Bitcoin is Key to an Abundant, Clean Energy Future

 
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Bitcoin is Key to
an Abundant, Clean
Energy Future
In this memo, we aim to explain how the Bitcoin network functions as a
unique energy buyer that could enable society to deploy substantially
more solar and wind generation capacity. This deployment, along with
energy storage, aims to facilitate the transition to a cleaner and more
resilient electricity grid. We believe that the energy asset owners of
today can become the essential bitcoin miners of tomorrow.

                                                          ABOUT THIS MEMO
Highlights
                                                          The Bitcoin Clean Energy Initiative has
                                                          developed this short research paper as a starting
             Bitcoin mining presents an
                                                          point to share our vision for how bitcoin mining
             opportunity to accelerate the
             global energy transition to                  - in conjunction with renewable energy and
             renewables by serving as a                   storage - is especially well suited to accelerate
             complementary technology for clean           the energy transition. To complement this work,      Energy asset
                                                                                                               owners are the
             energy production and storage.               ARK Invest has contributed an open source
                                                                                                               entities which
                                                          model that demonstrates how bitcoin mining           own the power
             Solar and wind are now the least
             expensive energy sources in the              could augment these renewable + storage              production
             world, but are hitting deployment            systems to supply a larger percentage of a grid’s    plant once it is
             bottlenecks primarily because of             baseload energy demand for comparable or             in commercial
                                                                                                               operation.
             their intermittent power supply and          lower cost unit economics. This work is merely
             grid congestion.
                                                          the beginning of what we hope will be a fruitful
                                                                                                               Bitcoin Clean
             Bitcoin miners as a flexible load            exploration of solutions to help usher in an
                                                                                                               Energy Initiative
             option could potentially help solve          abundant, clean energy future.                       (BCEI) is a
             much of these intermittency and                                                                   project launched
             congestion problems, allowing                A UNIQUE ENERGY BUYER                                by Square in
             grids to deploy substantially more
                                                          Bitcoin miners are unique energy buyers              December 2020 to
             renewable energy.                                                                                 promote the use
                                                          in that they offer highly flexible and easily
                                                                                                               of clean energy
             By deploying more solar and wind,            interruptible load, provide payout in a globally     in Bitcoin mining.
             these generation technologies will           liquid cryptocurrency, and are completely            Learn more about
             likely fall even further down their          location agnostic, requiring only an internet        its origin here.
             respective cost curves, bringing
                                                          connection. These combined qualities
             them closer to zero marginal cost
             energy production.                           constitute an extraordinary asset, an energy         Interruptible load
                                                          buyer of last resort1 that can be turned on or off   is an end use of
                                                                                                               electricity, like
                                                          at a moment’s notice anywhere in the world.
                                                                                                               mining bitcoin,
                                                                                                               which can be
                                                                                                               turned on or off
1. Special Report: Energy Backed Money, Satoshi Energy.                                                        quickly and easily.

