UAE: Rising heat in Bitcoin mining region a big problem

Author: Jaran Mellerud / Erick Vera; Compiler: Wu Shuo

The United Arab Emirates (UAE), with its political stability, friendly business environment, strong capital market, and abundant energy resources, is becoming the preferred destination for Bitcoin miners in the Middle East.

In this article, we will explain the peculiarities of Bitcoin mining in the UAE and analyze its possible future directions.

Leading Bitcoin mining methods in the Middle East

The United Arab Emirates is a Middle Eastern country adjacent to the Persian Gulf, consisting of seven emirates, the most famous of which are Abu Dhabi and Dubai.

The UAE is a business-friendly and entrepreneurial country where people are curious about new technologies. Thanks to this spirit of innovation, as well as the electricity subsidy policy enjoyed by certain industries, home mining and other small-scale amateur mining facilities have been widely present in the country for many years.

Over the past year and a half, however, two superprojects have emerged in the UAE, propelled by homegrown sovereign wealth funds, propelling it onto the global stage as a serious and ambitious bitcoin mining player.

At the end of 2021, Zero Two (then called FS Innovation), the digital asset arm of Abu Dhabi's sovereign wealth fund, partnered with local bitcoin mining company Phoenix Technology to build a 650-megawatt water-cooled mining farm in Abu Dhabi. With an overall investment of $2 billion, the project has become the largest single bitcoin mining farm to date.

In February 2023, Zero Two entered into a second Bitcoin mining partnership with US public miner Marathon. Under the partnership, Zero Two and Marathon will construct and operate two immersion cooling facilities totaling 250 MW in Abu Dhabi, with Zero Two having 200 MW and Marathon 50 MW.

All in all, the UAE is becoming a leader in Bitcoin mining in the Middle East due to its business-friendly environment, innovative spirit, and abundant energy resources.

UAE map

Consequently, all major projects in the UAE are led by the Abu Dhabi sovereign wealth fund in partnership with established industry players. Additionally, almost all mining activity in the country takes place in Abu Dhabi, the largest and most energy-rich of the seven emirates.

Between the mentioned government quasi-official projects and numerous small-scale amateur deployments, the current Bitcoin mining capacity in the UAE is probably around 400 MW. That capacity could exceed 600 MW by the end of the year as the government's parastatal program expands.

With an assumed average energy efficiency of 30 J/TH, Bitcoin miners in the UAE should be able to generate about 13 EH/s of computing power, which is equivalent to 3.7% of Bitcoin's total computing power. This share of computing power makes the UAE the leading bitcoin mining country in the Middle East, surpassing its neighbors Oman, Kuwait, Saudi Arabia, Bahrain and Qatar. While these energy-rich countries may have huge Bitcoin mining potential, the innovative UAE is leading the way.

UAE continues to expand its power supply capacity

As a member of the Organization of the Petroleum Exporting Countries (OPEC) and the seventh largest oil producer in the world, the UAE plays an important role in the global energy market.

Like most oil and gas-rich countries, the UAE exports most of its oil while using natural gas for internal power generation. Historically, almost all electricity in the country has been generated from natural gas generation.

Nuclear Energy Estimates from the Ministry of Energy and Infrastructure

As part of its push to develop alternative sources of electricity, the UAE recently opened the Barakah nuclear power plant, the largest in the Arab world. The three operational reactors have a combined capacity of 4 GW and are expected to generate 19% of the country's electricity. The final reactor will be commissioned later this year, bringing the total capacity to 5.4 GW.

Not only does this expansion of nuclear power provide Bitcoin miners with an ample supply of cheap power generation, it also increases the need for demand flexibility, since nuclear power generation output cannot be easily adjusted to demand. As Jaran Mehlerud in Bitcoin Magazine explains, **Bitcoin miners are the only flexible consumers of electricity and thus can provide much-needed demand flexibility to the inflexible nuclear power grid. **

In addition, the new nuclear power plant is located in the extreme south of the UAE, hundreds of kilometers away from population centers such as Abu Dhabi and Dubai. Given these distances, Bitcoin miners can minimize power losses by establishing operations directly at the power station, similar to Talen Energy in the US. **However, given the security sensitivity of the nuclear project and the early stages of bitcoin mining in the country, nuclear-based bitcoin mining may still be a utopia. **As Minestack’s Reza Dabilae explained, setting up a dedicated Bitcoin mining area less than 100 kilometers from the power station is a more realistic solution.

