Construction started in April 2022 in Texas, USA. Blockstream and Block have joint forces to build a 100% off-grid renewable energy bitcoin mining facility. It consists of 3.8MW of solar panels combined with 4 Tesla Megapack battery units with the capacity to store up to 12MWh of energy.

Some technical details:

● The total cost of the plant is $12 million; ● Out of the 3.8MW of solar power installed, 1MW will be used to mine bitcoins and 2.8MW will be used to charge the batteries; ● Batteries are required so that the solar-powered bitcoin mine can operate 24/7; ● Assuming a performance of the solar plant of 2200 equivalent hours, 25% of the day the mine will be powered by solar panels and 75% by batteries. Hence the ratio of 2.8MW batteries / 1MW bitcoin mining; ● 1MW of solar capacity provides the mining facility with a computing power of 30 petahash/second. I estimate that at the current hash rate, the plant will be mining ~1 bitcoin per week; ● ~177MWh of energy will be required to mine 1 bitcoin. This is equivalent to the consumption of 17 American homes in 1 year.

This solar power bitcoin mine marks another step in a trend recently started by mining companies to become greener.

Bitcoin mining facilities provide an alternative use of renewable energy in remote areas with abundant resources but lacking transmission infrastructures.

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• Rubén Martínez Fanals

• agilibus.es

As of March 24, 2022, the Bitcoin network hash rate is around 201 ExaHash per second (EH/s). Explained in lay terms a hash is a complex mathematical operation. 201 ExaHash is equal to 201 followed by 18 zeros, which is a pretty high number of complex mathematical operations per second. It represents the computational power provided by all bitcoin miners globally.

If you want to mine bitcoins you need a very unique piece of equipment; specifically you need an ASIC miner. This piece of hardware is characterized by hash rate and energy consumption. One of the models available in the market is the Antminer S19 Pro, which features:

• A hash rate of 110 TeraHash per second (TH/s);

• A power consumption of 3,250 Watts (W).

Knowing that new blocks in the bitcoin blockchain are mined every 10 minutes, for which the miner receives a reward of 6.25 bitcoin, we can estimate that 900 new bitcoins are mined per day.

As stated above, global calculation power available is 201 EH/s. Based upon this number we can then estimate that app. 19,300 EH are required to mine one bitcoin.

With your brand new Antminer S19 Pro you enjoy a hash rate of 110 TH/s. A single unit will need slightly over five and a half years to mine one bitcoin (5.6 years).

Assuming your hardware is working at full capacity for 5.6 years, and knowing that it requires 3,250 W to operate, 158 megawatts-hour (MWh) of electricity will be consumed before mining your first bitcoin.

If you are kind of a geek like me and enjoy making calculations that involve renewable energy, you might be wondering whether it makes sense to feed your mining operations with solar power.

Let's say you can install a 106 kW solar PV plant with a specific production of 1,500 equivalent hours (eq.h). This plant will be generating 159,000 kWh a year, theoretically enough to mine your first bitcoin.

However, so far you have a single Antminer unit plugged into the solar plant, mining 1,500 hours per year. This is enough to produce 594 EH, or 0.03 bitcoins. In the process it will have consumed 4,875 kWh, leaving most of the generation output of the solar plant available.

I assume that you'd rather want your first bitcoin sooner than later, so obviously you need to scale up your operations and acquire more Antminers. Let's say you want to mine one bitcoin in one year. Then you need to connect 32.5 Antminers to your 106 kW solar plant so that 100% of the generation output is utilized for mining.

It might sound cool but... does it make economic sense to build a solar plant to mine bitcoins? I will be exploring this question in a future post.

Contact

• Rubén Martínez Fanals

• agilibus.es

Now imagine you are very bullish on bitcoin.

You would scrap all your investments and put the cash together with the balances of your savings accounts. Then you would use up the money to buy more bitcoin.

Let’s take it one step further.

Imagine you are super bullish on bitcoin. What would you do?

You would go to the bank and take out a loan. A loan as leveraged as your collateral permits. You would then use the proceeds to buy as much bitcoin as possible.

Does it sound rational?

Not much.

Does it make sense?

Only if you don't have a family to sustain and have a place to go should your gamble go south.

As insane as it sounds, that's exactly the plan the Government of El Salvador announced in November 2021.

El Salvador plans to sell bitcoin-backed bonds

The plan consists of the sale of $1 billion in U.S. dollar-denominated bonds with a coupon of 6.5% and a maturity of 10 years backed by bitcoins.

Half of the money would be used to buy bitcoin and hold it for 5 years. The other half would be used to invest in bitcoin-related stuff, like building a "Bitcoin City".

To give some context, El Salvador is a highly indebted country with a battered economy and an increasing public spending deficit. On top of that, there are $800 million in upcoming bond payments due in early 2023.

For the moment, the plan is on hold.

I assume it has to do with the steep decrease in the valuation of bitcoin since last November when bitcoin was sitting comfortably above the $50,000 mark. 