Bitcoin Clean Energy Initiative Memorandum                April 2021                                                              01
RENEWABLE ENERGY IS NOW THE CHEAPEST ENERGY                  NREL Duck Curve
The Levelized Cost of Energy (LCOE) for solar                Net load in Megawatts, January 11
                                                             Years 2012-2020 represented
and wind has fallen 90% and 71%,1 respectively,
over the last decade. The unsubsidized costs                 34k
                                                                                                               2020
of solar and wind energy are now 3-4 cents /
kWh and 2-5 cents / kWh, respectively. Certain               30k
individual projects have had even lower costs.
For context, the average LCOE for fossil                     26k
fuels such as coal or natural gas is ~5-7 cents
                                                                                                               2012
/ kWh. This means that solar and wind are                    22k
already at a lower price point than coal and
natural gas. Solar and wind energy also just                 18k                                                      Levelized Cost
reached cost parity2 with both geothermal and                  0                                                      of Energy (LCOE)
                                                                   12am   3am   6am   9am   12pm   3pm   6pm   9pm
hydroelectric, which at around 3-5 cents / kWh                                                                        is the total
are inexpensive, but geographically limited.                 Ten Years of Analyzing the Duck Chart, NREL.             lifetime cost of
                                                                                                                      building and
                                                                                                                      operating a power
There will always be inexpensive individual                                                                           plant divided by
sites for different power sources like hydro or           In essence, the sun shines during the day, but              the total amount
geothermal, but on the whole, solar and wind              not at night. Wind is more unpredictable, but               of energy
are now the lowest cost and most scalable.                tends to blow more heavily at night. Energy                 it produces
                                                                                                                      (measured in
What’s more, we believe they will only continue           supply, therefore, is either abundant or non-               cents / kWh).
to get more affordable over time. We believe              existent. Demand, however, peaks around the
this is especially true for solar, a semiconductor        late afternoon or early evening when people                 Semiconductor
technology, which has consistently declined in            arrive home and turn on appliances, at which                technology the
price by 20-40%3 per doubling of cumulative               time neither solar nor wind are abundantly                  basis of modern
capacity deployed.                                        available. The end result is significantly more             electronics and
                                                          power than society typically needs for a few                computing which
                                                                                                                      has historically
                                                          hours per day and not nearly enough when                    fallen in cost as
   LCOE by Energy Source                                  demand spikes. This same challenge also plays               its production
   In Price per kWh                                       out seasonally as the sun shines more during                capacity increases
                                                          the summer and the wind blows more during                   (e.g. see
   Hydro    ~.01 – .04      Nat. Gas       ~.04 – .07                                                                 Moore’s Law).
                                                          the winter. These deficiencies are further
   Wind     ~.02 – .05      Geothermal     ~.05 – .10
                                                          exacerbated by grid congestion,5 which is
   Solar    ~.03 – .04      Coal           ~.06 – .07     similar to highway traffic and frequently occurs            Intermittency is
                                                                                                                      when an energy
                                                          because solar and wind projects are often built
                                                                                                                      source is not
   All but Hydro, Lazard. Hydropower, IRENA –             in rural areas with lots of sunlight and wind               constant. For
   International Renewable Energy Agency.                 but little nearby load (i.e. end power users)               example, in the
                                                          and transmission capacity. Because of these                 case of a solar
                                                          challenges, there are >200 GW6 of delayed solar             farm, it only
                                                                                                                      produces when
TEMPORAL SUPPLY & DEMAND MISMATCH AND                     and wind capacity currently in just three U.S.
                                                                                                                      the sun shines.
GRID CONGESTION                                           grid interconnection queues. These are solar
Solar and wind energy, however, both suffer from          and wind projects which have developers and
                                                                                                                      Grid congestion
one major deficiency versus more expensive                financing readily available, but which grids                is when a grid’s
baseload power like natural gas or nuclear:               physically cannot accommodate.                              transmission lines
intermittency. In the energy industry, this results                                                                   have reached the
in what is known as the “duck curve.” 4                   Increased transmission capacity and energy                  maximum capacity
                                                                                                                      for how much
                                                          storage will be critical to solving these
                                                                                                                      electricity can flow
                                                          problems, especially as Lithium Ion batteries               through them at
1. Levelized Cost of Energy and Levelized Cost of
                                                          continue to fall down their cost curve. For the             any given moment.
   Storage – 2020, Lazard.
2. Levelized Costs of New Generation Resources in         moment, though, utility-scale batteries are
   the Annual Energy Outlook 2021, U.S. Energy            still too expensive to deploy universally. After            Transmission
   Information Administration.                            they’ve fallen another 80% in cost, they will still         capacity the rate
3. Solar's Future is Insanely Cheap (2020), Ramez Naam.   face physical limitations around their useful               at which electricity
4. Ten Years of Analyzing the Duck Chart, NREL.                                                                       can be moved
                                                          lifespan and for how long they can store energy
5. Transmission congestion & constraints: Market                                                                      from a power plant
   impediment or opportunity? NRG Editorial Voices.       without dissipation. They will, however, be the             (e.g. a solar farm)
6. New data tool from Berkeley Lab Tracks Proposed        most critical technology in storing inexpensive             to a load center
   Projects in Interconnection Queues, Berkeley Lab.      mid-day solar power for evening peak demand.                (e.g. a city).

