Hashrate Index: A look at the Swedish Bitcoin mining industry

Thanks to its idle hydroelectric resources, Sweden has become one of Europe’s last havens for bitcoin mining. But what defines the industry in this Arctic outpost?

This is the first in a series of articles on the global Bitcoin mining industry. Why do miners flock to certain countries? Which countries have the most potential for developing new mining operations? These are the questions we will answer in this series of articles.

This article explains why Sweden is the most attractive place for Bitcoin mining in Europe. The article will then grade the Bitcoin mining industry in Sweden based on factors such as electricity prices, electricity price risk, regulatory environment, political risk, and operating conditions.

Europe's Last Bitcoin Mining Sanctuary

First, let’s determine the size of the Bitcoin mining industry in Sweden.

Cambridge University regularly publishes its Bitcoin mining map, which estimates the percentage of hashrate output in different countries. According to the latest version in January 2022, Swedish miners account for 0.84% ​​of the total hashrate. Multiplying this percentage by the electricity consumption of the Bitcoin network at the time, we can conclude that Bitcoin mining electricity consumption in Sweden is 80 megawatts.

This Cambridge estimate is from over a year ago and was based on a top-down approach using data from only four mining pools. I will now provide an updated estimate based on identifying as many Swedish Bitcoin mining facilities as possible and getting approximate values ​​for electricity consumption from Swedish miners.

It is estimated that the Bitcoin mining industry in Sweden consumes about 150 MW. According to the Bitcoin mining energy consumption index of Hashrate Index, this electricity consumption should be equivalent to Sweden's 1.8% of the global computing power production, which is currently 8.1 GW. In addition, Sweden has several graphics card mining facilities that mined Ethereum before the PoS merger and are now mining other coins and performing high-performance computing.

Swedish mining community

The computing power produced by the Swedish miners accounts for far more than 1%. Although this value is not the highest, it is still an important contributor to the security of the Bitcoin network. So who are these miners? Where do they operate?

The Bitcoin mining industry in Sweden consists of a few international players and some local data centers, with mining being one of many activities. The most prominent international players are Hive Blockchain, Northern Data and Genesis Digital Assets.

The entire mining industry is concentrated in the north of the country, where there is abundant access to idle renewable energy. The region’s largest mining center is in Boden, an industrial town that is also home to operations of Hive Blockchain and Northern Data.

Abundant renewable energy

The main reason Sweden has attracted a fairly large Bitcoin mining industry is its abundant renewable energy. Sweden is a powerhouse, ranking fifth in the world in terms of electricity per capita in 2021.

Sweden has become a hotspot for Bitcoin miners looking to achieve carbon neutrality, as 98% of its electricity resources meet ESG standards. A combination of hydropower and nuclear power is the backbone of the country's power system, accounting for 44% and 31% of electricity generation respectively. In addition, Sweden's wind power share is also rising, currently accounting for 16%.

Figure 1: Swedish electricity resource composition in 2021

Sweden is a large country with a diverse topography. In the north, numerous rivers carry water from the mountains on the Norwegian border to the Gulf of Bothnia. This geography is ideal for hydroelectric power, and the industrious Swedes have long taken advantage of it and developed a total hydroelectric capacity of 16.4 GW.

The southern region is flat and has few rivers suitable for hydroelectric power. The Swedes solved this problem by developing nuclear power plants in the 1970s. The Swedish government originally planned to phase out nuclear power, but the current energy crisis in Europe changed their minds. It is very likely that Sweden will not follow Germany's example and reduce its nuclear power capacity to ensure its energy security.

Low electricity prices limited to northern regions

Sweden is the third largest country in Europe. Most of the country's 10 million people live in the southern part of the country. And, as mentioned above, almost all of the hydropower resources are located in the north.

The huge distances between hydroelectric plants in the north and demand centers in the south make it a challenge to unify isolated generating hubs by developing the necessary transmission capacity. As a result, severe transmission constraints between the north and the south hinder the outflow of zero marginal cost hydropower from the north.