As of today, bitcoin trades slightly below $21,000.

Bitcoin is highly volatile. It is challenging to predict its valuation the next month, let alone in 5 years. Bitcoin is still in its infancy, and any institutional investment in bitcoin should be treated with extreme care until a more widespread adoption occurs.

I am not against Bitcoin. On the contrary, I am a firm believer. I like the concept, I think it is the hardest form of money, and I appreciate the freedom this technology provides to its supporters.

It was bold enough to make bitcoin legal tender in El Salvador last year.

It was a movement that brought the country into the limelight and attracted the interest of many investors and crypto supporters.

But if I was the President of El Salvador, I would think twice before going further and making such splendorous announcements.

Unless you are negotiating a bailout package with the IMF and want to have an ace up your sleeve to increase your negotiation power. 

But that is another story...

Contact

• Rubén Martínez Fanals

• agilibus.es

A few months ago, we witnessed the collapse of Terra. Terra was a blockchain empire that went from a market capitalization of +$30bn to $0 in a few days.

Below are the four similarities shared by the collapses of both empires:

Monetary Policy

The Roman Empire required massive funding to finance wars and expansion. Instead of increasing collection and/or lowering spending, Roman Emperors resorted to currency debasing. This technique reduced the amount of collateral (i.e. noble metals) that sustained the value of the Roman currency.

Terra consisted of two cryptocurrencies: TerraUST (a stablecoin pegged 1:1 to the US dollar) and LUNA (a cryptocurrency whose value fluctuated). There was an algorithmic mechanism regulating the supply and demand of TerraUST and LUNA so that the 1:1 peg between TerraUST and the US Dollar was maintained. But the value of TerraUST was not collateralized to sustain its value. In other words, TerraUST and LUNA were conjured out of thin air.

Insider Attack

To increase the collection of taxes the Roman Empire granted Roman citizenship to barbarians. Those barbarians were conquered following border expansions. Barbarians were responsible for weakening the Empire from the inside. Finally, Odoacer, a barbarian leader, deposed the last Roman Emperor in 476 AD.

The collapse of Terra started when an attacker shorted several hundred million of TerraUST. This trigger event caused TerraUST to depeg from the US Dollar, creating panic in the market and a bank run of people selling their UST. The panic led to a death spiral that drove the value of TerraUST and LUNA to zero. It was an attack led by someone who preyed on the internal weakness of the algorithmic mechanism that sustained TerraUST value.

Arrogance

Roman Emperors were quite arrogant and even considered themselves Gods. The phrase "Memento Mori (Remember that you will die)" is well known. This phrase was repeated to marching generals by accompanying slaves after war triumphs as a reminder of the inevitability of death.

Do Kwon, Terra's founder shrugged off the possibility of attacks that might have caused the TerraUST-USD to depeg. He mocked those who warned him of stability threats to the blockchain. There are even quotes of him encouraging billionaires to attempt an attack on Terra to prove its solidity.

Extinction

Following the overthrown of Romulus Augustulus, the last Emperor, the Roman Empire ceased to exist. It never had the strength to rise again.

Terra developers have published several proposals to create a new blockchain upon the ashes of the old. It might prove challenging for a Terra_v2 blockchain however to re-gain credibility again. Investors have lost confidence in the ecosystem. It will take much time until they come back after having suffered massive losses.

Conclusion

It is common knowledge that the study of history might prove helpful to avoid repeating past mistakes.

Several millenniums separate the demise of the Roman Empire from the collapse of the Terra blockchain. It is yet an interesting thought experiment to find the similarities behind the fall of both giants. It might help understand the reasons that led to the collapse of Terra.

Contact

• Rubén Martínez Fanals

• agilibus.es

• We all also know about the main advantage of renewable energy projects: reduction of CO2 emissions

• Required low-carbon investment levels in green infrastructure to keep temperature increase below 1.5ºC threshold are enormous ($460B/yr until 2030, $1560B/yr thereafter)*

• There are additional considerations:

  • What if your country does import oil and/or gas?

  • Take advantage of your local resources

  • Fuel is free! All countries have wind and/or solar to some extent

  • Benefits to local communities

  * What investments are needed in the global energy system in order to satisfy the NDCs and 2 and 1.5 °C goals? – International Institute for Applied System Analysis

What are renewable energy projects?

• Electricity is generated from a renewable energy source (e.g. wind, solar, hydro, biomass, tides, geothermal)

• Instance of infrastructure projects. As such, characterized by:

  • Capital intensive before any revenue is generated

  • High risk / high return

  • Long term investment horizons (10+ years)

  • Complex contractual interplay between many parties (construction contracts, loan agreements, land leases, offtake agreements, interconnection rights, operation and maintenance, and many more)

• Once these projects are up and running, the cost of running them is almost zero!

Examples of renewable energy projects

Examples of the contractual structure of a renewable energy project

Let’s build a renewable energy project!

