Dear Readers,
In this Update for Product | Strategy | Innovation I will discuss innovation where energy is abundant, clean and almost free. Energy is a key driver for economic growth. Sustainable energy economies should thrive if they can continue to lower the cost of energy as they scale. A key deployment can act as a “tip of the spear” for early adoption of sustainable energy. The deployment may vary by location, but the outcome is the same with scaled adoption of sustainable energy.
Governments, industries and commercial businesses have developed robust regulations, policies, technologies and markets to advance the generation, distribution and use of energy. However, California, New York and other regions around the world are experiencing more rolling black-outs during summer heat waves to balance demand with the available supply of energy.
South Australia may be a reasonable proxy for what is possible with its current 150MW Hornsdale Power Reserve co-located with a 315MW Hornsdale Wind Farm. These projects were developed to address significant power shortages with peak demand during extreme weather events. These are multi-phase, grid-scale projects with the option to renew or decommission every 20-30 years. Recycling is a key component of long-term planning.
PG&E in northern California has also completed a 400 MW / 1600 MWh stationary battery storage project at its Moss Landing substation between Santa Cruz and Monterey, California. This site has the ability to expand to 1,500 MW power to supply 6,000 MWh of energy. For comparison, the Hoover Dam supplies 4,000 MWh (or 4 GWh) of energy each year in Nevada, California and Arizona, or enough to power 1.3 million homes.
In this Update I will cover:
Limitations of the legacy Energy economy
How energy can be abundant, clean and almost free?
What energy-intensive, end-use technologies will thrive with abundant, clean, cheap energy?
How can a booming sustainable energy economy transform access to global financial services for more people?
Sustainable energy deployments and micro-grids will develop where the end-use unit economics favor abundant, clean, cheap energy. These micro-grids can also divert sustainable energy to the grid during peak energy demand as an alternative to using fossil fuels.
The Hornsdale sustainable energy projects mentioned in South Australia were financed to add a sustainable energy supply to meet the energy needs for about 225,000 homes. A combination of grid-scale solar, wind and stationary batteries plus residential solar, stationary batteries, heat pumps and electric vehicles would further scale the impact in South Australia and beyond.
As covered in the last Update on Master Plan 3, we will need an estimated 240 TWh of battery storage and 30 TW of sustainable power for a complete conversion to a sustainable energy economy worldwide. So, these South Australia and PG&E projects are only baby steps towards a sustainable energy future. We can accelerate this transition when end-use technologies thrive and scale with abundant, clean, cheap energy.
1. Limitations of the legacy Energy economy
The current Energy economy is based primarily on fossil fuels which waste about two-thirds of the energy generated, transported and consumed. This waste means there are a lot of embedded costs building and maintaining the legacy Energy economy. Master Plan 3 mentions for every $1.00 spent over the next 20 years to convert to sustainable energy, the total cost over the same period for fossil fuels to match the same amount of energy would be $1.40.
We must also understand the current business model for energy generation and distribution by the electric power sector across all end-use sectors. Utility-scale electricity infrastructure to generate and distribute electricity can be deregulated to allow multiple power companies to compete for customers with better services.
This works well for the base electricity supply when demand is normal. But on hot summer days when air-conditioning use surges, electricity demand spikes and the price for electricity surges, too. This premium pricing attracts peak power generation to add more electricity supply. But the economics of peak power generation must warrant investment into new plants and to maintain current plants.
If the supply of electricity beyond the base electricity generation is not adequate to meet the peak demand, electricity demand must be curtailed using rolling blackouts to ration the limited supply of electricity. This is becoming more common.
As the legacy Energy economy continues to expand with only about 12% of energy currently coming from sustainable sources like wind, solar, hydropower, geothermal and nuclear energy, carbon emissions will also continue to expand with the use of fossil fuels. Master Plan 3 provides a blueprint to convert to a sustainable energy economy.
We just need to accelerate this conversion with superior economic returns on investments made into sustainable energy. Over half of that conversion is possible switching the existing utility grid to sustainable energy and transportation to electric vehicles. Switching HVAC systems to heat pumps across all sectors will further increase the conversion to 78%.