Figure 2: Northern and southern Sweden under electricity price considerations

Due to transmission constraints, the Swedes divide their electricity market into four price zones. In this article, we will refer to the two northernmost price zones as "Northern Sweden" and the two southernmost price zones as "Southern Sweden". As the above chart shows, electricity is cheap in the north, while it is expensive in the south.

Figure 3: Comparison of electricity prices in northern and southern Sweden over the years

Electricity prices in southern Sweden were not always high. As shown in the figure above, electricity prices in northern and southern Sweden have always been low and close to each other, but in 2021, a significant price difference suddenly appeared. Southern Sweden is well connected to the European electricity market via submarine power cables. Therefore, starting in the second half of 2021, the surge in European electricity prices quickly spread to southern Sweden.

From 2018 to 2020, the average spot electricity price in southern Sweden was just $41/MWh. In 2021, the price rose to $82/MWh, causing the electricity cost of Bitcoin mining to soar. In 2022, the average electricity price reached an unprecedented $148/MWh, pushing even the most energy-efficient mining machines into a cash flow negative situation. This increase in electricity prices has caused damage to mining companies in southern Sweden, and they have gone bankrupt or moved to the north.

Meanwhile, electricity prices in northern Sweden have remained at pre-energy crisis levels. Severe transmission restrictions between northern and southern Sweden have shielded electricity consumers in northern Sweden from the worst of the energy price increases. Our newly released 2022 year-end report describes the impact of the energy crisis on the Bitcoin mining industry.

According to industry sources, Swedish miners can reduce their average annual all-in electricity price by about 25% through demand response initiatives. For example, Hive announced in December that it had earned significant revenue by reducing electricity consumption in response to market signals.

Can electricity prices in the north continue to remain low?

We mentioned above that electricity is cheap in northern Sweden. But will it always remain so?

There are three factors that can influence the development of electricity prices in northern Sweden: the development of local generation capacity, changes in local electricity demand, and the expansion of transmission capacity between northern and southern Sweden. We assess each of these in turn.

As mentioned before, hydropower is the backbone of the electricity system in northern Sweden. Unfortunately, the government currently has no plans to develop additional hydropower capacity. In the near future, the only power generation capacity growth in northern Sweden will come from wind power, which is estimated to increase by 22% between 2023 and 2027.

Figure 4: Future changes in the composition of electricity resources in northern Sweden

As shown in the chart above, total electricity generation in northern Sweden is estimated to increase by 11% between 2023 and 2027, equivalent to a meager 2.6% annual growth. More worryingly, the entire capacity increase will come from weather-dependent wind power, which has a significantly lower capacity factor than hydropower. Limited supply leaves little room to increase demand without prices rising.

This leads to the next question: How will local electricity demand in northern Sweden develop in the coming years? It will probably increase significantly, as a small number of huge, electricity-intensive industrial projects are being developed. These industrial companies are attracted to northern Sweden due to the difference in electricity prices between traditional industrial powers such as Germany and northern Sweden.

These industrial projects are closely tied to the EU and Sweden's ambitions for energy transition and include battery factories, green steel production and the electrification of Europe's largest iron ore mine. All of these projects will require a lot of electricity. For example, by 2030, the electrolyzers that produce hydrogen for green steel production will consume 800 megawatts, more than five times the electricity consumption of Sweden's entire Bitcoin mining industry. The electrification of the iron ore mine will require even more electricity support, an estimated 2,300 megawatts by 2030.

We now know that electricity demand in northern Sweden will increase significantly without a corresponding increase in generating capacity. Now we turn to the final factor: the development of transmission capacity.

The Swedish Transmission System Operator plans to make significant investments in transmission capacity through a project called NordSyd to remove transmission constraints between northern and southern Sweden. Still, it will take 20 years to complete these transmission expansions, so the electricity markets in northern and southern Sweden will remain relatively separate for the foreseeable future.

I expect prices in northern Sweden to converge towards the higher prices in southern Sweden due to the huge growth in industrial electricity demand expected by 2030. Nevertheless, miners in northern Sweden will probably continue to enjoy low electricity prices for at least another three to five years.