Dubai Electricity and Water Authority (DEWA): Mohammed bin Rashid Al Maktoum Solar Park

In addition to nuclear power projects, the UAE plans to undertake large-scale solar development in its vast sun desert. The country's largest solar project, currently operating at 1.6 gigawatts (GW), will expand to 5 GW by 2030, making it one of the largest in the world. Currently, solar power accounts for around 3% of the UAE's electricity demand, but this share is likely to grow significantly in the coming years.

A solar project of this magnitude undoubtedly generates large amounts of excess electricity on a regular basis. As location-agnostic and interruptible consumers of electricity, Bitcoin miners can build operations directly on these solar farms, harnessing and monetizing electricity that would otherwise be wasted. We’ve seen many similar projects in the US, forming a synergy between solar farms and bitcoin miners.

Overall, the UAE continues to expand its electricity supply at a pace that North American and European consumers can only dream of. By continuing to develop nuclear and solar power, the UAE will have enough excess electricity to meet the needs of its fast-growing bitcoin mining industry.

Electricity demand fluctuates wildly between seasons

A thriving economy in the desert requires two key components that are often taken for granted in other parts of the world: fresh water and cooling. The production of these components accounts for 70% of the UAE's energy consumption. As we will explain next, **a high proportion of energy consumption associated with freshwater production and cooling has important implications for electricity supply and demand patterns. **

Let's analyze the requirements side first. **Temperatures in the UAE vary greatly between the hottest and coolest months, resulting in dramatic seasonal variations in the electricity consumption of the country's hundreds of thousands of air-conditioning units. Because of this consumption pattern, baseload demand in winter is about half of peak summer demand. **

This seasonal variation naturally puts stress on the power system. To make the situation even more challenging, power plants in the UAE are unable to reduce capacity during the winter to accommodate lower demand. Now let's explain why this is the case.

With limited freshwater resources, the UAE uses combined power generation and desalination plants to desalinate seawater. Due to the importance of providing fresh water, these plants must maintain a relatively constant capacity throughout the year, even as electricity demand fluctuates wildly between the hottest and coolest months. This results in a huge waste of electricity.

In 2021, the UAE generated 149 terawatt-hours (TWh) of electricity while only consuming 129 TWh, corresponding to 20 TWh of excess electricity wasted. Assuming a replacement cost of $0.03 per kilowatt-hour, this wasted electricity costs utilities approximately $600 million in lost revenue annually.

Bitcoin mining can solve this problem. As Marathon CEO Fred Thiel explained on The Mining Pod, bitcoin miners can augment utility companies’ revenues by monetizing previously wasted electricity. Utilities can then invest these increased revenues in further improvements to the power system, or in lower electricity prices for residential, commercial or industrial consumers.

Reza Dabilae explained this in a similar way, but he emphasized the demand flexibility that Bitcoin mining provides to the electricity system. There are currently no base load customers in the UAE with steady year-round demand. **By adding a stable and flexible bitcoin mining component to the grid, the UAE's electricity system can reduce the proportion of seasonal demand, making the system more efficient and resilient. **

Electricity price is related to the industry

The UAE operates an electricity market with a government-controlled utility structure. Electricity prices set by utilities vary significantly depending on the industry of the final consumer.

For example, the government provides a subsidy of US$0.012 per kWh of electricity for agricultural consumers. This subsidy has inadvertently opened up opportunities for operators to set up small bitcoin mining sites on agricultural land, benefiting from subsidized electricity prices. Dozens of such small digs have sprung up in rural areas.

However, the long-term strategy of exploiting government subsidies is not sustainable, and as Kazakhstan and Kyrgyzstan have demonstrated, governments are unwilling to tolerate such exploitation.

Own estimates for government projects

**A unique feature of the UAE's electricity system is that citizens of the country pay much lower electricity bills than expats. **Many UAE citizens have installed small bitcoin mining farms in their backyards and basements to take advantage of their heavily subsidized electricity rates of $0.02 per kWh.