2. How can energy be abundant, clean and almost free?
Most large grid-scale sustainable energy projects completed so far are considered “front-of-the-meter” projects where electricity is sold to users when it passes through their meter like any other energy. Utility companies are investing in these projects to help address electricity supply deficiencies. Utility companies can also add “front-of-the-meter” stationary battery storage and use net metering to purchase electricity generated or stored “behind-the-meter”.
As “front-of-the-meter” grid-scale stationary battery storage scales, more sustainable energy generation projects will also scale to help maintain an adequate charged battery capacity to meet energy demand. The return on investment here is likely the highest in markets where the price for peak energy is the highest. With adequate scale these deployments replace the need to build new power plants that consume fossil fuels. However, it will take a lot of scale with sustainable energy to start decommissioning legacy power plants.
Large solar farm deployments include the 2.8 GW Golmud Solar Park in China and 2.7 GW Bhadla Solar Park in India. The 3.5 GW Jiuquan Wind Power Base in China is the world’s largest wind farm. The next largest wind farm is the 1.6 GW Jaisalmer Wind Park in India. Most of these projects are heavily subsidized by government programs to seed sustainable energy deployments.
Purchase Power Agreements (PPAs)
PPAs with corporate customers are another way utility companies can scale sustainable energy projects. Physical and virtual PPAs allow more options on the terms between a customer and the utility company. Virtual PPAs also allow mid-to-large size companies to procure more electricity from sustainable sources. Environmental concerns are the primary driver for early adoption here, but cheaper prices will accelerate adoption in the future.
The most efficient use of energy is when it is generated on-site and used on-demand to power equipment, appliances, computers, lighting, and heat pumps. Additional efficiency is created when excess energy generated can be stored on-site, too, with a stationary battery.
The battery can use net metering where allowed for electron arbitrage between on-site energy storage when the meter price is low and selling excess electricity to the grid when the meter price is high. Net metering may limit how much electricity is sold to the grid, but these limits should decrease as more sustainable energy capacity comes online and PPAs drive more sustainable energy demand.
Behind-the-Meter deployments and micro-grids
A parallel path to accelerate the transition to sustainable energy is scaling adoption of “behind-the-meter” solar and wind energy generation coupled with adequate battery storage onsite to form a micro-grid when multiple buildings are involved. These serve 3 primary purposes related to energy.
On-site demand for electricity from the grid is reduced at the peaks since the site is able to access their own electricity during these periods.
Excess electricity can be sold to the grid with net metering to help provide energy for others to use.
Multi-year PPAs between the utility provider and end-users can further incentivize incremental expansion of “behind-the-meter” deployments and micro-grids.
Residential “behind-the-meter” capacity requires a lot of scale to provide an impact on the utility grid. This will be required for long-term conversion to sustainable energy. But a more immediate impact happens when commercial “behind-the-meter” capacity is added on a larger scale if their energy demand can also be curtailed during peak periods to divert most of their electricity generation and storage capacity with net metering to the utility grid.
As “front-of-the-meter” grid-scale battery storage, sustainable energy PPAs with mid-large size companies, and “behind-the-meter” sustainable energy capacity scale, energy will become abundant and cheaper outside of peak energy demand. The price for sustainable energy with abundant supply will approach free when curtailment of energy generation is the alternative. Transmission becomes the primary variable cost for abundant sustainable energy.
Tesla Energy: Grid-Scale, Commercial, and Residential Solar, stationary Battery Storage and Software Services for electron arbitrage
Tesla has successfully deployed grid-scale battery storage and scaled residential battery storage to address energy needs during peak-demand. It has also addressed the supply constraints for lithium-ion batteries by using readily available iron phosphate for its stationary batteries where energy density is less of a priority. Tesla is now scaling production of its Megapack product for grid-scale battery storage.
Each megafactory has the capability to produce 10,000 Megapacks per year. Each Megapack is capable of storing 1.9 MW of power and 3.9 MWH of energy, so each megafactory can add about 40 GWh of grid-scale battery storage each year. For comparison, each Tesla Powerwall holds 13.5 kWh for residential energy storage. The megafactories announced so far are located in Lathrop, California and Shanghai in China.
