Leveraging Bitcoin Mining to Improve Grid Resilience in Africa
- Milensu Kapaipi
- 1 day ago
- 9 min read
Report highlights
Understanding Bitcoin Mining
A blockchain is a digital distributed ledger used to document transactions and is sometimes called a decentralized database. In contrast to traditional databases, spreadsheets or ledgers, blockchain data is not stored in a central place. Instead, the data is stored in blocks that are copied and distributed among a network of peers (for example, individuals, organizations, businesses, and increasingly, data mining facilities), which explains the name distributed ledger technology. Each block stores verified and validated transactions that are impossible to alter once added to the blockchain. Bitcoin mining is the process of using specialized computers to discover new blocks, verify transactions and add them to the Bitcoin blockchain.
The verification and validation of transactions added to the blockchain uses a consensus mechanism called proof of work (PoW), which helps secure the network. Bitcoin mining uses PoW to contribute computation resources to maintain and secure the Bitcoin blockchain network. Miners are incentivized to participate in the Bitcoin blockchain by block rewards, which they earn for successfully mining new blocks. The block reward includes two components - the first is the block subsidy and the second is the Bitcoin transaction fee. The block subsidy is the amount of newly minted Bitcoin generated when a new block is added to the Bitcoin blockchain, while the transaction fee is the amount paid on each transaction submitted to and verified by the network.
Miners must develop a good understanding of mining economics to stay profitable and competitive. One important aspect of Bitcoin mining they have to consider is mining difficulty. Mining difficulty refers to the level of complexity of the mathematical equation that miners must solve to find the hash for the next block. The difficulty of the mathematical problems is adjusted roughly every twelve weeks to ensure that blocks are added approximately every 10 minutes. The number of miners contributing to the network's total computational power affects the mining difficulty. The more miners there are, the higher the hash rate, resulting in an increase in mining difficulty. The opposite is true; fewer miners and a lower hash rate reduce mining difficulty. The regular adjustments in mining difficulty ensure Bitcoin's monetary policy functions as intended and safeguards the network's security. Another important feature that ensures Bitcoin's monetary policy functions is the halving. The amount of Bitcoin awarded to miners is reduced by half every four years in an event known as the halving. The halving reduces the Bitcoin supply over time, which can increase its price (if demand stays steady). This is how Bitcoin's protocol creates scarcity, which makes Bitcoin attractive to many people.
Bitcoin mining is price-sensitive. Therefore, Bitcoin miners seek out geographies where electricity prices allow them to remain profitable. According to the Cambridge Electricity Consumption Index, the average electricity price for Bitcoin mining globally is constant over time at 0.05 USD/KWh. Therefore, miners aim to find electricity priced at this level or below. Some miners, however, are willing to pay up to 0.08 USD/KWh. In 2023, more than 38 percent of Bitcoin mining hash rate (the hash rate represents the efficiency and performance of a mining machine) was in the United States, making it the country with the largest share of Bitcoin mining operations. Bitcoin miners are drawn to the United States for several factors, one being the cost of electricity. Commercial electricity tariffs in states like Texas, where the largest Bitcoin mining data centres are located, are 0.069 USD/KWh. Low electricity prices allow large Bitcoin mining data centres to keep costs down and maintain their profitability even in highly competitive environments when more miners enter the market. Besides the price of electricity, Bitcoin miners are choosing to set up their operations in North America due to a high level of confidence in the regulatory business environment.
Monetizing Stranded Electricity
Mining digital assets such as Bitcoin is an energy-intensive process and has the potential to generate significant economic and technological benefits, such as the creation of new jobs and driving the development of innovative technologies. Digital asset mining data centres resemble cloud computing facilities owned by large corporations such as Google and Amazon. Mining data centres and cloud computing facilities both convert electricity using computers, data centre infrastructure and a highly skilled workforce into a digital product sent over the internet. However, a key difference is that traditional computing facilities have less operational flexibility. In contrast, digital asset mining data centres can ramp their production up and down depending on the grid's electricity demand. Therefore, digital asset mining data centres such as Bitcoin miners can serve as a flexible load through participation in demand response programmes that help balance electrical grids. Digital asset mining operations can curtail their power usage at a moment's notice, allowing them to give power back to the grid if demand exceeds available supply.
