This is an opinion piece by Ali Chehrehsaz, a mechanical engineer with 16 years of experience in the energy industry.
This article will explain how collecting and storing solar energy can provide powerful dynamics for bitcoin mining operations highlighting that:
- Hybrid power plants that couple power generation, especially solar, with batteries are growing rapidly
- Bitcoin mining will be integrated into these factories alongside batteries, for the same reasons
- Integrating bitcoin mining as well as batteries requires proper sizing of deployed assets, as well as power distribution between batteries, mining, and the grid in a way that optimizes revenue.
- The way forward won’t be technically or commercially straightforward, but the opportunity is enormous.
Hybrid power plants
There is a new generation of power plants on the rise: batteries are collocated with wind, solar photovoltaic (“PV”), fossil fuels, etc. to create so-called “hybrid power plants”. Among these hybrid power plants, solar plus battery power plants are the fastest growing segment.
Lawrence Berkeley National Labs (LBNL) recently published its findings in a briefing titled “2021 was a big year for hybrid power plants – especially PV + storage.” In the article, he mentioned: “Among operational generator + storage hybrids, PV + storage dominates in terms of number of installations (140), storage capacity (2.2 GW [gigawatts]/7.0 GWh [gigawatt hours]), the storage capacity/generator ratio (53%), and the storage duration (3.2 hours). ”
The briefing goes on to state that: “Last year was a banner year for PV + storage hybrids in particular: 67 of the 74 hybrids added in 2021 were PV + storage. At the end of 2021, there were more GW of battery capacity operating in PV + storage hybrids (2.2 GW) than in stand-alone storage plants (1.8 GW). Much of the battery capacity added in hybrid form in 2021 was a upgrading the battery of a pre-existing photovoltaic power plant.”
This last point is remarkable, and we will come back to it to discuss it later.
This trend continues and, as the article points out, there were more than 670 GW of solar power plants in the interconnection queues in the United States at the end of 2021.
Prisoners of time and geography
Why are batteries being added to solar power plants at such a rapid rate? Two factors are at play: the deflation of the value available for solar energy and the ever-increasing competitiveness within the solar industry.
First problem: the deflation of the solar value
What is solar value deflation? The LBNL briefing gives a clue: “…[PV+storage] can be found throughout much of the country…although the largest such plants are in California and the West…” In a nutshell: geography.
Solar power in places like California, Nevada, and Arizona suffers from an anti-grid effect. The anti-grid effect of solar energy occurs in a market when the penetration of solar energy in a location reaches a market-specific tipping point, after which the addition of new solar capacity reduces the profit (i.e. the value of solar production) for all solar power plants in this market. In its 2021 “Utility Scale Solar” report, LNBL demonstrates this problem in more detail.
As solar penetration on a grid increases, the value that solar energy can capture decreases. This brings us to another clue: time. The hours during which a given solar generator can generate electricity are, by definition, the same hours that any other nearby solar generator can generate electricity, which eventually become the hours during which the market is oversupplied and the prices are lower.
This is why renewable energies are somehow trapped in time and geography. See the California example described by LNBL: at 22% penetration, solar can only capture 75% of the value of generation with a 24/7 baseload power profile. The problem is already visible in other markets with penetrations as low as 5%.
All markets are moving in this direction. Owners of existing or planned solar projects need to find ways to hedge this risk and diversify their revenue streams.
Second problem: extreme competition
The other factor is the success of solar energy, creating an extremely competitive industry that now defies future growth.
The solar industry started much later than other power generation industries and had to catch up to gain its share of the power generation mix. The industry uses the levelized cost of energy (LCOE) to compare its costs to coal, natural gas and other generation sources.
Solar has become the lowest LCOE form of generation over the past decade, driving the incredible growth in solar capacity. But competition with other generation sources continues within the industry itself, creating a race to the bottom that is eroding returns for solar investors. The following chart is taken from an article by Lazard titled “Levelized Energy Cost, Levelized Storage Cost, and Levelized Hydrogen Cost” which shows the rapid drop in the levelized cost of solar electricity:
A continued reduction in the solar LCOE results in a downward trajectory of solar plant revenues. As such, solar investors are looking for ways to increase their profits within the confines of the electricity market. Batteries are one such technology that is paving the way for higher revenues through arbitrage, demand response and ancillary services.
The Roadmap for Bitcoin Miners
What is the opportunity for bitcoin miners? The way storage has seamlessly integrated with the Solar Value Stack provides a useful roadmap for bitcoin miners to follow. Bitcoin mining can also provide opportunities similar to solar power plants to access higher profits by functioning as a flexible resource for the grid.
But because batteries have a fixed storage capacity and provide a short-term energy arbitrage opportunity against the local power grid, even a battery must eventually take market prices from the local grid. Bitcoin mining has no storage limit (allowing long-term arbitrage) and can provide arbitrage anywhere on the globe (more on this: “Bitcoin is the world’s leading electricity market “).
The combination of bitcoin mining and solar is simple in principle, but making the physics and finance work in practice is not easy. To create accretive returns, Bitcoin miners must accurately size their deployments when co-locating with solar and battery-hybrid plants. The co-location strategy requires an understanding and forecast of the solar plant’s electricity production volume and the associated value of each unit of energy produced by the plant. This needs to be done both long-term and short-term (near real-time), to support design/investment and operations. In addition to the probabilistic production volume of solar, knowing the value of energy at each interval should be understood (eg, five-minute period); for example, the value can vary widely and can sometimes reach $0 per kilowatt hour (kWh) due to discounts.
Note on Wind and Solar Discounts: Below is a graph from BTU Analytics showing that wind and solar discounts are increasing as more intermittent renewables are deployed on the Electric Reliability Council of Texas (ERCOT) grid. ). The most impacted wind and solar power plants have seen 29% and 21% (respectively) of their total annual production reduced from 2021 to 2022!
Co-optimization for integrating bitcoin mining is a challenge worth solving for miners given the rise of solar and battery-hybrid power plants in the mix of new generation sources. This trend is likely to grow at an exponential rate.
In summary, increase deflation in value and increase in competition of solar have encouraged the pairing of batteries with existing solar power plants. Now there’s a new incentive that accelerate the growth of paired hybrid plants in battery.
What we have seen so far happened in the pre-Inflation Reduction Act (IRA) era. The IRA now allows for a 30% Investment Tax Credit (ITC) incentive for stand-alone batteries over the next ten years, which will boost the redevelopment of existing solar power plants become hybrid plants.
As mentioned earlier, retrofitting existing solar power plant batteries is an emerging segment. This segment will grow even faster over the next decade with the new ITC incentive. The new incentive as well as investment in the manufacturing of solar panels and batteries in the United States is poised to make the United States the number one country for solar power plants and storage. Bitcoin miners have a huge opportunity to harness one of the fastest growing forms of energy production by learning about the physics and financing of co-location with solar and storage plants.
This is a guest post by Ali Chehrehsaz. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.