Solar-Powered Bitcoin Mining Could Be a Very Profitable Business Model

Bitcoin and other cryptocurrencies are now a major business, with the global market capitalization of these coins exceeding $170 billion at their recent peak, according to Coin Market Cap.

Bitcoin alone has reached over $70 billion in value, up from nothing when it was created just eight years ago.

A major issue with Bitcoin, which may eventually undermine success unless it is remedied, is the massive amount of power required for “mining” of the coins.

The mining metaphor is apt because bitcoins are created through specialized computers looking for the correct codes (hash keys), just like digging for gold. That electronic digging takes more and more power as more and more people dig for that virtual gold. Sebastian Deetman calculated in 2016 that mining would require as much electricity by 2020 as the entire nation of Denmark currently consumes.

That’s just the beginning. Bitcoin’s algorithm requires that it get more and more difficult over time to mine, as long as mining itself becomes increasingly popular. With an approximately 132-year discovery cycle to mine all 21 million bitcoins, mining power demand will go up exponentially.

So what to do if we care about the power of blockchain and cryptocurrency as well as protecting our climate and our environment?

Well, one thing we can do is consider the potential for environmentally friendly power for mining.

I’ll look at solar power’s potential for Bitcoin mining in this piece. I conclude that it can be both very profitable and far better for the environment than some other options.

I first considered combining solar power with Bitcoin mining due to my work in solar power development and my recognition of how difficult it can be to obtain a power sales contract. There are many difficult aspects of solar power development, but obtaining the sales contract is now generally the most difficult part of the process, largely because there are so many market participants chasing too few contracts.

Mining Bitcoin is one way to obtain significant revenue — potentially far greater revenue than under normal power sales contracts to the grid — without needing any sales contract at all.

Bitcoin mining profitability is determined by the cost of electricity more than any other factor. So if solar power is cheaper than buying grid power, it can make sense to combine on-site solar power with mining operations.

To date, I am not aware of any significant mining operations using low-cost solar power at scale. Genesis Mining, a “cloud mining” operation, and some other mining operators use geothermal power in Iceland, which is cheap and sustainable. But this resource is far more geographically limited than solar power, which can be and is being developed all around the world.

The bottom line is that solar-powered Bitcoin mining operations can be highly profitable and enjoy payback times as short as a year or two. After that, Bitcoin revenue comes with almost zero ongoing costs for another 25 years or more for solar farms — though the mining machines will need to be upgraded periodically.

There are also opportunities for obtaining very low-cost grid power, or even negatively-priced power, to increase the profitability of solar mining operations.

If a large share of future mining operations use solar power, geothermal power, hydro power, biomass or wind power, the massive power demands of mining and their consequent environmental impacts could be largely mitigated.

Low-cost and negative-priced grid power

Some markets in the U.S. are increasingly paying businesses to take excess grid power. Under a negative-pricing scenario, the grid is receiving too much power and the grid operator must either temporarily shut down (curtail) some power plants or pay electric customers to take the excess power and avoid curtailment.

Negative pricing can be caused by various factors, but it is increasingly due to renewable energy sources like solar and wind power. California, for example, is seeing increasing durations of negative pricing during the day when solar production occurs. The figure below shows the daily grid electricity demand curve, with demand plummeting during the day when a large amount of solar power is produced from existing solar plants around the state.

Negative pricing happens because California’s grid generation assets can’t all be turned down or off as solar production ramps up. Some baseload must run all the time. And as solar plants come on-line in amounts that exceed the baseload generation plus the solar power, some power must be curtailed or sold at negative prices. As the duck’s “belly” gets fatter (lower in the chart) there will be more and more negative-priced power.

Texas has also seen negative pricing periods for a number of years, prompted by excess wind power on the grid.

Given the strong focus on renewable energy in a number of states, it is all but certain that times of negative pricing are going to increase in the coming years.

Bitcoin mining

Bitcoin mining began as an activity that could be done on personal computers, but quickly morphed into a high-powered affair requiring specialized chips and large amounts of electricity. This trend is continuing and, as mentioned above, the cost of electricity is now easily the largest factor in determining mining profitability.

By forecasting where we can expect substantial negative pricing of power in various markets around the country, smart investors can set up large-scale mining operations in those jurisdictions — getting paid to take negatively priced power while mining a financial resource that is very likely to appreciate significantly in value over time. The price of Bitcoin recently hit $5,000. It is currently at about $4,100, up from under $1,000 at the start of the year.

In sum, by taking advantage of negative pricing in markets that are implementing high amounts of excess renewable energy, Bitcoin mining operators can earn additional revenue from the grid operator by taking that power, which is revenue over and above the revenue from selling mined bitcoins. (For the uninitiated: “Bitcoin” with an uppercase B is the technology and platform, whereas “bitcoin” with a lowercase b refers to actual bitcoins.)

There are, accordingly, two significant revenue streams available in this model: 1) taking negative-priced power, which earns up to 2 cents per kilowatt-hour currently, but may become even more valuable in the coming years; 2) using that power to mine bitcoins, which can return 25-50 cents per kilowatt-hour — or even more if the price of Bitcoin continues to rise.