Tesla provides commercial solar installations in California. These can be paired with Megapacks for a complete sustainable energy solution. Otherwise, Tesla is focused on residential installations with the Solar Roof and Solar Panels. But solar is available from multiple providers, so Tesla Energy is more focused on stationary battery storage with Megapacks and Powerwalls.
3. What energy-intensive, end-use technologies will thrive with abundant, clean, cheap energy?
Although not an exhaustive list, the technologies mentioned below range from what is already in use today to earlier stage deployments. All could scale with abundant, clean, cheap energy. Some do have location constraints like desalination which requires access to seawater nearby to produce potable water.
Desalination
Desalination already produces about 95 million cubic meters of fresh water daily from seawater based on an estimate in 2019. The largest desalination projects are based in the Middle East (Saudi Arabia, Israel, Kuwait) and Australia, but are also expanding into China and India. Scaling sustainable energy to power desalination and managing concentrated brine wastewater are the biggest challenges to manage cost and reduce carbon emissions from burning fossil fuels to power these plants.
“Behind-the-meter” grid-scale sustainable energy generation and battery storage could have an immediate impact for conversion to sustainable energy when desalination is curtailed to meet local peak energy demand. PPAs could continue to scale such a micro-grid beyond the initial deployment funded by more energy-efficient, cost-effective and clean desalination to produce clean water.
A key limitation to desalination is the requirement for access to sea water. This limits these project to coastal areas on the ocean. However, many thousands of miles of such coastlines are in favorable locations with access to abundant offshore wind, wave power, and solar energy.
Semiconductor Manufacturing
Taiwan Semiconductor is the world’s largest chip manufacturer and the second largest industrial consumer of energy behind only Samsung with its own large chip fabs. These are very large facilities to gain efficiency advantages with scale and unit volume production. If energy is abundant, clean and cheap, chip fabs would certainly seek out this opportunity. Chip fabs also provide high-paying tech jobs to surrounding communities and opportunities for businesses in the same region. However, other environmental factors like water use and waste byproducts will have to be dealt with by chip fabs.
Nvidia, AMD, Intel, Apple, Amazon, Alphabet, Tesla and Meta all make their own GPUs for many specialized computing applications. AMD and Intel have their own fabs, but most of these other companies use either Taiwan Semiconductor or Samsung to manufacture their GPUs. But with geopolitical concerns in Taiwan, there is a strong interest to build semiconductor manufacturing outside of Taiwan and China. GPUs could be the ideal opportunity to leverage sustainable energy to build specialized chip factories on a smaller scale.
High-Performance Computing (HPC)
Cloud computing and GPU clusters have made supercomputing more accessible to more applications and projects like visual effects (VFX) rendering, molecular simulations, blockchain-enabled games and large language model (LLM) training. These services will continue to push the capabilities of HPC with increasing demands for energy.
ASIC computer clusters provide specialized computing to secure a network using proof-of-work. The Bitcoin mining network increases the difficulty for proof-of-work in proportion to the computing capacity. Energy is a key input cost to mine Bitcoin. Abundant sustainable energy to lower this input cost will help drive expansion. The difficulty for proof-of-work will scale with lower cost green computing to maintain the security of the network. This will then put more emphasis on sustainable energy for the semiconductors used in the computers to mine Bitcoin.
Most HPC applications can also be curtailed quickly during peak energy demand to divert more energy to the utility grid. This is a key feature and benefit of this use case to accelerate the transition to sustainable energy. HPC can be a local catalyst to drive adoption of sustainable energy.
Metal Fabrication
Mini-mills using large electric arc furnaces can produce metal products on a just-in-time basis. Nucor Corporation was a pioneer in the mini-mill industry, but is using smaller micro-mill designs with less capital requirements to accelerate sustainable energy initiatives. These micro-mills might be more specialized to produce rebar for concrete reinforcement from scrap metal, but the smaller facilities could be widely distributed to match the output of larger facilities.
Agrivoltaics
Agrivoltaics are a recent innovation that is still improving with pilot-scale commercial deployments around the world. The concept combines elevated rows of adjustable solar panels with crops that favor shade grown under the panels to reduce direct sunlight. The shade also reduces evaporation to conserves water.