• Not so quick… what options are available?

  • You can start a development from scratch (greenfield projects) - High risk and high return

    • Long development times

    • High probability of failure, project development is complex and risky

  • You can acquire a partially developed project (brownfield projects) – Medium risk and medium return

    • Usually ready to build

    • Construction risk

  • Or you can acquire a project already in operation – Low risk and low return

    • Think of it as a bond

    • Stable and predictable cash flows

    • All major risks behind

Show me the money!

• Once project development is ready, the time has come to commit serious money (mostly construction and purchase of equipment)

• The most common tool used to finance renewable energy projects is Project Finance:

  • Project owned by a SPV (Special Purpose Vehicle), completely separated from the project Sponsor

  • Finance is provided to the SPV, that assumes the risks and the financial consequences

  • If things go south, banks have no recourse to the project Sponsor, “only” the equity is exposed

  • The project Sponsor keeps a “clean” balance sheet

Corporate Finance vs. Project Finance

Hold on… how much did you say you need!?

• Renewable energy projects have big capital expenditure requirements (CAPEX) and are highly leveraged (small equity vs. big debt)

• Banks tend to be wary

  • If things go well, no upside

  • If things go wrong… only recourse to the SPV

• Process to finance a renewable energy project tends to be long and complex

  • Banks spend a high amount of time studying in detail the project (Due Diligence)

  • Usually they do not want to do it alone – Syndicate of banks

What will the weather be like tomorrow?

• Renewable energy projects rely on electricity generation to generate cash flows

• The problem with renewable energy generation: you cannot control when it is going to be sunny or windy

• Through thorough measurement campaigns, it is possible to estimate the level of renewable energy resource of a project

• Banks rely on these analysis to estimate the amount of debt the project is able to accommodate:

  • P-levels: Annual generation levels to be exceeded (P50 and P90)

  • Coverage Ratios: CFs available vs. debt service

The future ain't what it used to be*

* Quote attributed to baseball-playing philosopher Yogi Berra

• Historically renewable energy projects have been developed leveraging government support

• Goal: Achievement of technological maturity through subsidized tariffs

• Every unit of renewable energy generated was paid at a fixed price not determined by the market (Feed-In-Tariffs)

• This model has worked very well in the past: Renewable energy technology has achieved grid parity

• Now what? An additional layer of complexity enters the game

It's tough to make predictions, especially about the future*

* Again Yogi Berra

• Governments around the globe have slashed subsidized tariffs

• Renewable energy projects sell electricity directly to the market

• Electricity market price tends to be volatile and unpredictable, hence direct exposure to market risk

• Debt tenors tend to be long (10+ years)

• The project needs stable cash flows to pay back the loan

• Banks get scared off, cancelling lending or reducing debt size and at hardened terms

PP… what?

• There are several tools available to transform volatile market prices into stable and predictable cash flows:

• Power futures

  • Traded in exchanges (e.g. European Energy Exchange EEX)

  • Shorter-termed than required (max. 10 years) and low liquidity

• Insurance products

  • Derived from weather insurance

  • Revenue swaps exchanging variable revenues for a fixed payment

• Long-term electricity contracts (aka PPAs)

  • PPA stand for Power Purchase Agreement

  • An agreement between a buyer and a seller to sell a certain amount of electricity for an agreed term at an agreed price

  • OTC market, bespoke agreements

Some additional notes on PPAs

• Preferred tool

• PPAs can be physical or virtual

  • Physical: there is a physical link between the renewable energy project and the off-taker

  • Virtual: Financial contract (CfD); the renewable energy project and the off-taker can be not connected by a grid or even in different countries

• As OTC products, PPAs can have several structures

  • Fixed price

  • Discount to market with floor (basically a put option)

  • Cap and floor (collar)

• PPAs are not risk-free

  • Market risk, shaping risk, volume risk, balancing risk…

Physical PPA

Financial/Virtual PPA

PPA Pricing Mechanism - Fixed price

PPA Pricing Mechanism - Floor Price with Discount to Market

PPA Pricing Mechanism - Zero Cost Collar

Investment metrics

• Leveraging renewable energy projects with debt usually adds value to investors

• Most common metrics to evaluate renewable energy projects (i.a.):

  • For investors:

    • NPV, IRR, MOI…

  • For banks:

    • Debt-to-Equity ratio, Debt Service Coverage Ratio (DSCR), Loan Life Coverage Ratio (LLC)

Key takeaways

• Building renewable energy projects require big capital investments upfront and feature long investment horizons

• Project Finance is the preferred tool to finance renewable energy projects

• Financing renewable energy projects is challenging due to volatility of cash flows (intermittent generation and market risk) – Tools available to mitigate these risks

• There are several metrics available to evaluate the quality of renewable energy projects from a financing perspective, depending on your side in the transaction (investor vs bank)

Contact

• Rubén Martínez Fanals

• agilibus.es