We're seeing the same everywhere - **electricity subsidies attract bitcoin miners. **

While UAE nationals and farmers enjoy cheap electricity, industrial consumers pay relatively high electricity prices ranging from $0.073 to $0.099 per kWh. These electricity prices are prohibitively high for Bitcoin mining, which begs the question: How much do semi-government mining projects pay for electricity?

Although we don't have exact sources, we believe that semi-government bitcoin mining projects pay electricity bills in the range of $0.035 to $0.045 per kWh. **This price is fair considering the cost of generating electricity in the UAE, and we assume that if Marathon pays more than $0.045 per kWh for electricity, it will not enter the UAE.

Under the current electricity tariff regime, there are only three ways to operate as a bitcoin miner in the UAE. First, you can take advantage of subsidies to run small bitcoin mining farms on agricultural land, but this is neither a scalable nor sustainable strategy. Second, if you're a UAE national, you can install a small digging hut in your backyard - not very scalable either.

Therefore, to get reasonable electricity prices in the UAE in a scalable and sustainable way, Bitcoin miners partnering with government entities is the only way, as Marathon has done.

Access to capital in the UAE is excellent

The UAE is exceptionally rich due to its rich oil and gas resources. In addition, in recent years, Dubai and Abu Dhabi have developed into international business centers, attracting a large amount of foreign direct investment. These cities are full of wealthy sovereign wealth funds, government affiliates, family offices and other investors looking for a slice of the scarce bitcoin pie.

For maximum control over their investment, many investors want to mine Bitcoin themselves, ideally within the UAE. An example is the Zero Two project in Abu Dhabi.

During our stay in the country, we came across a number of companies offering mining farm services, such as Phoenix Store and Blockfarms, helping to meet the never-ending local investment demand for Bitcoin mining. It is worth noting that these companies do not offer hosting solutions within the UAE, but in countries such as Canada, the United States, Russia, and Paraguay. Currently, there are limited hosting options for smaller miners in the UAE, as large semi-government projects focus primarily on self-mining.

It needs to be remembered that one of the main reasons why ** the United States has rapidly developed into one of the most important bitcoin mining countries in the world is its strong capital market. Similar to the US, Bitcoin mining projects in the UAE will have superior access to capital, allowing them to raise funds more easily than projects in other mining hubs such as Russia and Paraguay. **

Political stability and friendly business environment

The UAE is an absolute monarchy divided into seven emirates, each headed by a local ruling family. Since its founding in 1971, the UAE has enjoyed unprecedented political stability. On this stable footing, the country followed a business-friendly approach that transformed the cities of Dubai and Abu Dhabi from small fishing villages in the 1970s to international business metropolises.

Downtown Dubai

The UAE is not resting on its laurels when it comes to diversifying its economy and building new industries. **The country is eager to develop the information technology industry and wants to have a significant data center infrastructure within the country. Bitcoin mining is known to be an excellent way to quickly build multifunctional power and data center infrastructure. **

**Also, the UAE is very open to the cryptocurrency industry. **For bitcoin miners, cryptocurrency friendliness may bring advantages in relationships with government agencies, banks, and other service providers. We particularly see this as an advantage given the recent tightening of restrictions on access to banking services for crypto companies and bitcoin miners in the US and Canada.

** One of the reasons why the UAE has attracted a lot of FDI is its tax advantages. **Certain export-oriented companies, including bitcoin miners, can register in one of the country's more than 30 free trade zones and avoid paying corporate taxes, VAT and import duties. This is a huge advantage in a globally competitive industry like Bitcoin mining.

The Abu Dhabi Global Market (ADGM) is one such free zone where Marathon and Zero Two have established their Abu Dhabi-based bitcoin mining entity. The free trade zone is particularly focused on attracting digital asset businesses.

**However, it is important to note that the UAE is an absolute monarchy and the government tends to be heavily involved in areas it deems important. **Given that Bitcoin mining is closely related to the energy sector, the UAE government may seek to exert control over the industry. We've seen this happening.

**Currently, there are no specific regulations for Bitcoin mining in the UAE. **As a result, all miners, except semi-government projects, currently operate in a legal gray area. The industry is likely to be regulated soon, with the government creating a licensing scheme where private companies can apply for a mining license and must operate in a specific manner approved by the government. This is similar to how the country regulates the oil and gas industry.

