How Northern Italian Hydropower Producers Became Bitcoin Miners

TRENTINO, ITALY – Daniele Graziadei, the 37-year-old mayor of Borgo d’Anaunia, a small municipality in the northern Italian region of Trentino-Alto Adige, entered the 100-year-old Alta Novella hydropower plant with familiar ease, with hands in his jean pockets and sporting a baseball cap.

This piece is part of CoinDesk’s Mining Week

This year, under the leadership of Graziadei, Borgo d’Anaunia, home to around 2,500 people, became Italy’s first municipality to run a crypto data center. Whirring away on a small shelf at the far end of Alta Novella’s historic turbine room are 40 state-of-the-art application-specific integrated circuit (ASIC) machines powering the world’s most popular cryptocurrency, bitcoin.

Under pressure over rising energy costs, and concerned about achieving climate goals, some regulators and parliamentarians in the European Union are looking to outlaw proof-of-work, the energy-intensive computing method that powers the Bitcoin network. But in Italy, this same mechanism has become an economic incentive for hydropower producers to continue or expand their renewable energy production.

The northern Italian regions bordering the snowy Alps are home to dozens of hydroelectric power plants in a range of sizes, thanks to the abundance of water and varying altitudes. Alta Novella had belonged to Borgo d’Anaunia since the 1960s, but then it was abandoned because of the absence of a dam. There was no way of controlling the Novella river, Graziadei said.

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In 2008, the municipality decided to open the facility again by changing the turbine, and the Italian government granted the facility some monetary incentives.

But there was little rain and snow in Borgo d’Anaunia this past winter, Graziadei said. When CoinDesk visited in February, still in the dead of winter, the landscape framing the valley was mostly free of snow, except for a dangerous layer of thin ice on the road that led down to the facility.

When production is low, running and maintaining a hydropower plant becomes an expensive burden.

“If there is no snow that increases water levels in the river, electricity production is low, and during these months in previous years, we would shut down the facility for maintenance,” Graziadei said.

The state incentives, which included purchasing the power produced by the facility at 0.20 euros (around $0.22) instead of at the standard price of around $0.06, had expired a few years ago.

But when CoinDesk visited, despite the relatively dry conditions, the plant was still running: The small amount of energy being produced was used to run a few of the bitcoin mining machines.

“In periods like this winter when there has been little precipitation, and the amount of water the river brings is very low, this new technology is allowing us to maximize production and therefore give higher value to our facility,” Graziadei said in Italian, adding, “Even if the water levels are low, [mining] allows us to keep the facility in production.”

Indeed, Graziadei’s main motivation for setting up a data center at the municipal hydropower plant was economic. The municipality doesn’t actually mine or trade bitcoin. Alps Blockchain, the Italian tech company that set up the mining farm at Alta Novella and carries out maintenance, simply purchases the computing power produced by the facility’s mining farm for at least 35% more than what the government pays for its energy. Alps Blockchain sells the computing power purchased from the facility to bitcoin mining pools around the world.

Graziadei, who dabbles in crypto trading himself, said it wasn’t that hard to convince the city council and his constituents to set up the data center: In the absence of the government’s incentives, they had to find a way to cover maintenance costs of the facility and turn it into a sustainable revenue source for the municipality.

“Income from [the Alta Novella power plant] is used for the maintenance of the facility, and for the municipality’s public work in service of the community,” Graziadei said.

Alta Novella is one of 18 hydropower plants in northern Italy that now house a mining farm set up by Alps Blockchain. The company aims to double that number by the end of the year.

Alps Blockchain, the Italian startup behind the slew of hydropower plants that are contributing to the Bitcoin network, was founded by two 23-year-olds from Trento, a northern Italian city dubbed “Bitcoin Valley” because of its early interest in cryptocurrencies.

Co-founders Francesca Failoni and Francesco Buffa met while working as event planners a few years ago. They became interested in blockchain thanks in part to its influence around them.

Failoni, in a clean-cut pantsuit, is commanding in a man’s world of energy and tech, while Buffa, in his black turtleneck and glasses, leaves little doubt in your mind about who he aspires to be. When CoinDesk visited in February, the young entrepreneurs were moving their team into an expansive office space in Trento.

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Failoni, the chief financial officer at Alps Blockchain, said they wanted to participate and build in the blockchain world, but mining bitcoin themselves proved to be a challenge because of high energy prices.

Mining bitcoin at home in Italy means paying at least $0.22 per kilowatt hour. By comparison, household energy costs around $0.138 per kilowatt hour on average in the U.S.

“The price of the energy you buy from the grid is higher than the rest of the world,” Failoni said. “But we understood that renewable energy producers sell energy at a far lower price than what we buy from the grid.”

The duo began studying the mining sector and discovered that there was a shift toward the use of renewable energy for powering energy-intensive crypto networks like the proof-of-work verification system used for Bitcoin. They also found that some hydropower producers in northern Italy were struggling to keep their plants profitable once government incentives expired.

“We realized that they can self-consume the energy they are producing … That can be an alternative to the state incentives, that is, using some part of the energy produced to create computing power,” Failoni said.