Bitcoin mining data centres are proposed as ideal anchor tenants for mini-grid developers because their operations often require substantial amounts of power, allowing developers to maintain a load profile that would guarantee the highest return on investment, often in the short to medium term for most developers. Bitcoin mining data centres are also considered location agnostic, meaning they can be set up in any location, even very remote rural areas. While there are many types of digital asset mining data centres, this research will focus on Bitcoin mining data centres that have drawn the most attention and have been documented by several industry actors.
Organizations such as the Green Africa Mining Alliance (GAMA) propose colocating Bitcoin mining data centres at mini-grid sites to absorb stranded or excess energy that would otherwise go to waste, especially during off-peak hours. Bitcoin mining is an energy-intensive process that uses a proof-of-work consensus mechanism, which is the process of adding transactions to the blockchain by being the first to solve a mathematical problem via computation. Bitcoin mining data centres can be designed to have real-time demand levelling, which allows them to moderate their energy use to match available supply, thereby improving mini-grid efficiency by reducing over or under-generation of electricity. This ability to dynamically flex electricity consumption can incentivize additional renewable energy capacity buildout by reducing the period required to start seeing a return on investment.
Bitcoin Mining Opportunities
The Main Grid vs Mini-grids
The number of people without access to electricity in sub-Saharan Africa has remained stubbornly stagnant at about 600 million since 2010 due to population growth. Most countries experience long periods of electricity rationing due to chronic underinvestment in power infrastructure. In South Africa, for example, supply shortages and ageing grid infrastructure have resulted in increasingly high levels of load shedding since 2007, estimated to have reached up to 5% in 2022.
Countries have increasingly turned to renewable energy and mini-grids to bridge the gaps in energy access. The International Energy Agency (IEA) estimates that between 2020 and 2030, Sub-Saharan Africa will see the fastest growth in renewables and take the highest share of new installations globally, led by hydropower and solar photovoltaics (PV). This would entail doubling hydropower output, accounting for nearly half of total generation, while solar PV will increase from next to nothing to as much as 20 percent. As countries continue to increase investment in the electricity sector, installed capacity is expected to rise from 260 GW to 510 GW.
Between 2020 and 2021, renewable power generation expanded, with wind and solar PV installed capacity reaching 6,491MW and 9,505 MW, resulting in 12.2 percent and 14.5 percent growth, respectively. In the previous decade, the continent saw 320 assets constructed with 14GW of electricity added, and this is expected to almost triple between 2020 and 2030 when an additional 648 assets are forecasted for construction and will generate about 77GW of electricity.
By connecting distributed solar and storage with the grid and mini-grids, consumers can more easily climb the energy staircase through improved access to energy services and benefit from a new approach to integrated electricity planning. Centralized and decentralized electricity can collaborate to find the necessary technology, processes, and regulatory solutions to transform electricity systems into resilient networks that provide everyone with reliable, affordable, and universal access.
Key Takeaways from the Assessment
Kenya, Ethiopia, Zambia and South Africa stand out in terms of how they scored positively across different criteria. Despite an average electricity price that would make it unattractive to most Bitcoin miners, Kenya is one of the few pioneers of Bitcoin mining on the continent. The country has an open policy for innovation, which allows cryptocurrency companies to operate even though it is yet to introduce separate legislation for cryptocurrencies. The country has among the top scores for Ease of Doing Business on the continent, attracting foreign investments across different sectors, including the technology space. But it still lags behind South Africa in terms of overall investment across all sectors. Despite its failing infrastructure, South Africa still remains Africa's second-largest economy and has a well-established regulatory framework to support and protect local and international investments.
Ethiopia scored well because it has some of the cheapest electricity prices and a booming private sector. Its Ease Doing Business scores demonstrate how well the economy is performing relative to other African countries. The country also has the added advantage of being one of the few countries with a licencing regime for Bitcoin miners. Further, the expanded installed capacity means the country has resulted in stranded energy being available to Bitcoin miners while it builds out its national grid. Electricity prices in Zambia are above the preferred global average of 0.05 USD/KWh but still within a reasonable range considering what Bitcoin miners pay to mine in other countries. The country scored relatively well under several Ease of Doing Business criteria and the government it also crypto friendly. The country has ambitious plans for developing mini-grids over the next few years, which would present an opportunity for partnerships with Bitcoin mining data centres to ensure short- to medium-term financial sustainability.
