CRU: Competition for Energy in Heavy Industry--Bitcoin Impact's Rising

There are investment advisors suggesting cryptocurrencies should be part of investors’ portfolios. It appears that Bitcoin and its imitators are going mainstream. While this fascination with alternative stores of wealth is interesting, the knock-on effects on energy consumption are a little noticed byproduct of its newfound popularity.

Bitcoin’s Blockchain Technology Consumes Massive Electricity

Bitcoin operates as a virtual currency employing blockchain to record it. This is done through data processing centers around the world. We don’t have the space to give you a deep dive into the inner workings of blockchain. Suffice it to say, it is complex. Estimates published by BBC News (Feb. 27) suggest that Bitcoin servers run 160 quintillion calculations every second to keep the system humming. This consumes a LOT of energy.

The Cambridge Centre for Alternative Finance has published estimates of how much energy Bitcoin is using, ranging from a low consumption of 40 terawatt hours/year (TWh) to a high of 445 TWh. The mean consumption was estimated at 111 TWh. That would represent about 56% of the electricity consumed by all global data centers.

Let’s put this into some perspective:

• The United Kingdom consumes 300 TWh per year.

• Global data centers consume 199 TWh per year (Google uses about 12.4 TWh).

• The U.S. aluminum smelting industry consumes about 14.8 TWh to produce 1 million tons of primary aluminum.

• Steel electric arc furnaces consume about 29.1 TWh of power to turn out about 59.5 million tons of crude steel, representing about 68% of all U.S. steel output.

Should We be Worried About this Competition for Electricity?

A casual observer of the U.S. aluminum industry knows that the sector is a shadow of its former self.

In 1980, we operated 32 primary aluminum smelters producing 4.6 million metric tons of metal. In 2020, we have seven smelters producing 1 million tons.

One of the catalysts behind the demise of aluminum production was the deregulation of electricity prices. Industrial users of electricity were asked to go head to head with the retail market starting in the late 1980s.

When aluminum smelters in the Pacific Northwest attempted to negotiate in the deregulated environment, they found themselves competing against new wholesale and retail buyers. That demand was seemingly inelastic. Price was secondary to keeping the lights on and the devices running. That type of competition proved to be the undoing of aluminum.

Fast forward to the present. We have cryptocurrencies coming on strong, with huge appetites for power. They are joining a market where data center demand is already exploding.

Hyperscale data centers are popping up everywhere. A hyperscale data center is a facility owner and operated by the company it supports. This includes the likes of Amazon Web Services, Microsoft, Apple and Google.

There are about 500 in the world today and we are adding about 50 each year, with Amazon and Microsoft accounting for over 50% of the centers built. About 40% of these centers are in the U.S.

These centers use about 100 megawatt hours each, consuming enough electricity to power 80,000 U.S. households (Source: U.S. Department of Energy 2020).

If history is a teacher, steel’s EAF sector may want to pay attention to what happened to aluminum as it faced new and different competition for electricity.

If Mr. Biden is serious about “Building Back Better,” it would be worthwhile to remember that manufacturing still matters. A national energy plan that encourages the production of aluminum and steel with competitive energy prices is important, even as it provides for sufficient energy to support these new sources of energy demand.

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