According to Buffa, who is Alps Blockchain’s CEO, it wasn’t easy to educate hydropower producers who were unfamiliar with crypto, about how mining worked.

“But once they understood, the hydro sector is small, so word of mouth helped. The second problem was finding money to buy machines and push forward the business,” Buffa said, adding that talking to banks and convincing investors about the merits of blockchain technology was a challenge.

Although the hydropower plant owners make the investment in setting up a farm, Alps Blockchain handles everything from purchasing mining equipment to setting the machines up and maintaining them, as well as helping each facility with tax reporting.

Failoni said his company’s hydropower mining farms are custom-made based on their production capabilities, their size and the owner’s willingness to invest. For instance, Alps Blockchain set up a special payment plan for the small farm at Alta Novella: To shield the municipality from the volatility in the crypto markets, the company purchases a portion of the computing power produced at the facility at a fixed rate.

During the 2021 crypto bull market, Buffa said the Alps Blockchain hydropower plants made up to 400% more than usual. Alps Blockchain’s own revenue rose 18 times from 2020 to 2021.

“This allowed Alps Blockchain and [the hydropower plants] to develop their business. Having margins and making more money, they bought more computers, they refurbished the plants and they created more computing power centers,” Buffa said.

Alps Blockchain mining farms are small operations compared with larger mining facilities in the U.S. and European countries like Sweden that host thousands of mining rigs. Alps Blockchain’s hydropower plants house between 20 and 600 ASIC (s19 pro or s19j) mining rigs generating between 2,000 and 60,000 terahashes per second.

In February, CoinDesk also visited one of the company’s other facilities in the Veneto region –

a larger hydropower plant (also a century old) in the municipality of Valstagna that has 300 machines and that is in the process of adding 150 more.

The Valstagna hydropower plant is one facility belonging to a large local energy company. According to Giacomo Magoni, who manages the mining project at the power plant, the plant has been self-consuming 20-25% of its total production to generate computing power since July 2020. During CoinDesk’s visit, only a 10th of the 10 megawatt facility’s production was being self-consumed.

“We decided to take this road in generating computing power to diversify our business and to become a forward-looking company,” Magoni said in Italian.

The energy company’s main goal is to provide as much clean energy to the national grid as possible, Magoni said, adding that profits from its mining operation are being invested in the company’s expansion into multiple renewable energy sectors including hydro and wind power.

In November, Swedish financial and environmental regulators published an open letter calling for a ban on crypto mining in the EU over energy concerns.

“Sweden needs the renewable energy targeted by crypto-asset producers for the climate transition of our essential services, and increased use by miners threatens our ability to meet the Paris Agreement,” the letter said.

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Since then, a growing number of politicians in the EU have been fiercely campaigning for laws directed at limiting the use of energy-intensive cryptocurrencies in the bloc. The EU crypto-energy debate reached its most recent climax earlier this month when a committee vote in the European Parliament narrowly defeated a proposed provision looking to outlaw cryptocurrencies that cannot switch from the proof-of-work consensus mechanism into more environmentally friendly methods such as proof-of-stake.

Bitcoin, powered by proof-of-work, would have effectively been banned in the EU under the measure.

“We narrowly lost the vote, but the debate on this continues. Clear ecological criteria will come sooner or later, and then cryptocurrencies that optimize their energy consumption will prevail. Others will disappear,” EU parliamentarian Rasmus Andresen, who supported the provision that would require cryptocurrencies to meet climate standards in the EU, said on Twitter.

It is unclear if Italian hydropower producers that are self-consuming portions of their production to power the bitcoin network would appease the concerns of lawmakers and regulators in the EU.

For instance, Valstagna’s Mangoni said that, to some extent, the volatility of energy prices and the profitability of mining dictate where the energy produced at the plant goes.

“We constantly monitor the fluctuation of these two values, and we decide whether to put the energy in the grid or take advantage of generating computing power,” Mangoni said.

On the other hand, Failoni argues that without the mining farms, Valstagna wouldn’t be able to invest in expanding its renewable energy production, while Alta Novella would have been shut down altogether this winter, unable to cover costs.

Failoni says the renewable energy sector in Italy and the crypto economy both stand to benefit from robust and clear regulations that target efficiency levels of mining machines instead of specific consensus mechanisms.

“One thing that makes this kind of activity very energy-consuming is that … the hardware used is not efficient. If they can make some regulations about using only efficient miners, using only renewable energy sources, this kind of sector would change for sure,” Failoni said.

Graziadei, the mayor, says that he has no plans to expand the computing center at the Alta Novella power plant and that it’s perfectly calibrated to the needs of the plant – just enough to keep it running and well-maintained. He urges regulators to understand the technology.

“I read some proposals, but they were never very well argued,” Graziadei said.”I advise them to understand the functioning of the tech.”

When asked what would happen to the energy that is not consumed by the 300 mining rigs at Valstagna, Mangoni said all of it would go to the national grid.

“[The grid] always buys it because in Italy, we consume more than we produce in all the hours of the day,” Mangoni said.

“Optical proof-of-work” would improve geographic distribution of hashrate and quell fears of climate-related pushback, proponents argue.

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