Egypt also scored well under various Ease of Doing business indicators and the country has a well-developed electricity sector that supplies sufficient power to meet demand. The government has also opened up the electricity sector to private sector operators, which might be a good entry point for bitcoin mining. However, the government has not been friendly to crypto companies operating within the country and its position on Bitcoin mining is unknown.
Policy Recommendations
To foster the development of mini-grids and Bitcoin mining data centres, countries should adopt the following policy measures:
Protect the investments of mini-grid developers by providing clear and transparent plans for grid expansion and introducing legal protections or adequate compensation for mini-grid developers in case of grid encroachment, which may undermine their profitability and viability by offering lower tariffs to consumers.
Introduce clear and streamlined policies and guidelines for Bitcoin mining data centres that would enable them to obtain the necessary licences and permits to collocate at public utilities or mini-grid sites, and ensure compliance with environmental and social standards.
Extend tax incentives on machinery and equipment provided to renewable energy grid developers to Bitcoin mining data centres that have long-term partnerships with mini-grid developers, and facilitate access to finance and credit for both parties.
Promote and support skills development in local training institutions to enable local talent to participate in the development of the mini-grid and data centre industries, and create employment and income opportunities for rural communities.
Improve the business environment and reduce the administrative and regulatory barriers that affect starting and running a business, including business registration, accessing electricity, enforcing contracts and resolving insolvency.
These policy measures would help to create a conducive and supportive environment for mini-grids and Bitcoin mining data centres, and enhance their contribution to rural electrification, economic development, and climate change mitigation.
Conclusion
The highest potential for Bitcoin mining in Africa lies in mini-grids because this would reduce any pressure on the main grid, which is already highly constrained in most African countries. The few exceptions are North African countries, which have achieved nearly universal access to electricity but have governments that are the least friendly to cryptocurrencies and Bitcoin mining. Further, these countries rely on fossil fuels to power their electricity, which might not appeal to Bitcoin miners looking for renewable energy-generated electricity. Opportunities for tapping into stranded energy on the main grid still exist in countries that have not reached universal access but have excess capacity, which has no way of reaching end users in the short to medium term due to underdeveloped transmission and distribution networks. This allows countries to monetize stranded energy, improve their investments' financial performance, and increase their ability to pay off investment loans.
The use cases from Kenya and Nigeria have demonstrated the positive impact of Bitcoin mining data centres in improving the financial sustainability of hydro-powered mini-grids. At the same time, Uganda has similarly shown a successful pilot from Bitcoin mining on solar PV mini-grids. These cases provide some insights into potential partnerships that mini-gird developers can consider as they plan their investment in rural areas where anchor tenants and productive electricity users are scarce. However, due to the price sensitivity of Bitcoin mining, mini-grid developers will have to provide globally competitive prices that will attract Bitcoin miners and they should also advocate for policy and regulation that is friendly to Bitcoin mining to reduce concerns of regulatory uncertainty. Further, Bitcoin mining is volatile because it is sensitive to the price of electricity, the price of Bitcoin itself, and other factors such as mining difficulty and block subsidiGes.
Therefore, these factors will determine if Bitcoin mining operations remain profitable and if Bitcoin mining data centres can continue operations. In bear markets and due to the Bitcoin halving events, a significant percentage of Bitcoin mining centres fold up, which is a key risk for mini-grid developers relying on them as anchor tenants. Therefore, a good understanding of the Bitcoin miners' data centres' business model and strategy for riding bear markets and events such as the halving are important factors for mini-grid developers to consider when deciding on medium- to long-term partnerships. Alternatively, mini-grid developers can also build their own Bitcoin mining data centres to streamline operations and manage costs.
While Bitcoin mining is not the ultimate solution for addressing the challenges associated with expanding electricity access in Africa, it does provide an opportunity to ease challenges faced by mini-grids at the forefront of providing access to electricity in underserved rural communities most affected by energy poverty.
You can download the full report from Tikula Research Network here: Leveraging Bitcoin Mining to Improve Grid Resilience in Africa
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