The bitcoin gold rush – the new threat to world energy
Mining cryptocurrencies has in recent years become such a mass phenomenon that it now has a noticeable affect on energy and geopolitics.

An attempt to combat its development in one country can end up upsetting the energy balance in countries nearby.

  China’s attempts to ban the mining of cryptocurrencies on its territory led to other countries taking over the leading role in the sector – the United States as well as Kazakhstan and Russia, whose economies were not prepared for such a scenario.

   Chinese ban

   According to data from Cambridge University, the United States has assumed the lead in mining with a 35 % share, followed by Kazakhstan at 18 % and Russia, as of last August, with a share of 11 %.

   Until recently, China stood out as the world leader. But this year, all cryptocurrency operations were declared illegal in the country. Chinese authorities pledged to root out mining of digital assets and barred foreign crypto exchanges from offering their services to Chinese investors and financial companies from facilitating exchanges in cryptocurrencies.

   In May, limits on mining were imposed on Inner Mongolia, the largest “crypto production” region. Other Chinese provinces followed suit in the summer.

   The People’s Bank of China, the central bank, then informed banks and payment systems it was vital to curb speculative operations with cryptocurrencies and bitcoin. And the bank developed platforms enabling it to monitor such operations.

   China, which has launched a digital yuan, explained its battle against bitcoin as a means to reduce CO2 emissions.

   In recent years, China’s share of world mining had diminished but it remained, in any event, significant – about half of global production. But the decisions adopted by Chinese authorities meant miners had to “move operations” from China and the most popular countries for them became Kazakhstan, the United States, Canada and Russia, as well as European countries. And in Russia, the most attractive areas for miners became Irkutsk region in Siberia and Yakutia in the far north, where electricity rates were kept low by subsidies.

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   Like any digital process, mining consumes vast amounts of electricity, sometimes equivalent to the volume consumed by entire countries. According to an estimate by Galaxy Digital, the energy used for mining bitcoin is equivalent to nearly half the energy used by the world-wide banking system or the entire world-wide gold industry. World-wide gold mining consumes about 240.61 TWh per year and the banking sector 263.72 TWh/year. According to their calculations, bitcoin requires about 113.89 TWh/year.

   The Cambridge University experts calculated that mining required about 121.35 Twh per year. That is more than the volume consumed by, for instance, Argentina, the Netherlands or the United Arab Emirates.

    And the figures keep growing. Just a year ago, electricity consumption by miners was estimated at 93 TWh and in 2019, the figure was about 75 Twh.

   Galaxy Digital is at pains to show that it is impossible to keep track in real time of the level of electricity consumption in the banking sector – but with mining, it is entirely possible. Data produced by specialist Hass McCook of Bitcoin Magazine show that mining is responsible for 5 % of the overall volume of energy use world-wide in the financial sector.

   When mining was still permitted in China, the magazine Nature Communication estimated that by 2024, emissions from Chinese mining farms would exceed the entire greenhouse effect in the Philippines.

   According to research appearing on the Forexsuggest website, this year CO2 emissions into the atmosphere associated with bitcoin mining totalled 56.8 million tonnes. That is twice the amount associated with mining another cryptocurrency, ether. And since the beginning of the year, the level of pollution from bitcoin has declined by 5 %.

   Experts link that to the move by miners from China to other countries where power generation tends to use cleaner energy sources. 

   The Cambridge University experts estimated the share of renewable energy sources in cryptocurrency mining at 39 %. Countries in the Asia-Pacific region use primarily hydropower and coal in energy production, while in Europe and the Americas, they use hydropower and gas. Data from those involved in cryptocurrency operations differs. The Bitcoin Mining Council says the share of renewables in mining exceeds 56 %.

   In Iceland, for instance, there are mining farms that operate exclusively on geothermal energy. Next year, the cryptocurrency miner Mintgreen is to launch a programme to heat the Canadian city of North Vancouver with energy from bitcoin mining.

   Teaching an old energy system new cryptocurrency tricks

   Mining raises questions not only among environmentalists, but also among energy producers unable to take account of the processes in planning their energy balance.

   The ban imposed by China prompted companies to start moving en masse to other parts of the world, where energy producers were ill prepared for the new burden placed on energy systems. 

   In Iran, last spring, the rise in energy consumption by miners against a background of a seasonal demand peak for power and an extreme drought led to immediate power cuts in several cities. Iranian authorities imposed a temporary ban on producing digital assets – this was lifted in September, but a recurrence of such a situation cannot be ruled out.

   In Kazakhstan, which this year took over second place in world-wide mining volume, an even more dramatic situation occurred. Energy shortages became apparent in the country in the summer and rolling blackouts were imposed.

