Dear Reader,
Within just days apart last week, Hurricane Ida made landfall in Louisiana as a Category 4 storm and the Caldor Fire threatened Lake Tahoe, California. We certainly need to adapt in the short-to-medium term to these events, but we should also look to innovate solutions for better long-term outcomes.
Larry Fink leads the largest asset management company in the world at Blackrock. The Larry Fink CEO Letter published in January of recent years has become an informal proxy for Environmental, Social and Governance (ESG) policies since the talking points in the letter highlight important criteria for Blackrock’s ongoing investment criteria. A company’s strategy and progress to become net zero regarding carbon dioxide emissions by 2050 is just as important as its financial performance. Progress on diversity, equity and inclusion were highlighted in the January 2021 letter to highlight the importance of “S” in ESG.
University endowments are listening. Harvard University President Lawrence Bacow announced that Harvard has divested all direct investments in fossil fuels and its legacy indirect investments as a limited partner make up less than 2% of the total $40+ billion portfolio. Harvard has also committed to become fossil fuel neutral by 2026 and eliminate all use of fossil fuels on its campuses and through its operations by 2050. Harvard is also investing more aggressively into the sustainable energy economy.
In this Product | Strategy | Innovation update, we will summarize a path towards a sustainable energy future. We have the products. We will provide a strategy. We just need to innovate our way towards the solution. The strategy leverages a model in Texas that can be replicated further in the state and elsewhere. Why focus on Texas? Texas consumes the most energy of any state in the United States. And Tesla also recently filed with Texas regulators to become an electricity provider in Texas. This state also provides its own deregulated power grid where many companies can sell energy into an open market.
The Tesla filing follows the construction of a 100 megawatt Tesla energy storage system south of Houston that will eventually be connected to the power grid. Texas also has a large network of interstate highways that will need more Tesla Superchargers to meet the growing demand for the EV fleet from Tesla and other OEMs. Tesla has stated it will open its Supercharger network to other OEMs in the future, so this will be an open ecosystem to serve many electric vehicles.
3,500 acres of rural land adjacent to a Tesla Supercharger can generate 700 megawatts of Solar power
Assuming a network of Superchargers located about every 200 miles on Texas interstate highways, this would require 20 or more Supercharger destinations in remote areas with access to abundant land. Assuming 5,000 acres per Supercharger at $2,000 per acre in the Texas panhandle and $5,000 in central Texas near Austin, $10-25 million would be needed to acquire the raw land per Supercharger destination. This amount of land would allow 3,500 acres to be allocated to a solar plant per site. Assuming 5 acres per megawatt of solar power, the 3,500 acres would provide 700 megawatts and 2.8 gigawatt-hours of energy. Assuming a solar plant installation cost of $1 per watt, 700 megawatts would cost an estimated $700 million.
230 Tesla Megapacks co-located with a solar plant would provide 177 megawatts of power and 708 megawatt-hours of energy at a purchase price of $198 million. Annual maintenance would cost an estimated $859,000 and increase 2% annually. Tesla would assume the cost to build out the Supercharger destination with stalls for both passenger vehicles and semi-trucks, restaurants, entertainment and merchandise.
Assuming the land, solar plant and energy storage operate as a separate entity from Tesla, energy use for the Superchargers can be purchased under contract from the separate entity by Tesla and surplus energy can sold to the open energy market or directly to customers by Tesla. This is a net positive for Texas since more supply lowers price in an open market.
The Texas average commercial electricity rate is $0.075 per kilowatt-hour and average residential electricity rate $0.12 per kilowatt-hour. If Tesla owns a portion of the solar plant to access cheap electricity on-site, they could buy up to a monthly cap of kilowatt-hours at a discount in proportion to their level of ownership to the commercial electricity rate before buying the rest at the spot commercial electricity price.
So what is the total all-in cost for a solar plant with co-located grid-scale energy storage at a site in the panhandle of Texas?