Globally, mining conditions in the UAE are dire

Although the UAE has many advantages in terms of political stability, business friendliness, strong capital market and abundant energy resources, it has the most unfriendly mining environment in the world. The harsh combination of hot weather, high humidity, salty air, dust and regular sandstorms has made bitcoin mining operations in the country challenging.

Heat is the biggest problem. As a country located in the desert, the UAE's average daily temperature ranges from 24 degrees Celsius in January to 42 degrees Celsius in August. During summer, it is not uncommon for temperatures to exceed 50 degrees Celsius.

climate data

Compared to what the chart above shows, West Texas, the center of Bitcoin mining, has an average monthly temperature between 14°C and 35°C, which is noticeably cooler than the UAE. Interestingly, even in West Texas, miners regularly reduce digging activity during the summer months due to the hot weather.

During our visit to the UAE, we saw some facilities using air cooling with outside temperatures around 45°C. Operators use water curtains to cool the air entering the facility. As a result, the ambient temperature close to the rack remained at an acceptable 26°C. However, water is very expensive in the UAE and we doubted that such a water curtain would be equally effective in the hotter summer months when temperatures often exceed 50°C. We also questioned the impact on machine life of operating in such a high temperature environment.

**The heat is not the only climatic factor plaguing miners in the UAE, large amounts of dust and periodic sandstorms also pose considerable problems. **Dust filters are available for air-cooled facilities, but it is still not possible to completely prevent dust from entering the machine and prolonging its life.

Hydronic or immersion cooling can mitigate the effects of heat and dust, so they are considered the preferred cooling solution in this region. Compared to immersion cooling, hydronic cooling presents more challenges due to the lack of fresh water resources in the UAE and the applicability of desalinated water in a hydronic setting is currently being evaluated.

** In order to provide maximum benefit to the grid, large-scale excavation projects in the UAE need to ensure that they can control power consumption at all times. **Therefore, they must have sufficient cooling infrastructure to avoid emergency lowering of excavation activities during the high summer heat. Only immersion cooling currently offers this kind of reliability, which is certainly one of the reasons why Zero Two and Marathon chose to implement this solution in their new facility.

Immersion Cooling in UAE Source: FBOX

However, even with immersion cooling techniques, the cooling medium must be cooled. This is a challenging task when the outside temperature exceeds 50°C. As a result, facilities employing immersion cooling in the UAE will likely require the use of heat pumps or similar technology to cool the medium, which will add considerable cooling electricity consumption to that already consumed by the machines.

Operating a large bitcoin mining facility is still experimental in the UAE when it comes to cooling solutions. Despite the region's climatic conditions being among the harshest in the world, we have no doubt that operators will find an optimal solution that will allow them to continue operating during the hottest summer months. However, no matter how efficient their systems are, miners in the UAE will always face higher cooling costs compared to miners in cooler climate environments like Norway.

in conclusion

**The Middle East is rich in energy resources and is one of the most promising regions for Bitcoin mining. As the most open and business-friendly country in the region, the UAE is a natural leader in this regard. **

The UAE has a large electricity surplus, and that surplus will only increase as nuclear and solar power are integrated into the grid in the coming years. Bitcoin miners could provide significant benefits to the electricity system by monetizing previously wasted electricity and providing much-needed demand flexibility.

**Despite the huge potential for bitcoin mining in the country, the industry is still in its early stages and is not yet regulated. Currently, the only way to conduct Bitcoin mining in a scalable and legally sustainable manner is through partnerships with government entities. **This is how Marathon came into the country.

Marathon may be the first North American miner to enter the UAE, but it won't be the last. Geographic diversification is becoming an increasingly important consideration for North American bitcoin miners, and few places outside of North America and Europe offer such a high level of political stability and business as the UAE friendly environment. Growth in the country is likely to be driven by local semi-government players teaming up with established players like Marathon.

While operating in the UAE has many advantages, we cannot avoid its greatest challenge: harsh weather conditions. Bitcoin miners can address this challenge by using immersion cooling techniques and firmware.

Overall, the UAE will become an increasingly important bitcoin mining country in the coming years and provide a case study for other Middle Eastern countries to learn from.

A list of indicators of the UAE Bitcoin mining industry