Solar power for Bitcoin mining

It can make good financial sense to use solar power to mine Bitcoin. Solar plants can provide power that is cheaper than grid power in areas with good insolation and low construction costs. The price of power is also known with some certainty over time because there are no fuel costs and thus no volatility.

A 1-megawatt solar project could provide power over the 25-year life of the project at about 5 cents per kilowatt-hour or less (substantially less than the approximate 10 cents per kilowatt-hour of industrial grid power in California). Power-purchase contracts may also be available for solar power of this size in California as a backup source of revenue generation. A contract must be obtained that allows power to be used onsite first and any excess remaining to be sold to the grid. I discuss this further below.

In the chart below, I look at the numbers behind a solar Bitcoin mine powered by a 1-megawatt PV system. The mine uses grid power when solar power is not available. It also assumes a constant $2,500/Bitcoin value. (This is about half the current price; I’ve also assumed that the price adjusts higher to maintain a constant reward as the blocks halve every four years, which has been the case so far; I also assume amortization of the full cost of new mining machines over each eight-year period as machines get more efficient and need to be replaced.)

The right column contains all year-one costs and revenue, except for the last two cells that contain the 20-year net revenue and net present value.

This financial model does not rely on any negatively priced power, because the above results are already highly favorable. It’s an added bonus if the grid power costs are lower due to periods of negatively priced power.

This is a conservative model in another key way: I’ve assumed a $2,500 Bitcoin price, but used the current mining difficulty level. (I used the CoinWarz Bitcoin profitability calculator, which is not entirely realistic. This is because there has been a 95 percent correlation between Bitcoin price and mining difficulty over the last two years. This means that if the current price were to drop to $2,500, the mining difficulty would also drop, and our 1-megawatt mining farm would produce significantly more than the 789 bitcoin per year included in the chart above.)

What does this mean? This 1-megawatt solar mining farm will probably be more profitable than what I’ve calculated here.

How does this compare to a solar-only model? The net present value for a 1-megawatt solar project would be about $200,000 to $400,000 for a project with a good power sales contract and low costs of development. A net present value of $9.3 million for the solar-plus-Bitcoin alternative is a good improvement.

If the mined Bitcoin are held long-term rather than being converted to dollars or other currency, there’s a good chance this revenue will increase even further (by additional multiples) as the price of Bitcoin continues to increase in the coming decades.

Another benefit of the renewable energy mining model is that the renewable energy tax benefits can be absorbed with tax liability from the sale of Bitcoin (all or partial sales as they’re mined), eliminating the need for outside equity investors to absorb the tax benefits, as is often the case with standalone solar or wind power operations.

Off-grid mining operations?

This development model can also be pursued in areas that have no power lines and very cheap land. No grid connection is required to do the mining. Under this scenario, the miners are connected to the internet via a satellite connection, but otherwise the entire project is off-grid. All solar power is used for mining. This kind of facility could also include onsite storage to both smooth production and to extend mining operations beyond daylight hours.

Being off-grid prevents using grid power to supplement the solar mining, but such a project could be built very easily and quickly. For example, Texas counties have no permit requirements for this kind of project, so it would be as easy as buying land, contracting to build the solar and mining facilities, and then commencing operation. Revenue is lower for the off-grid option, but still very profitable.

The backup plan: Selling power to the grid

What happens if the price of Bitcoin collapses entirely, leaving minimal or no profit from Bitcoin mining? This is an unlikely event given the growth of Bitcoin over the last eight years (Bitcoin’s market cap is about $68 billion as of this writing, up from zero in 2009), but it is nevertheless prudent to consider an alternative revenue stream to Bitcoin mining.

A less risky (but more complex) scenario is to construct a solar farm with the local utility as the backup power offtaker, but preserving the ability to use power onsite to mine Bitcoin. This is the excess sales arrangement mentioned above.

A 1-megawatt solar farm can obtain a power sales contract in California and other states. But the project must, of course, first be connected to the grid and go through the application or bidding process to obtain a power sales contract. This adds cost, time and complexity. And there’s no guarantee of winning a contract. However, obtaining a backup grid sales contract substantially reduces the risk of the pure Bitcoin mining approach.

This approach allows the farm owner to use as much power as they like to mine Bitcoin instead of sending it to the grid. So if the profit is higher in mining, they’d engage in mining, and if selling the power to the grid is more profitable, they’d do that instead.

The solar-plus-Bitcoin operation pays for itself in about two years, adding another level of insurance. Accordingly, the risk of losing the investment is mitigated and completely eliminated relatively quickly. Once the project costs are paid back, there is minimal risk remaining.

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Tam Hunt is a lawyer and owner of Community Renewable Solutions LLC, a renewable energy project development and policy advocacy firm based in Santa Barbara, California and Hilo, Hawaii, co-founder of Solar Trains LLC, and author of the new book, Solar: Why Our Energy Future Is So Bright.

Source: greentechmedia