Toward Permissionless Power Markets

Bitcoin’s impact on the price, stability and sustainability of global power markets

By Andrew Myers. October 2023

This week’s essay is by Andrew Myers, CEO at Satoshi Energy, Inc. Everything you do, everything you eat, everything you watch, consume and produce is dependant upon the power markets and energy grids. Read on to understand how they work, why they’ve been neglected and how we can breathe new life into this critical infrastructure.

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“I always try to solve problems by some artifact, some tool or invention that makes what people are doing obsolete so that it makes this particular kind of problem no longer relevant. My answer would be to develop a world energy grid, an electric grid where everybody is on the same grid. All of a sudden there would be no problems anymore, no international troubles. Our new economic basis wouldn’t be gold or dollars; it would be kilowatt-hours.”

- R. Buckminster Fuller

Introduction

Life is an exchange of energy. A warm hug from a loved one after time apart. The vibration of a high five with your teammate after the big win. A hot sip of coffee in the morning before deep work on your given craft. Each of these simple interactions exchanges energy for a unique purpose. On a larger scale, humans leverage electrical energy to enhance our way of life and survive as a species - from washing our clothes to powering the free flow of information over the internet. The architecture of our very civilization is built upon electrical energy. Despite its ubiquitous and fundamental nature, investment in the world’s electrical energy supply is, in no uncertain terms, constrained by government overreach and misallocation of capital from central banks. While intelligent, hard working engineers and tradespeople build and operate one of the world’s most sophisticated machines, i.e. the power grid, they are constantly called into question by non-technical bureaucrats “looking out for public safety”. 

It is well understood that the essential condition of power markets, as compared to other types of commodity markets, is the need to keep supply and demand in close balance at all times to prevent blackouts and damage to vital infrastructure. For the last century, engineers have had the tools and systems to perform this balancing act in a safe and reliable manner. Yet, for just as long, the fear of such consequences has been exploited to enact layers of rules and regulations “to protect public safety” and “to keep the lights on”. In the real world, from the most free and open markets to the most heavily regulated power markets, the only thing that actually keeps the lights on is the price of electricity - the equilibrium of supply and demand. When supply matches demand and the price signal is clear, the power grid operates in near perfect harmony to deliver much needed electrical energy to homes and businesses around the world. 

Today, however, the price of electrical energy is distorted across disjointed, heavily regulated markets and is unpredictably inflated year over year by fiat money. In the future, bitcoin will be the only objective measure of price and the only form of money that can measure the unconstrained wealth humanity is able to create with free flowing energy.

How Power Markets Function Today

Physical & Financial Flows in Power Markets

Power markets exist to provide the lowest cost, highest quality electrical energy by facilitating the real time balance of supply and demand. Today, most power markets perform this balancing function through a primary energy market and a secondary ancillary services market.

• Energy Market – Primary real time sale of electricity produced by power plants and consumed by residential, commercial, and industrial loads.

• Ancillary Services – Secondary services such as frequency, voltage control, and reactive power management supporting the operation of the system when electrical energy supply and demand are out of balance.

To create a primary energy market, operators must provide real time price signals to both sellers and buyers. This process is generally referred to as Security Constrained Economic Dispatch (SCED). In simple terms, SCED means the market is trying to deliver (dispatch) the lowest cost (economic) electrical energy to consumers while also being limited by transmission and generation capacity (security constrained). More specifically, the power market continuously runs an optimization model with a) the objective of achieving the lowest cost price of power and b) the dynamic constraints of supply, demand, and transmission capacity for each location (generally referred to as nodes) on a vast regional network. In most power markets, the market operator will publish a per megawatt-hour price for each node every five minutes. The price signal informs:

• a buyer if they should continue operating or shut down if prices are too high, and

• a seller if they should continue operating or shut down if prices are too low.

During real world operation, supply and demand are always changing due to events such as transmission line outages, dynamic loads coming on and offline, and unexpected weather events. When these occurrences create a divergence between supply and demand that is too large, the market resorts to ancillary services. These ancillary services and protection systems can operate in milliseconds to keep the system operational while supply and demand find a new equilibrium.

As time passes and the SCED model runs, power market operators meter all production and consumption at a given price for each node. Market operators then facilitate the financial settlement of these trades between the market participants. By necessity, power is being produced and delivered in real time. Yet, the cash payment for this power lags by days, weeks, and months. As we’ll show, the implications of this mismatch in the timing of delivery and payment are enormous.

Challenges With Today’s Power Markets

Market conditions become challenging when supply and demand change rapidly. Take the example of a hot afternoon when people are arriving home from work, turning up their home air conditioning, starting their laundry, cooking dinner, and consuming television programming. Demand has now increased. Now suppose one of the nearby coal fired power plants shuts down for unexpected maintenance. Supply has now decreased. Under these conditions, energy prices can rise three orders of magnitude in minutes, from a few dollars per megawatt-hour to thousands of dollars per megawatt-hour. For energy buyers, this change in price provides a clear signal to immediately cease operations so as not to incur a massive operating expense in a short amount of time. For energy sellers, the price change provides a clear signal to deliver more energy and capture more revenue. However, as power markets are currently designed, balancing supply and demand is not so simple.

First, power markets are more volatile than they should be due to government controlled price fixing over the last century. In most of the world, government controlled monopoly utilities offer only a single fixed price for electricity, regardless of supply and demand, causing consumer response to price signals to atrophy or never blossom in the first place. In microeconomics 101 terminology, the market is seriously lacking in demand side elasticity. In reality, the majority of electrical loads are highly interruptible and could be shifted based on real time price signals, thus significantly decreasing the magnitude and volatility of demand. 