Drip irrigation can be added in arid climates to make agriculture more viable. Livestock can graze on grass grown under solar panels within a fenced field. As agrivoltaic deployments scale in size, they become an opportunity to create a microgrid when combined with stationary battery storage in areas with abundant land that might not be well suited for many crops due to the intensity of direct sunlight.
A key advantage of agrivoltaics is the primary use of the solar panels is for a passive use to provide shade for agriculture. The solar energy generation can then supply energy for other uses. An industrial zone could develop a sustainable energy micro-grid where surrounding land is used for agrivoltaics to power commercial uses of sustainable energy with the agriculture also supplying produce to local communities.
Underground Hydrogen Storage
Depleted underground gas fields, salt caverns, aquifers and hard rock caverns are currently used to store natural gas under increasingly higher pressure in the offseason to use for heat in the winter. Hydrogen gas can also be produced using sustainable energy and stored under high pressure in the offseason to generate electricity in the winter to power heat pumps to heat homes efficiently even during the coldest winters.
This requires retrofitting power plants for hydrogen gas to generate electricity and homes with heat pumps. Hydrogen storage requires electrolysis to generate hydrogen gas from renewable sources of electricity to separate water into H2 and O2. A key advantage of underground hydrogen storage is it can store energy for longer periods than batteries.
Underground hydrogen storage can utilize existing underground storage facilities, but the retrofitting required to convert power plants to hydrogen gas to generate electricity and homes away from natural gas furnaces to electric heat pumps will take investment and time.
Sustainable Aviation Fuel (SAF)
Synthetic kerosene is an example of an SAF manufactured using hydrogen gas generated from the electrolysis of water and combined with captured CO2 from other manufacturing processes. Synthetic kerosene is thought to be carbon neutral because sustainable energy can be used to manufacture it and when synthetic kerosene is burned, it is just returning the same amount of CO2 that was used to manufacture it. It may also be possible to combine the production of hydrogen gas for both energy storage and SAF at the same site.
4. How a booming sustainable energy economy can transform access to global financial services for more people worldwide?
Bitcoin launched on January 3, 2009 with the creation of its first block. Each new block is a permanent ledger of validated Bitcoin transactions. Each transaction has a unique transaction ID and the amount of Bitcoin transferred from one digital address to a second digital address. Each new block of validated transactions is then added in sequence to the chain of prior validated blocks. This is called a blockchain and is distributed across a peer-to-peer network of nodes that include Bitcoin miners.
The protocol for validating Bitcoin transactions to add a new block establishes the proof-of-work called Bitcoin mining. The reward for mining is an allocation of Bitcoin. The mining difficulty and security of the Bitcoin network are a byproduct of the computational power, also called the hash rate, required for this proof-of-work. As the price for Bitcoin goes up, the demand to mine Bitcoin also goes up. This Bitcoin mining forms the “base layer” or Layer 1 for Bitcoin.
Bitcoin has some key features and benefits:
Bitcoin is scarce. There will never be more than 21 million Bitcoins. This helps its long-term price although there is a lot of variability in the short-term based on speculation of what that price will become and other factors.
Bitcoin is decentralized. No one owns the Bitcoin network. Bitcoin information is shared across a network of nodes that can be based anywhere in the world using a standard protocol of rules for how to share information about Bitcoin transactions. Bitcoin miners have the additional capability of adding a validated block to the blockchain.
The Bitcoin network is secure. Proof-of-work requires an adequate hashrate by miners using computational power to compete for the Bitcoin reward by validating Bitcoin transactions. Miners and nodes must also come to a consensus to validate transactions to add a new block.
Bitcoin is liquid. Bitcoin can be bought or sold within minutes under most conditions. During periods of high demand, a fee can also be paid to process a transaction faster.
Bitcoin has multiple use cases. Money as a medium of exchange and store of value are 2 primary uses for Bitcoin using Layer 1. But the security of the network makes it well suited for other use cases. The Lightning Network was developed as a Layer 2 platform to scale off-chain transactions secured by Bitcoin Layer 1. Other applications include authentication using a unique digital signature and multiple signatures for contracts and legal documents.