Bitcoin Clean Energy Initiative Memorandum                April 2021                                                                     02
LONG TERM IMPLICATIONS
                                                       We believe there are two large implications
                                                       if bitcoin mining becomes normalized as
                                                       an energy buyer of last resort. First, the
                                                       amount of solar and wind energy on the grid
                                                       cold increase dramatically. As noted above,
                                                       there’s currently >200 GW of delayed solar
                                                       and wind capacity in the interconnection
                                                       queues of just three U.S. electricity markets.
BITCOIN MINING IS AN IDEAL COMPLEMENT FOR              For context, that’s approximately double the
GENERATION + STORAGE                                   amount of solar and wind capacity currently
Bitcoin miners, on the other hand, are an ideal        installed there.
complementary technology for renewables
and storage. Combining generation with both            As society starts deploying more solar and
storage and miners presents a better overall           wind, we believe it should bring their LCOE
value proposition than building generation and         even further down their cost curves, making
storage alone. As mentioned above, there will          the next batch of solar and wind even more
always be physical limitations to how much             affordable. If the LCOE falls, it could potentially
energy can be cost effectively stored without          unlock profitable new use cases for that
dissipation. However, the daily intermittency          electricity like desalinating water, removing         Dissipation is the
challenge can be met almost entirely with just         CO2 from the atmosphere, or producing green           process of losing
a few hours of storage capacity.                       hydrogen. Some experts in the field expect            some stored
                                                                                                             energy as heat,
                                                       that the marginal cost of producing new               also known as
By combining miners with renewables + storage          electricity will actually approach zero.1             “heat loss”.
projects, we believe it could:
                                                       The second major potential impact could be            Black swan
                                                                                                             events are low
1 Improve the returns for project investors            a sizable transformation and greening of the          probability, high
  and developers, moving more solar and wind           bitcoin mining industry. It’s estimated that          impact events
  projects into profitable territory.                  there’s only 10-20 GW2 of mining capacity             like severe
                                                       worldwide today. Deploying miners at even             winter storms
2 Allow for the construction of solar and              20% capacity with the above mentioned                 or heat waves.
  wind projects even before lengthy grid               200GW of delayed solar and wind projects              Utility-scale
  interconnection studies are completed (as            on U.S. grids alone could result in 40 GW of          storage is large
  bitcoin miners can offtake the energy until          new mining capacity, effectively dwarfing the         batteries deployed
  selling to the grid becomes possible).               entirety of the existing global market. Note          by utilities with
                                                                                                             storage capacity
                                                       that while many of these projects would likely        ranging from a
3 Provide the grid with readily available              be built “behind the meter” to utilize otherwise      few megawatt-
  “excess” energy for increasingly common              curtailed solar and wind power whenever               hours (MWh) to
  black swan events like excessively hot or            possible, they would likely still mine with           hundreds of MWh.
  cold days when demand spikes (e.g. the early         grid electricity during other periods when
                                                                                                             Interconnection
  2021 outages in Texas).                              profitable to do so, so it wouldn’t be entirely       queues are
                                                       green from day one. But if solar and wind             projects awaiting
Note that this “excess” energy will also be quite      become even less expensive and constitute             approval to
useful as society’s electricity demands increase       an increasingly large portion of baseload             supply energy to
                                                                                                             transmission grids.
with the proliferation of electric vehicles and        power, the ultimate trend would continue
the electrification of all devices. In a sense, the    moving quickly toward renewable dominated             Behind the meter
unlimited appetite of miners allows them to            hashrate. We believe deploying such a large           refers to using
eat whatever remains of the “duck’s belly.” Given      amount of new, geographically diverse hashrate        energy directly at
                                                                                                             the generation site
these benefits, we believe it makes logical            would also have the second order consequence
                                                                                                             without traveling
sense for utility-scale storage developers to          of strengthening the security of the Bitcoin          through the grid.
augment their current battery offerings with           network, potentially further entrenching
bitcoin miners.                                        bitcoin as a sound currency for all.                  Hashrate
                                                                                                             is the total
                                                                                                             computational
                                                                                                             power securing
1. Zero Marginal Cost Energy, Max Webster. Dec 2020.                                                         the Bitcoin
2. Cambridge Bitcoin Electricity Consumption Index.                                                          network.

Bitcoin Clean Energy Initiative Memorandum             April 2021                                                                03
THIS SECTION OF THE MEMO WAS WRITTEN BY THE TEAM AT ARK INVEST

                                                            Bitcoin mining could encourage
                                                            investment in solar systems, enabling
                                                            renewables to generate a higher
With real-world data, we                                    percentage of grid power with no
(ARK Invest) demonstrate that                               change in the cost of electricity
bitcoin mining could encourage                                                                 Size of bubble is bitcoin mining power

investment in solar systems                                                             2,0k                                              99% of grid
                                                                                                                                         demand met

(solar grids + batteries), enabling                                                                                             90%
renewables to generate a higher
                                                                                        1,5k

                                                        Solar installation power (MW)
                                                                                                                         80%
                                                                                                                   70%
percentage of grid power with                                                           1,0k
                                                                                                             60%

potentially no change in the                                                                           50%

cost of electricity.                                                                    500
                                                                                                      20%
                                                                                                             40%
Without bitcoin mining, solar - an intermittent                                           0
                                                                                                10%

energy source - could supply only 40% of                                                            200     400    600    800    1,0k   1,2k   1,4k   1,6k

grid power before utilities would face the                                                     Battery system capacity (MWh)

