover fixed cost of
electricity generator and profits

Cost of
natural gas
(raw material for
electricity produced
at the margin)

Source BitOoda, Roland Berger

With the green energy transition in mind, there is understandable concern around
any tool that may help improve the profitability and lifetime of fossil-fuel-based power
plants. The industry is under tremendous pressure to use clean power generation.
Assistance can also be provided for solar generation, enabling a value stream for
projects that are in long interconnection queues or in areas that are already filled with
too much solar power in a particular location. The additional value streams with crypto
capital can accelerate a renewables buildout.

This could potentially change the economics of transmission, particularly for projects that
are primarily designed to arbitrage the price of generation in two different regions. With
low costs, remote generation now has an alternative option for use instead of depending
on transmission lines to connect the power to cities and load centers. In additional, in
hotter climates with significant seasonal demand curve differences (like the Middle East),

6
 Bitcoin miners can help increase the utilization of assets in winter months, when the load
is significantly lower than in the summer (mainly based on AC consumption).

2 Demand response and load balancing

More dynamic participation of customers in balancing electricity supply and demand
on a very short-term basis is a megatrend in the utility industry. To maintain power
reliability and quality, electric system operators must match supply and demand in real
time. With electricity supplies becoming more intermittent and highly variable (e.g. solar
and wind), and new electricity demands also being more volatile (e.g. EV charging),
"Crypto mining flexible tools to manage both supply and demand are all the more important and
offers an entirely valuable.
new way to
Typical supply-side means for matching available generation with customer load
monetize power include flexible peaking generation plants, or batteries and other forms of storage. The
generation." main instruments on the demand side for real-time system balancing are extreme peak
pricing (to discourage peak usage) and demand response programs (to control peak
usage voluntarily). Rather than adding new supply resources to meet peak electric
system demands, it is often less costly to recruit customers who are willing to reduce
their electricity usage in response to requests from the utility, in return for a discount
or payment. Hence the term "demand response." This saves money for both the utility
and its customers.
CHRISTINE VAUGHAN
Director Crypto mining can take demand response to a new level, with large loads that can be
quickly curtailed for a fee. Forbes describes it as a "shock absorber for green power."
It can provide a seasonal balance in hot climates where air conditioner usage and water
desalination create seasonal load patterns.

Innovative utilities such as Black Hills Energy are developing new flexible tariffs to
accommodate this new use case. Other uses for these tariffs could be interruptible
data center loads, which would include other applications that are non-mission-critical
computations such as some machine learning and computational biology. These tariffs
may also be used for other large flexible load applications such as the production of
green hydrogen, another use case that will compete with crypto mining for low energy
pricing and curtailed energy.

3 System control and planning

Just as demand response can be implemented at the wholesale level to manage the
system, crypto mining also has the potential to help local utilities with distribution
management. Given the locational flexibility of mining operations, the utility can
strategically place the operations where it's most beneficial from a system control point
of view. With the integration of distributed generation, the grid is becoming more
complex, with power needing to flow in two directions instead of one. Given that the
system must always be in balance and that it is more difficult to predict new demand
and supply in this environment, the utilities are going to need more tools to manage
and control power flow. Crypto mining can be an additional tool, a vacuum of sorts,
absorbing "waste" power where it is not needed in the system so that the grid can
operate smoother. This tool can be added to other strategies such as advanced control
systems, demand response and improved system architecture to optimize the grid
of the future.

7
 System risks

The intense power usage of crypto mining can cause grid reliability and equipment
problems if large mining operations are conducted in grids that do not have the
"Even with the demonstrated capacity to handle the expected increase in loads. Many governments
tremendous have banned or significantly regulated the mining of cryptocurrency due to its impacts
on the reliability of grids that were already stressed, including China, Iran and Turkey.
efficiency Growth in crypto mining could raise similar locational concerns in other countries if
improvements, the increase in mining loads occurs in areas where the grid is at or near capacity.
the exponential
From the perspective of other utility customers, service to new large crypto mining
expansion of crypto loads could be detrimental if the energy volumes demanded would require significant
mining operations new utility investments in long-lived generation or transmission assets. The full
will add to global recovery of such additional fixed costs, or at least the costs of their acceleration from
when they would be needed to serve other customers, is threatened by the volatility
power generation of the cryptocurrency market, the reluctance of crypto miners to commit to long-term
demand, especially energy purchase obligations, and the portability of the miners' major physical assets
in the US." (their computers). In other words, the utility and its other customers face significant
risks of stranded generation or transmission costs should the crypto miners leave
before their cost responsibility is discharged.

Utilities can largely mitigate such risks through collecting prepayments or securing
obligations from the crypto miners before undertaking system expansion investment on
their behalf, and by managing a staged interconnection process that requires growing
levels of financial commitments from the crypto miners as any system expansion
BILL KEMP
projects progress. This helps improve the credibility of new service requests that may
Director
sometimes have speculative elements. Most utilities already have such processes in
place for new large customer loads.

Again, to present the risk picture fairly, these system reliability and stranded
investment threats are much smaller and more manageable if the existing generation
and transmission system has adequate capacity to serve the new crypto miner loads,
or if the crypto mining operations are not connected to the grid.

Conclusion
The rise of the crypto economy and the increased investments into
proof-of-work mining activities come with major implications for the
energy system. If handled well with the right regulatory and commercial
framework, it will lead to very positive opportunities for governments
and utilities that embrace the potential symbiosis, including an indirect
acceleration of renewable energy growth. On the other hand, if it is not
properly designed with a holistic view of the energy system and the
energy transition objectives, it will lead to risks in the system. Hence, it
is important to understand the in-depth mechanics of the industry and
bridge it to national energy strategies.

8
 Further reading

THE RISE OF THE CRYPTO ECONOMY

rb.digital/Crypto_Economy

EXPERTISE: ENERGY & UTILITIES

rb.digital/Energy_and_Utilities

NEXT LEVEL GRID OPERATIONS

rb.digital/ Next_level_grid_operations

CONTACT: CHRISTINE VAUGHAN

Director
Boston Office
+1 617 306 2139
[email protected]

PIERRE SAMATIES
Partner
Dubai Office
+971 4 446 4080
[email protected]

BILL KEMP
Director
Chicago Office
+1 941 448 5674
[email protected]

FEROZ SANAULLA
Partner
Dubai Office
+971 4 446 4080
[email protected]

This publication has been prepared for general guidance only. The reader should not act according to any information
provided in this publication without receiving specific professional advice. Roland Berger GmbH shall not be liable for
any damages resulting from any use of the information contained in the publication.

© 2022 ROLAND BERGER GMBH. ALL RIGHTS RESERVED.