China is rationing hydropower—and Bitcoin mines are getting cut off

June 22, 2021, 11:12 AM UTC

China’s Bitcoin mining industry had considered Sichuan a safe haven. The western region’s abundant hydroelectricity provided the power-hungry miners with a carbon-neutral electricity source, theoretically shielding them from China’s push to curtail carbon emissions.

But last week, Sichuan became the latest province to ban Bitcoin mines.

In a memo on Friday, China’s National Development and Reform Commission (NDRC) instructed local power companies to “filter out, clean up, and shut down 26 companies that have been inspected and reported as potential crypto mining projects” by June 20.

Bitcoin’s price plummeted 7% on the news as video circulated of miners shutting down their machines—and likely moving out of China entirely. Crypto enthusiasts view Sichuan’s crackdown as evidence that China’s campaign against Bitcoin is political rather than ecological—driven by Beijing’s distrust of a financial asset it can’t control.

But the truth is that demand for hydropower has surged as China shifts the national energy grid to renewables, and drought has drained the country’s water supply. So when it comes to prioritizing which industries get access to scarce hydropower, Bitcoin mining is low—if not last—on Beijing’s list.

Clean water

China pledged last year to reach net-zero carbon emissions by 2060 and—despite building new coal plants—has begun cracking down on polluting industries to meet its goals. Bitcoin mines have become an easy target.

In May, Inner Mongolia shut local Bitcoin mines down after the NDRC criticized local officials for failing to meet the province’s carbon reduction targets. Officials in Xinjiang, home to 40% of China’s coal reserves, recently shut down Bitcoin mines too.

But Bitcoin mines in Sichuan—which accounts for 10% of global Bitcoin mining—run on hydropower, a cleaner form of energy. In the wet summer months, supply tops demand, and Bitcoin mines have feasted on the excess. Yet as Beijing seeks to pad its national grids with more renewable energy to meet its 2060 goals, demand for hydropower is increasing across the country, and Bitcoin mines are getting cut off from the resource.

“Maybe a few years ago it made sense for Sichuan to welcome miners to help resolve an issue of electricity oversupply,” says David Fishman, a consultant at energy consultancy Lantau Group. “But now that problem has potentially swung the other way; miners aren’t welcome anymore.”

Heat and drought

China’s national grid is made up of six regional operators, which trade power across blocs. While most of the country’s electricity is produced in the coal-burning north and the rainswept west, the majority of power consumption comes from China’s manufacturing hubs to the south and east.

Transporting electricity across the length of China isn’t easy, and energy shortages are common. According to a June report from Morgan Stanley, “Guangxi, Shandong, Sichuan, Jiangsu, Zhejiang, [Yunnan, and] Guangdong” provinces—which stretch from China’s southwest border to its eastern seaboard—are all enduring power shortages.

Guangdong, China’s manufacturing powerhouse, began rationing industrial electricity usage last month, forcing factories to shut production lines during peak hours or close entirely for several days straight.

Local media Jiemian News reports electricity demand in the province has jumped 16% over the past two years, buoyed by surging export demand. A heat wave has pushed electricity demand even higher, as offices and homes pump up air conditioning.

But the heat has also reduced Guangdong’s electricity supply.

Some 30% of Guangdong’s electricity supply is imported from hydroelectric dams in Yunnan, 800 miles to the west, where a prolonged drought has reduced water flow. According to Morgan Stanley, Yunnan’s hydropower supply in April was 11% lower than for the same period in 2019.

Real economy

Yunnan—home to some 5% of global Bitcoin mining power—clamped down on Bitcoin miners this month too.

As in Sichuan, miners in Yunnan had been lured by deals on torrents of cheap hydroelectricity, acquiring low rates by striking direct supply deals with local power stations. But power demand has risen 30% in Yunnan this year, according to state-owned China Southern Power Grid, and the province cracked down on Bitcoin miners’ illicit electricity use last week.

The uptick in demand has been partly driven by aluminum smelters that have moved to regions rich with hydropower amid pressure by the government to cut carbon emissions. Morgan Stanley reports Yunnan had eight aluminum smelts as of June, up from three in 2019. The electricity-hungry plants consume 18% of the province’s total power output, leaving authorities with a decision to make: supply the smelts or Bitcoin mines. It was an easy choice.

“If you’re looking at a power system that is constantly struggling with undersupply and then you have Bitcoin mines consuming ungodly amounts of power and not even creating local jobs, then eliminating Bitcoin mines is an easy solution,” Fishman says.

Sichuan to Shanghai

Sichuan, which shares a border and rivers with Yunnan, is making the same calculation as its neighbor on which industries to supply.

The province’s major Xiangjiaba hydropower dam is connected to Shanghai 1,180 miles away by a power line that can supply 40% of the financial capital’s total electricity needs. The line, which is not fully utilized, saves Shanghai some 2.7 million tons of carbon emissions each year.

“This is the most important line in Shanghai’s power system,” an engineer at the Shanghai Fengxian power station told Sixth Tone in March.

With the home of China’s traditional financial system so dependent on dams in Sichuan, it’s little surprise Beijing has decided the country can’t spare water for Bitcoin mines.

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