$ 10 million for the raw land (assuming 5,000 acres at $2,000 per acre)
$700 million to install 700 megawatts of solar power (assuming $1 per watt)
$200 million to install 177 megawatts of power storage (230 Tesla Megapacks)
$ 20 million over 10 years for maintenance on the solar plant and power storage
This totals $930 million and assumes no major land improvements and does not include any property taxes. A portion of the land would be sold to Tesla to construct the Supercharger destination. This revenue should be adequate to cover the cost to build all-weather roads to access and maintain the solar plant. The land can also be used to graze cattle, add wind or additional solar panels in the future to generate additional revenue.
700 megawatts of solar power in Texas would generate $120 million in revenue per year if all the electricity generated was sold for residential use
If all 700 megawatts of the solar plant capacity were used to generate electricity for residential use in Texas (1 kilowatt of solar power produces 4.2 kilowatt-hours per day on average across Texas or 1,500 kilowatt-hours annually), this would yield 700 megawatts x 1,500 megawatt-hours or 1 terawatt-hours of electricity per year. If residential energy is sold at an average rate of $0.12 per kilowatt-hour, 1 terawatt-hour would generate $120 million in revenue per year. Over 10 years assuming fixed rates and production, the solar plant would would generate $1.2 billion or enough to cover the major upfront costs.
However, the math for renewable energy doesn’t really work out at current prices if we assume the fully burdened cost to fund, build and operate the solar plant and use a portion of the energy for the Supercharger to charge EVs. But we have more innovation in hand to build out our strategy. What if 1% of the energy produced could be used to mine and verify Bitcoin and Ether? Bitcoin mining using more sustainable energy is a primary objective of the Bitcoin Mining Council. Who serves on this council? The CEOs of Tesla, Square, Microstrategy and the leading Bitcoin mining companies serve on this council. These companies also hold a lot of Bitcoin.
What if the CEOs of these companies were willing to stake a portion of their company held Bitcoin to accelerate the transition to sustainable energy using Texas as a model to create 1 terawatt-hours of electricity annually per site with 10 gigawatt-hours allocated to sustainable mining on-site for Bitcoin. Staking Bitcoin for 10 years would allow more Bitcoin to be mined with up to 1% of the energy produced to pay a yield in Bitcoin for the stake in Bitcoin. The rest of the mined Bitcoin would go to the mining operator as compensation and the entity that owns the solar plant.
On July 15, 2021, the energy required to mine 1 Bitcoin was 1,721 kilowatt-hours, so 10 gigawatt-hours per year could mine about 5,000 Bitcoins annually. As the price of Bitcoin increases, the difficulty and energy required will also increase. At $50,000 per Bitcoin, 20,000 Bitcoin could be staked towards a site as collateral to fund the project. The project could be staged to build out the solar plant in phases to de-risk and generate revenue along the way. A yield of 100% over 10 years equates to an annual yield of about 7% or 2,000 Bitcoin per year. A yield of 50% over 10 years is about 4% annually or 1,000 Bitcoin per year. Tesla and Square have the most to gain. They could stake 7,500 Bitcoin each and Microstrategy could stake 5,000 Bitcoin to the project for a total of 20,000 Bitcoin.
2,500 Bitcoin mined annually with sustainable energy at $50,000 per Bitcoin would generate $125 million per year. Surplus energy sold to the utility grid would generate another $60-90 million or $200 million a year combined in gross revenue for each solar plant.
The staked Bitcoin would also be used as collateral to fund the solar plant buildout. US dollars could be borrowed at 5% interest (or $50 million in interest the first year) to pay for the project. Mined Bitcoin would cover this interest and repayment of principal. If 1,000 Bitcoin per year go towards yield for the staked Bitcoin and 1,500 go towards mining parter(s) like Hut 8 Mining, Marathon Digital Holdings and/or Riot Blockchain to deploy and operate the mining rigs, then 2,500 Bitcoin could go towards the solar plant entity to pay off debt, build profit and pay forward to capitalize the next site or expand the current site with wind or more solar. 2,500 Bitcoin at $50,000 each would produce $125 million a year. Surplus electricity sold to the utility grid would generate another $60-90 million per year for about $200 million a year in gross revenue for the solar plant entity.