A downside for proof-of-work is the energy required to drive the computational power needed. This has raised environmental concerns regarding Bitcoin even with all the positive benefits it can provide. Abundant, clean, cheap energy is what the Bitcoin network needs to keep advancing its security through more robust proof-of-work.
Early adoption of abundant sustainable energy in a location can attract Bitcoin miners who prioritize reducing their carbon footprint. But as sustainable energy generation scales to address peak-demand in the region, the price of energy outside of peak-demand also drops. This allows more computational power to be added by the miner at that location. This improves their competitiveness to win Bitcoin and propagates the desire to add more computational power with abundant, clean, cheap energy. So Bitcoin mining can be a key catalyst to scale sustainable energy. And this can happen simultaneously around the world.
Hut 8: Data Infrastructure at the Edge
Canadian data infrastructure provider (HPC and Bitcoin mining) Hut 8 announced an intended merger with USBTC in February 2023 to expand their data infrastructure network into the US to access sustainable energy in west Texas (wind and solar) and Niagra Falls in New York (hydropower). Hut 8 also holds over 9,000 Bitcoin they have mined on their balance sheet currently valued at over US$200 million.
USBTC provides technical expertise, software to operate fleets of Bitcoin miners and managed hosting services for third parties like other Bitcoin miners and sovereign wealth funds. One of the core strategies USBTC uses is electron arbitrage where sustainable energy capacity is used to mine Bitcoin, but then curtails mining during peak-demand for energy to divert it to the grid to help meet the demand. The price for energy determines whether to continue or curtail Bitcoin mining.
Hut 8 also provides VFX rendering for visual effects and Web3 infrastructure for gaming and other applications. Some of these services might require 24x7 availability, but services that can be curtailed during peak-demand are more strategic to build out sustainable energy infrastructure in new areas. Hut 8 is diversifying data infrastructure beyond just Bitcoin mining, but other Bitcoin miners pursuing sustainable energy strategies include Marathon Digital Holdings, Riot Platforms, Cleanspark, HIVE Blockchain Technologies, and Bitfarms.
Block: Bitcoin for Consumers, Creators, Developers and Businesses
I have written about the fintech company Block in prior Updates. This is a company with an original focus on giving small businesses options through Square to close more sales using credit cards and other forms of payment. Square expanded services to include consumers with the popular digital wallet Cash App and creators/artists with Tidal to stream audio/music.
Square was rebranded as Block to create ecosystems and cross-ecosystem transactions around Cash App, Square and Tidal plus new initiatives around a Bitcoin ecosystem. These Bitcoin initiatives are in various stages of development with Spiral already launching 3 open-source products. Spiral’s Lightning Development Kit has already been used by multiple platforms like Cash App, Twitter, Strike and others to add payment and money transfer with another user also using a Lightning Network enabled-digital wallet.
Block could have a big impact building the open-source tools Developers need to develop solutions for consumers, creators, and businesses to move and store digital assets. Those rails to move digital assets within and across borders include Bitcoin and the US Dollar Coin (USDC), also known as a stablecoin. Each jurisdiction or country would need the on- and off-ramps to convert a digital asset into a cash balance in the local fiat currency through an exchange. A debit card could also be used to withdraw that cash balance or spend it with a merchant who is not on the Lightning Network. Block’s Bitcoin initiatives include:
Spiral
Lightning Development Kit
Bitcoin Development Kit
Bitcoin Design Community
TBD
TBDex, Decentralized Exchange
Web5, decentralized identify (initial use case)
Partnership with Circle to expand access to USDC
Partnership with Yellow Card to expand access to USD, USDC & Bitcoin across Africa
Bitcoin hardware & software (still early in development)
Open-source hardware wallet to self-custody Bitcoin
Open-source bitcoin mining hardware and software
Cash App
Digital software wallet with Lightning integration
Buy, Sell, Send, and Receive Bitcoin
Integrates with popular hardware wallets to self-custody Bitcoin
Block also holds over 8,000 Bitcoin on its balance sheet
Strike: El Salvador & money app for 3 billion people in 65 countries
Strike is a privately-held money app that worked with El Salvador to support Bitcoin and launched in El Salvador in March 2021 following a successful public beta in July 2020 in El Zonte through the non-profit Bitcoin Beach. Strike and other companies continued to work with El Salvador and its President Nayib Bukele to adopt Bitcoin as legal tender in June 2021 to join the US Dollar which became legal tender 20 years earlier in El Salvador.
