• What would energy shortages do to cryptocurrency prices?
  • The bitcoin supply shock is now just a week away
  • Will the electricity grid undermine the energy transition?

Cryptocurrencies cop a lot of criticism for their energy use. It takes electricity to mine bitcoin. And, with bitcoin’s price surging once again, the incentives are greater than ever.

Unfortunately, our modern electricity grid is already struggling. Demand management plans are in place. We rely on imports to balance the grid. And in some countries things are outright falling apart. Often at the worst possible moment.

A little birdie tells me that the Australian energy grid is frequently being run outside the prescribed range of volts and hertz. This is doing severe but hidden damage to the economy. It wears out heavy machinery many years before its time, for example.

I suspect it’s the same in the UK. Renewables are proving too intermittent and unpredictable to handle safely on the existing grid. The consequences are yet to be exposed. More on that in a moment.

Bitcoin’s supporters have come up with all sorts of narratives and explanations for why the cryptocurrency isn’t a troublesome source of energy demand at all.

Bitcoin mining’s energy demand is flexible, making it a good way to balance a grid struggling with intermittent energy. The demand is self-regulating in the sense that it isn’t profitable when power prices are high, so it gets throttled back to balance supply and demand. And it’s a great way to ensure we use excess power during peak production times for renewables.

Here’s an intriguing thought: if we’re in for energy shortages, as I expect, what’ll this do to the price of bitcoin?

Less energy means higher prices. And that means higher costs for bitcoin miners. If it becomes less profitable to mine the next “block reward” as it’s called, will this reduce the supply of bitcoin? Will that raise the price?

Not so. As I understand it, the difficulty of mining new bitcoin adjusts to ensure a steady amount of supply. If less computing power is put to work mining bitcoin because power costs are too high, the difficulty of mining the next bloc just falls. So power prices won’t disrupt bitcoin supply.

But you know what will? An event next week. No, not my birthday. Something which Sam Volkering considers far more important.

I’ve heard him alert investors about this moment two or three times before. In 2012, when we first met, in 2016 and 2020. Each time, cryptocurrencies went on to soar higher.

To find out more, check out Sam’s detailed explanation here.

While cryptocurrencies may well be sucking up a lot of power, I think an even bigger story is about to break. It’ll define our next energy crisis.

A far more tangible supply crunch

I’m sure you’ve seen the headlines. Renewable energy projects are taking decades to connect to the electricity grid. High voltage lines are proving as popular as wind farms. The queue for regulatory approval is crippling renewables projects. Only a small percent of renewables projects and high voltage transmission projects ever see the light of day as a result.

It’s enough to make you wonder whether we’re on target to meet net zero at all. I mean, what happens if we have enough renewable energy to keep the lights on, but the government forgot to build the grid?

You need to transmit renewable energy long distances, because it’s built in notorious inconvenient places. I mean, who thought building power plants in the ocean would be a good idea?

And even if you get the power to land, you still need to distribute it amongst users.

The transmission system is easy to understand. It’s the long-distance pylons you see on the horizon. And the cables we plan to lay under the Russian submarines floating around the North Sea.

But the distribution system is more fascinating. One study from Palo Alto in California asked how the distribution system might fare under the electrification scenario planned.

It concluded that more than 95% of existing transformers couldn’t handle the strain, 20% of secondary distribution lines and 25% of feeders. This is for the electrification of single-family homes alone. In other words, the grid in your neighbourhood is going to need a lot of very expensive work to handle what net zero has planned.

Who’s going to pay for it? Well, such costs already make up a fifth of energy bills in the UK…

But what’s behind the grid’s disastrously slow rollout?

Aren’t we trying to save the planet? Did someone forget to tell the National Grid what the renewable energy system would look like? Did the National Grid think renewable energy was never going to actually happen?

Taking a closer look at what’s gone wrong offers a good lesson in what happens when you rely on the government. But it also exposes just how suddenly things could change…

The holdup is a bit of a Mexican standoff. Which makes it difficult to figure out where to start the explanation.

The National Grid builds and manages the construction of the grid connections. It blames the painfully long wait times on the government rules governing the planning process. The planning and approval stage takes more than twice as long as the actual construction of the network.

Ofgem, the regulator, reckons the National Grid’s process is “not fit for purpose”. The reason why is fairly simple. When considering which energy projects to connect to the grid, it uses a first-come-first-serve model. It’s a queue, in other words.

The trouble is, renewable energy developers have been submitting a lot of pie-in-the-sky projects. Very few ever get built. They’re known as “phantoms”. And they’re clogging up the application system.

Of course, the energy project developers blame the delays for their failed projects. How can they get a renewable energy project up and running when it takes years to connect?

It’s a right mess. But what does it really mean?

If it takes more than a decade to connect a renewables project to the energy grid, that implies we are going to fall dreadfully short of our 2035 goal to electrify the whole grid. Let alone Labour’s 2030 plan. Let alone covering the increased demand from electrification.

To reach those goals, given how long the process takes, the entire grid’s worth of renewables projects and grid projects would have to be up and running already.

If construction of the energy grid continues to falter while fossil fuel is shut down, we could be left with an electricity shortage. It won’t really be because of a lack of renewable energy. There just won’t be the grid to bring it to households.

This is a bit misleading, of course. Nobody is going to build renewables projects without ironclad agreements that they’ll be connected. The issue is more that the grid’s processes are holding up the projects we need. It is the weakest link in the energy transition. In many cases, it is a missing link.

This month’s issue of The Fleet Street Letter is about what might happen if this mess is ever sorted out. What if we could get rid of all these bizarre and unnecessary delays and hurdles?

But before it ever reaches subscribers’ inbox, something far more enticing will occur in crypto markets. To make sure you’re prepared for it, click here.

Until next time,

Nick Hubble
Editor, Fortune & Freedom