5,000 Bitcoin mined per year at one site and 100,000 Bitcoin across 20 sites would equate to almost 1/3 of the total 328,500 Bitcoin currently mined globally per year (6.25 Bitcoin every 10 minutes x 6 per hour x 24 hours per day x 365 days per year) in 2021. That is not realistic, but the energy required to mine would be basically free for the miner up to a limit, so more computing could be applied to mine Bitcoin up to that limit. And as the difficulty mining is somewhat regulated by the demand driven by the Bitcoin price, fewer Bitcoin are needed to generate the same total revenue from mining. So it is somewhat self-regulating unless every Bitcoin miner has access to basically free energy with similar structures.
When the next halving occurs in 2024, the number of Bitcoin allocated mining falls to 164,250 Bitcoin per year (3.125 Bitcoin every 10 minutes x 6 per hour x 24 hours per day x 365 days per year), but the price of Bitcoin is expected to also increase with increased scarcity. Bitcoin mining will continue even with the halving every 4 years until all 21 million Bitcoin have been mined around 2140 or over 100 years from now. As the total number of Bitcoin mined approaches the 21 million limit, processing fees to verify blocks will overtake fees earned with newly minted Bitcoin. But we have many years to realize that outcome. For the immediate future, over $300,000 in Bitcoin are awarded to miners every 10 minutes to incentivize the pursuit.
So all in, the overall operation would generate 1 terawatt-hours of renewable energy annually per site with 700 megawatts of solar power. This would provide renewable energy to charge EVs at the Superchargers, mine Bitcoin to help fund the operation with clean energy and leverage Square to process transactions and use smart contracts on top of Bitcoin to exchange funds between all partners. Square’s Bank, JP Morgan, Bank of Texas and/or other banks could fund the build out using the staked Bitcoin as collateral.
20 solar plants co-located with Tesla Superchargers across Texas can generate 10 terawatt-hours for the utility grid. That is almost 10% of the total electricity needed across all of Texas using sustainable solar power. This capacity also generates an estimated $4B in annual gross revenue across this network of solar plants.
But most important, at least half or 500 gigawatt-hours of renewable energy are provided to the power grid to reduce the need for natural gas and coal-fired electricity generation. And with 20 sites across Texas, the production becomes 20 terawatt-hours of total renewable energy generated with at least 10 terawatt-hours provided to the utility grid or almost 10% of total electricity needed across all of Texas per year.
The Electric Reliability Council of Texas (ERCOT) estimated a peak power demand of 77,000 megawatts for 2021. That would total 110 of the 700 megawatt Supercharger sites to supply all the electricity for the #1 energy consuming state in the United States. Bitcoin mining will eventually reach diminishing returns with site expansion, but other energy intensive processes could be considered for collocation.
There are supply constraints for unit production of lithium ion battery and solar panels, but projects like the one described here with corporate partners and startup ventures can change the trajectory of global weather patterns by accelerating the transition to sustainable energy. Elon Musk brought attention to this strategy. He also innovated many of the products to achieve the objective.
Others can help innovate adjacent solutions to accelerate the transition even faster. This is really just a thought experiment. Key details might be omitted, but it highlights how multiple exponential technologies can be used in combination to advance significant innovation.
Payment rails disrupting traditional banking are another example. Buy Now, Pay Later (BNPL) is an old concept, but companies like AfterPay and Affirm use fintech to reimagine the concept. Square recently announced its plan to acquire AfterPay to add BNPL as a feature to its CashApp and Seller ecosystems for $28 billion.
And a few weeks later, Amazon announced a partnership with Affirm to add BNPL as a feature to the Amazon e-commerce platform using Affirm’s service. Amazon will probably sell a few more TVs if you can get the best price from them online and can now pay the same purchase price interest-free over 18 to 24 months. It will also probably come with Alexa built in for a virtual assistant to close more sales with the BNPL feature. If it works once then why not 20 more times.
Best,
Stephen
The model presented here is for illustration purposes only. Nothing in this post is intended to serve as financial advice. Do your own research. I’m long AMZN, HUT, SQ and TSLA mentioned in this update.