Sweden has excellent conditions for mining operations

Few countries make it easier to run a mining farm than Sweden. The Arctic country’s cold climate provides natural cooling for heat-generating mining operations. Average monthly temperatures in Boden, Sweden’s Bitcoin mining capital, are -9°C (-15°F) and 17°C (62°F) in the coldest and hottest months. The air is also very clean. The climate is nearly perfect for Bitcoin mining.

The benign climate means that maintaining and running mining operations is simpler than in hotter Bitcoin mining centers such as West Texas. Miners can easily air-cool their operations and don’t need to worry about setting up additional cooling infrastructure. In addition, the lifespan of the machines is longer.

The low failure rates due to the cold climate also means lower maintenance requirements, which can reduce operating costs. I've heard that some small miners in the area sometimes run their facilities for weeks without any employees present except for regular safety inspections. Imagine doing this in the hot summers of West Texas.

Furthermore, even the sparsely populated northern Sweden offers an ample supply of labor. Most suitable locations for mining are relatively close to towns with at least 20,000 inhabitants, and the people generally have a strong understanding of IT, with one of Sweden’s leading IT universities being located in this region.

Political stability, but mining remains controversial

Sweden has historically been one of the most politically stable countries in the world. The country’s politicians and regulators have historically been business-friendly and open to innovation, as evidenced by the country’s 10th place ranking in the World Bank’s Ease of Doing Business Index. Low political risk, a favorable regulatory environment, and general business friendliness have fostered an innovative business environment and made Sweden one of Europe’s leading IT industry locations.

Compared to many European countries, Sweden has a relatively low tax rate, with a corporate tax level of 21%. On the other hand, the VAT rate is 25%, which affects imported products including mining machines. Nevertheless, Swedish mining companies can still avoid import VAT by registering their companies with the Swedish VAT register.

The country has a large traditional data center industry represented by companies such as Facebook, Google, Microsoft and Amazon. The Swedish government has been keen to attract data centers, especially in the northern region, and even help them set up operations. Swedish electricity producers have also developed initiatives to attract energy-intensive data centers, including Bitcoin mining companies.

Still, Bitcoin mining remains controversial on a political level. Swedish politicians and regulators have consistently taken a negative stance toward the industry. The most notable example came in 2022, when two Swedish financial regulators tried to get the European Union to ban mining. Fortunately, they failed.

While attempts at a Bitcoin mining ban were unsuccessful, Swedish government officials have been looking for ways to curb the industry, with Sweden’s energy minister stating that “we need energy for more useful things than Bitcoin.”

As part of the wider data center industry, Swedish miners are currently eligible for a reduced electricity tax of SEK 0.006 ($0.00057) per kWh, compared to the normal SEK 0.392 ($0.038) per kWh. The Swedish government is proposing to remove this reduction from data centers from July 1, 2023. Unfortunately, there seems to be a broad political consensus to increase electricity taxes, and mining companies will likely have to pay them from July 1.

Competition for grid connections is fierce in northern Sweden due to an influx of electricity-intensive industries. These other industries have strong support from the Swedish government and the European Union and are likely to win future battles for power distribution. Swedish miners are already finding it increasingly difficult to secure new power.

Summarize

Thanks to its cheap renewable energy, cold climate and political stability, Sweden has attracted a significant mining industry, accounting for well over 1% of the country’s hashrate output.

Idle hydropower resources have shielded northern Sweden from the energy price inflation that has ravaged Europe since late 2021, making the region one of Europe’s last Bitcoin mining havens. It’s worth noting that the low electricity prices only exist in northern Sweden for now.

Sweden has historically been a politically stable country with a good regulatory environment for most businesses. Despite this, Bitcoin mining remains controversial. Swedish regulators are eager to downsize the industry to make room for other electricity-intensive industries in line with Swedish and EU ambitions, and recently proposed increasing electricity taxes from July 1, 2023.

Competing for electricity with these government-approved industries leaves little additional room for the Bitcoin mining industry in Sweden. In addition to growing political opposition, there is also a huge risk of electricity prices. A large-scale increase in industrial electricity consumption in northern Sweden could cause electricity prices in the region to rise sharply over a period of time.

Still, since it takes time to develop these industrial projects, Bitcoin miners may have at least another three to five years of happiness in a stable country with low electricity prices and good operating conditions.