Hedging renewable energy investments with Bitcoin mining

Carlos L. Bastian-Pinto, Felipe V. de S. Araujo, Luiz E. Brandão and Leonardo L. Gomes

Renewable and Sustainable Energy Reviews, 2021, vol. 138, issue C

Abstract: Renewable energy sources such as wind power are increasing their share of the world energy matrix. In Brazil, the regulator promotes reverse bid auctions where the winner agrees to begin production a number of years ahead under a long-term contract. If a wind farm project chooses to anticipate construction, it can sell its energy in the short-term market but becomes subject to electricity price volatility. In order to create incentives for early investment, we propose that wind farm investors can hedge electricity price risk by simultaneously investing in a cryptocurrency mining facility that uses electricity as input to produce newly minted Bitcoins. As electricity and Bitcoin prices are uncorrelated, the ability to switch between these outputs allows the wind farm to maximize revenues and minimize losses. We develop a numerical application under the real options approach to determine the financial impact of the investment in a Bitcoin facility for the wind energy producer that will allow it to optimally switch outputs depending on the relative future prices of electricity and Bitcoins. The short-term energy price and Bitcoin price/mining-difficulty ratio are modeled as distinct stochastic diffusion processes. The results indicate that the option to switch outputs significantly increases the generator's revenue while simultaneously decreasing the risk of anticipating the construction. These findings, which can also be applied to other renewable energy sources, may be of interest to both the energy generator as well as the system regulator as it creates an incentive for early investment in sustainable and renewable energy sources.

Keywords: Renewable energy production; Windfarms; Real options; Switch option; Cryptocurrency mining; Bit-spread (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (8)

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DOI: 10.1016/j.rser.2020.110520

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