need to fund significant investments with
higher electricity prices. With bitcoin mining
integrated into a solar system however, energy        Our model demonstrates that integrated bitcoin
providers - whether utilities or independent          mining could transfigure intermittent power
entities - would have the ability to play the         resources into baseload-capable generation
arbitrage between electricity prices and              stations. It suggests that the addition of Bitcoin
bitcoin prices, as well as potentially sell the       mining into power developers’ toolboxes
“surplus” solar and supply almost all grid power      should increase the overall addressable market
demands without lowering profitability.               for renewable and intermittent power sources.
                                                      All else equal, with bitcoin mining, renewable
The graph above illustrates the impact that           energy could provision a large percentage of
bitcoin mining could have on the adoption             any locality’s power economically. As a follow-
of solar systems. Assuming a constant cost of         on effect, cost declines associated with scaling
electricity, it traces what percentage of power       renewables should most likely accelerate,
solar could provide to the grid. The y-axis is the    leaving them even more economically
power generated by solar, the x-axis is battery       competitive at equilibrium.
capacity. The size of each circle is proportionate
to the size of the bitcoin mining operation. At       WE PROVIDE AN OPEN-SOURCE VERSION AND MORE
each point, the solar system provides a different     DETAILED BREAKDOWN OF THE MODEL AND ITS
percentage of the grid’s needs. As bitcoin            ASSUMPTIONS HERE1.
mining scales, the solar system increases in
size and provides a higher percentage of the
grid’s needs. Increasing bitcoin mining capacity
could allow the energy provider to “overbuild”
solar without wasting energy. In the bottom left
of the chart, in the absence of bitcoin mining,
renewables can satisfy only 40% of the grid’s
needs. In the top right of the chart, including
solar, batteries, and bitcoin mining can satisfy                                                                                                             Baseload-capable
99% of the grid’s demand.                                                                                                                                    generation refers
                                                                                                                                                             to the ability to
                                                                                                                                                             meet the minimum
                                                                                                                                                             level of demand on
                                                                                                                                                             an electrical grid
                                                                                                                                                             over a span
1. Solar Battery Bitcoin, ARK Invest GitHub.                                                                                                                 of time.

Bitcoin Clean Energy Initiative Memorandum            April 2021                                                                                                            04
NEXT STEPS
There are still some important remaining                           Call to Action
questions about how the above vision could
play out. We see at least three meaningful
business opportunities:
                                                                   The bitcoin and energy
                                                                   markets are converging
1 Energy Management Software                                       and we believe the energy
  and Services
  Energy management companies that
                                                                   asset owners of today will
  specialize in both storage and mining could                      likely become the miners of
  build software to decide in real-time the best                   tomorrow. Utility executives,
  use for a newly created electron: whether
  to use it, store it, or mine it. They could also
                                                                   sustainable infrastructure
  provide key asset management tools and                           funds, and grid-scale storage
  analytics to monitor project performance.                        developers are well-positioned
2 Energy/Miner Marketplaces
                                                                   to expedite this future by
  Managed marketplaces could emerge                                aligning their strategic
  to connect project developers, miners,                           roadmap and deploying large
  and financiers. One key challenge would
  be solving the current creditworthiness
                                                                   scale investments into the
  threshold requirements for existing miners.                      emerging synergy between
                                                                   bitcoin mining and clean
3 ASIC Manufacturing
  New chip foundries could be built to meet
                                                                   energy production.
  the expected surge in demand. Samsung
                                                                   We plan to follow up with more research
  and TSMC are leading the way with recent
                                                                   explorations and additional resources focused
  announcements of new North American                              on the intersection of bitcoin and clean energy.
  plants. We also expect to see continued
  hardware and firmware improvements to                            CONTACT BITCOIN-ENERGY@SQUAREUP.COM
  increase the durability of mining equipment
  optimized for interruptible power usage.

                                                                                                                           Application
                                                                                                                           Specific Integrated
                                                                                                                           Circuit (ASIC) is
                                                                                                                           a computer chip
                                                                                                                           that’s customized
                                                                                                                           to perform one
                                                                                                                           function. In this
                                                                                                                           case, ASICs are
                                                                                                                           specialized to mine
                                                                                                                           and secure the
                                                                                                                           Bitcoin network by
                                                                                                                           performing a hash
                                                                                                                           function called
                                                                                                                           SHA-256.

                                                                                                                           Taiwan
                                                                                                                           Semiconductor
                                                                                                                           Manufacturing
This memo includes content and data (“information”) from ARK Invest, which is a holder of Square, Inc. (“Square,” “we,”    Company (TSMC)
“our,” “us”) Class A common stock. This information was made available to us for inclusion in this memo at no cost in      is a Taiwanese
furtherance of Square and ARK Invest’s commitment to bitcoin and renewable energy. This information has also recently      multinational
been open-sourced and made publicly available as set forth above. Although we believe the information from ARK Invest      semiconductor
included in this memo is reliable, we have not independently verified its accuracy or completeness. Square is presenting   contract
this information for informational purposes only and Square is not intending to approve or adopt the information. Square   manufacturing
undertakes no obligation to update this memo, and the information contained herein may be updated, amended or              and design
superseded by subsequent documents or disclosures, or may become outdated and inaccurate over time.                        company.

Bitcoin Clean Energy Initiative Memorandum                     April 2021                                                                  05
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