   In the first 10 months of 2021, demand for electricity in Kazakhstan rose by 8 % — as opposed to a rise of no more than 2 % in previous years. The shortages occurred in six regions and in November, the main electricity supplier in the country introduced restrictions in transmission in accordance with a schedule. 

   According to data from KEGOC (the Kazakhstan Electricity Grid Operating Company), the peak load this winter could amount to 17,000 MW – and power stations in the country generate 16,540 MW. And mining was identified as the main reason for the energy crisis. Media reported that more than 50 Chinese miners had shifted their activity to Kazakhstan.

   The Kazakhstan government has already pledged to limit power supply to illegal miners, which use up to 1,200 MW. Specialists say that a little more than 50 “white” or legally registered, miners operate in the country. Things are more difficult with “grey” companies, which can use up to 450 MW.

   As Alan Dorjiyev, president of the Data center industry and blockchain association of Kazakhstan, explains, there are some 200,00-250,000 mining devices in the country.

   To make up for the shortages, Kazakhstan, may import 400 million KWh from Russia in November and December. Inter RAO is already in discussions about possible commercial power supplies to Kazakhstan.

Russian Energy Minister Nikolay Shulginov has already expressed concern over an unplanned flow of 1-1.5 GW per day caused by mining, among other things.

  “This affects the operation of our power stations. Firstly, because they are being used in an inefficient manner and secondly, because we are often obliged to incorporate them rapidly in our operations,” he said.

   In essence, in order to meet such a rise in demand, Kazakhstan needs a new power station with a capacity of no less than 1,000 MW. And the government has not ruled out a decision to build a nuclear power station. In any event, that would require several years, whereas the power shortages have appeared right now.

   For the moment, Kazakhstan intends to solve the problem of the shortage by imposing restrictions through legislation by limiting the overall capacity of electric facilities for mining to100 MW and by obliging miners to pay an additional tax for their electricity consumption. But these measures are most unlikely to solve the problems of “grey” miners.

   There is also the issue of wear and tear on the Kazakhstan grid and electricity lost as a result. Attrition on average in the country is greater than 65 % – and in some areas it is as high as 80%.

   Tariff for the people

   Russia is attractive to miners for a number of reasons. Among them, a surplus of inexpensive power and plenty of open space for data centres as well as the possibility of using low temperatures for natural cooling of data centres. There is also the opportunity to use electricity in accordance with the principles of ESG – as can be applied to a high portion of energy generated by hydropower stations in Siberia.

   Miners in Russia consume energy at the same rate as domestic customers – with subsidies from industrial consumers. The Irkutsk regional union of employers “Partnership of Producers and Entrepreneurs” has already proposed that authorities introduce a special tariff for miners – differentiating them in terms of their volume of consumption. 

   The employers note that it was not solely in Irkutsk region that demand for electricity rose over the past four years disproportionately in terms of new consumers – and also taking account of illegal mining.

   In this year alone, customers in the region increased their use of power by 159 %. Steep increases in the power load led to breakdowns and outages and industry and agriculture have to make up losses linked to miners amounting to about 700 million roubles ($9.35 million) per year.

   Russia’s Energy Ministry supported the proposals from Irkutsk region and has begun elaborating a policy.

   “In order to boost the reliability and quality of the energy supply, we believe it is vital to rule out any consumption of electricity by miners at domestic tariffs,” said Energy Minister Nikolay Shulginov.

   This year, 24 cases of theft of power caused losses of more than 120 million roubles. From the beginning of 2020 until the middle of 2021, 34 cases were recorded with losses of 355 million roubles and beginning with 2017, losses totalled about 800 million roubles.

    Damage in real terms is clearly many times higher. The area with the highest incidence of theft is the Northern Caucasus. In general, Rosseti estimates damage to the country’s energy system from “black” illegal miners at billions of roubles.

   It is clear that Russia for now has no intention of banning mining, while proceeding instead along the path of regulation. At the moment, there is practically no legislative regulation of mining. The government has only started to talk about the need to recognise mining entrepreneurial activity with its own specific official sector identification (known as ОКВЭД in Russian) and its own tax regulations.

   As China’s experience has shown, a simple ban on digital operations involving cryptocurrencies is likely only to have a short-term benefit. Miners can change the country in which they operate and carry on with their activities. 

  Legalising this process from the outset appears to be a tougher task requiring detailed elaboration of legislative regulations, an adjustment of the energy balance and the creation of new financial instruments. But in the future, in the event of a timely scientific and technical approach to the matter, the government could derive benefits in the form of additional tax revenue and the formation of a new, and clearly popular, market.


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November 2021