Second, the real time pricing and delivery of energy does not actually constitute real time revenue and expenses. Electrical energy must be delivered in real time, but once delivered, the money remains idle for days, weeks, or even longer as sellers and buyers effectively accumulate IOUs. As prices increase and time passes, distrust between market participants compounds. The higher the prices and the longer the time period, the higher the risk of the buyer defaulting becomes, the more the opportunity cost increases, and the more inflation erodes any remaining value. With complex contractual obligations between layers of buyers and sellers, significant coordination is needed to ensure that those obligations will be met, and at the speed power markets move there is little time for such coordination.

Third, most market participants are dependent on a handful of highly leveraged and increasingly insolvent banks, making conditions even more challenging. Power market operators must be cautious of where market participant funds are held in order to not concentrate too much risk in a single bank. The constant need to monitor the overall credit health of the market while operating on antiquated and risky banking systems adds cost and complexity to the operations of the market.

The result is a patchwork of manual processes, added requirements, and added costs to keep the lights on. Fortunately, many of these challenges are being solved with modern technologies and common sense thinking. Real time power metering, advanced control systems, energy storage, demand response, real time pricing, and real time money are all moving us toward a world where reliability is fully automated and energy flows freely.

How Bitcoin Fixes This

Sound money is essential for equitable and innovative global trade. Bitcoin is energy backed sound money - built to be a reliable store of value, a super fast and efficient medium of exchange, and an unchanging measurement of price or unit of account aligned perfectly with humanity’s ambitions for abundant sustainable energy. 

Bitcoin Creates Unprecedented Purchasing Power (Store of Value)

As the world moves toward sound money on a bitcoin standard, economic decisions in the energy market will flow back to the individual. Rather than competing with big pockets full of cheap money, the individual innovator and investor will be operating on a level playing field. Political and banking relationships will matter less, and creativity, hard work, and perseverance will matter more. Rather than having a growing lower class and hollowed out middle class late on energy bills, we will see a growing class of entrepreneurs, investors, and every day people eager to produce and consume more energy to make their dreams a reality.

Bitcoin as a 24/7 Real Time Financial Settlement Protocol (Medium of Exchange)

With bitcoin, money can be sent anywhere in the world at any time of day, any day of the week, and any day of the year with only a few lines of code. What does this mean for power markets? It means a fundamentally more accurate price signal. At present, power markets have a stated real time price, yet the true price is unknown due to the slow and unreliable banking rails where you must either send money in advance or in arrears. These price distortions impact economic decisions between sellers and buyers, thus affecting the balance of supply and demand, and ultimately power grid reliability. With bitcoin, the price of energy, the delivery of energy, and the settlement of energy payments can all happen within milliseconds of each other. The market operator (or algorithm) publishes a price, the seller transmits the electricity at the speed of light, and the buyer pays for the electricity also at the speed of light. If the buyer fails to pay, the seller or market operator can simply disconnect all non-essential load via a circuit breaker. With perfect pricing and real time controls, supply and demand can remain in perfect balance. As Buckminster Fuller suggested, bitcoin makes the need for trust between buyers and sellers of electricity obsolete. Instead, buyers and sellers can focus on what they do best.

Bitcoin Dampens Power Market Risk & Volatility (Unit of Account)

The growth of bitcoin mining at the utility scale is the perfect complement to the growth of abundant renewable energy in our global power markets. The current lack of demand side elasticity is challenging enough for maintaining system frequency. When you add an unreliable and intermittent form of power generation (i.e. wind and solar) to the grid, you further stress the systems tasked with balancing supply and demand. With bitcoin mining colocated behind-the-meter of renewable power generation, we are now able to absorb spikes in renewable energy production before they reach the grid by converting that energy into bitcoin. Bitcoin mining is also leading the market in providing demand response at scale by turning off in order to not contribute to peak demand and providing ancillary services with frequency and voltage modulation. In effect, bitcoin dampens market volatility by putting a price on all energy. As bitcoin becomes widely used, its fixed supply will make it the most reliable way to measure the value of energy. In other words, bitcoin is already the unit of account for surplus energy and in the future will become the unit of account for all energy.

Permissionless Power Markets

Imagine a world where the government tries to stop you from hugging, i.e. exchanging human energy, for your safety. It’s not so hard to imagine because if you were paying attention, you would have already lived this experience. The constraints placed on power markets today come from the same worldview. Bureaucrats thousands of miles away from the problem who think they know what is best for someone else. They come from politically appointed public utility commissions reminiscent of the old Soviet Central Control Commission to monopoly utilities with footprints analogous to gang territories. The constraints placed on how economic decision makers can buy and sell energy are reducing power grid reliability, raising prices for the end consumer, and slowing the pace of industry innovation.

Moving forward, the system must be rebuilt from the ground up. As bitcoin brings unprecedented purchasing power back into the hands of sovereign individuals and local communities, they will have the opportunity to build decentralized and permissionless micro grids and micro markets where any seller or buyer of electrical energy can contribute to the market without gatekeepers. As micro markets grow to connect with local markets, and those with regional markets, and those with international markets, the world will begin to operate not only on a common currency but also a common frequency. 

An unconstrained global energy standard is necessary for humanity’s full potential to be realized. This can only happen if energy is priced accurately, in real time, in a form of money that is incorruptible and energy backed. In other words: Bitcoin.

Andrew Myers
October 2023

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