Strike soon became the most downloaded app in El Salvador once Bitcoin became legal tender in the country. Salvadorans can use Strike as their bank to receive paychecks in USD and maintain a balance in USD for payments as a medium of exchange or convert a portion to Bitcoin as a store of value. This is a significant innovation because an estimated 70% of El Salvador’s population remains unbanked.
El Salvador is better positioned against inflation with both the USD and Bitcoin as legal tender compared to Argentina and Venezuela where the local currencies are experiencing hyperinflation. Strike announced in May 2023 it was using its operating license in El Salvador to expand beyond just the US, El Salvador and Argentina to 65 countries to reach 3 billion people around the world. Strike also announced it was moving its global headquarters to El Salvador to lead this expansion with a clear regulatory framework on how to operate. Other fintech companies may follow Strike’s lead.
Microstrategy: Bitcoin for Corporations using the Lightning Network
Microstrategy is an enterprise, business-to-business, software-as-a-service provider for business intelligence solutions. Microstrategy became the first publicly-listed company to buy Bitcoin in Aug 2020 when it purchased just over 21,000 Bitcoin for about US$250 million at the time of the transaction. Microstrategy’s CEO Michael Saylor was seeking options to return value to shareholders beyond share buy-backs with significant cash held on the balance sheet generated from its operations. Microstrategy held 140,000 Bitcoin as of April 5, 2023 currently valued at just under $4 billion (1 BTC = US$28,114).
Microstrategy has held events on Bitcoin for Corporations and Lightning for Corporations and has recently added a suite of Bitcoin-related products and advisory services to complement its core business intelligence services.
Treasury (Bitcoin as a store of value)
Payment Settlement (Bitcoin as a medium of exchange)
Cross-border rails to move or transfer assets
Rewards Programs (employees, customers, partners) where each participant is provided their own unique digital wallet to receive rewards in the form of “sats” where 100 million Satoshis, or sats = 1 Bitcoin). These sats can be accumulated and eventually used to purchase a good or service of interest.
Some Final Thoughts
The pace of innovation only accelerates across electric vehicles, grid-scale battery storage, Bitcoin mining, agrivoltaics, and micro-mills with abundant, clean, cheap energy. Sustainable energy is not just good for the environment. Sustainable energy economies will thrive.
And the unit economics for solar farms, wind farms and grid-scale battery storage only improve with scale. But the best catalyst for many geographic areas to adopt sustainable energy deployments at the “Edge” may be Bitcoin mining. Sovereign wealth funds and corporations like Tesla, Microstrategy, Block and Hut 8 who hold Bitcoin on their balance sheet and with a vested interest in securing their Bitcoin investment can play a critical role here.
Securing the Bitcoin network is enhanced by scaling access to clean, cheap energy. The entities mentioned could stake a portion of their Bitcoin as collateral to seed funding to launch and build out sustainable energy projects at the Edge. Here, solar, wind and even hydropower or geothermal energy are abundant but the utility-grid may not be well developed. These Edge projects would generate and store the initial clean energy to mine Bitcoin, but with adequate scale, the sustainable energy could support other innovations like those mentioned in this Update.
Fintech built on top of a secure Bitcoin network plus Layer 2 solutions like the Lightning Network give more people around the world access to reliable and cost-effective financial services where legacy systems have left many people unbanked and unable to participate in a global economy. Strike is able to provide fintech services to 3 billion people around the world.
Sustainable energy is about unleashing innovation to bring more people on a sustainable energy journey to improve their economic opportunities.
Best,
Stephen
I’m long AMZN, HUT, MSTR, SQ, and TSLA mentioned in this Update. Nothing in this Update is intended to serve as financial advice. Do your own research. The opinions and views expressed in this newsletter are those of the author. They do not purport to reflect the opinions, views or policies of any other organization, company or employer.