Kevin’s Daily Digest for 6/23/16, Creative Destruction Edition

Schumpeter’s Gale blows on the house of coal, oil price debates, the end of nuclear energy in California nears, and BMW recycles i3 batteries for home use.

The Daily Digest, published Monday-Friday, focuses on the latest news and perspectives in renewables, storage and electric vehicles. For more follow me on Twitter @kkchristy. The Digest archive and the rest of my Medium content is here.

In Joseph Schumpeter’s 1942 economic treatise Capitalism, Socialism and Democracy, he characterized capitalism’s constant tearing down of the old and building up of the new as “the perennial gale of creative destruction.” The term has become part of our lexicon, and the phenomenon is generally accepted as a good thing.

Overall, anyway. While another economic aphorism tells us that “a rising tide lifts all boats,” in practice some boats will get swamped because their anchors are stuck onto the sea floor. Call it the destruction part of creative destruction.

I can think of no better example in today’s energy markets than the plight of the coal industry, which is in terminal and irreversible decline in the face of cheap natural gas, wind and solar. That decline is bringing with it many sad stories of pensioners, workers and communities left struggling in the wake of departing dollars as coal revenues plummet and former giants go bankrupt. Today’s article is a case in point: bankrupt Peabody Coal is defaulting on a monthly $1.2M tax payment to a Colorado town, leaving the town unable to fund vital services.

“It’s a huge hit. We definitely need help from the state,” South Routt School District superintendent Darci Mohr said. “This puts in jeopardy our ability to pay our bills and meet payroll. … It means we will not be able to continue business as usual. We will have to start looking at what those cuts are,” Mohr said. “And it is not just our schools struggling to pay bills. It is also our families. We have a lot of Peabody Energy retirees, and we have a lot of current employees who do not know what their future will be.”

It’s a sad story, and it’s repeated elsewhere. And like most industries facing capitalism’s relentless gale, there are those who try to stand up to the storm and preserve the existing way of things. For today’s coal industry it’s Donald Trump, who clearly has locked onto coal workers — angry, dislocated, non-college educated white males — as a natural constituency.

But he won’t be able to save coal, any more than others were able to save the steel industry of my youth, whose downfall due to competition from Asia and Europe devastated communities like Youngstown, Ohio, my father’s home town. From almost the time I was born until I became an adult, we would travel there every summer to visit family. In the early 70s steel was still strong, employment high, and the air foul with coal smoke and the stench of sulfur. All that changed through the decade and the one to follow. Now the air is clean, the rivers are no longer soiled and burning, and the town has never recovered. The largest employer is now the local state university.

Like the crash of the steel industry, coal’s sudden and painful dislocation tears at the heart strings because I remember how steel’s decline hurt my own family. But we do have to accept it as a reality of change, and certainly in the case of coal, change for the better. Coal is brutal on air, water, and the health of the workers who dig it from the ground and burn it for power. It’s a major contributor to the nightmarish Asian brown cloud.

The Asian Brown Cloud over China (Source: Wikipedia).

There is no good reason to prop up coal markets to stave off Shumpeter’s Gale. Our collective health and our planet’s climate is more important than preserving a way of life for coal workers. That said, we as a country should find ways to ease the process of dislocation, as we have through universal healthcare. We should again through more generous unemployment benefits, and even ultimately a guaranteed minimum income. While some bemoan what they feel is the inevitable moral hazard of giving people “something for nothing,” I tend to believe that making creative destruction less painful will make for more creativity and faster, less painful destruction.

Take the transportation sector in the New Economy: taxi drivers give way to Uber drivers, who will give way before too long to driverless cars. Just when you get used to gigging in the gig economy, your gig may be up. The cycle of change accelerates, and with it the pace of dislocation and new opportunities.

Coal workers will find no more comfort in these words than did my Youngstown relatives back in the late 70s and early 80s, when they received assurances that they would all become part of a new and better Service Economy, as knowledge workers laboring on IBM PCs instead of assembly lines.

But through all of the traumatic dislocations of the last few decades driven by globalization, the U.S. economy has in fact grown considerably and thrown off tremendous amounts of wealth. It’s time for our politicians to imagine and implement ways for the economy to continue to creatively destroy the old while easing the destructive impacts of change on the dislocated, which should certainly involve redirecting a portion of our wealth surplus back in the form of an improved social safety net.

Tweet of the Day.

Recovering oil prices are leading to increased supply among shale producers, with experts weighing in that at $50-$60/barrel, investors will open their wallets again (today’s price is just under $50).

It’s worth noting that not everyone believes that oil will stabilize at $50-$65/barrel. Morgan Stanley lays out the case for a return to $30 oil.

This is the right way to retire nuclear plants: PG&E has announced that at the end of Diablo Canyon’s NERC licensing period in 2024–2025, they will retire the plant and replace it with renewable generation. They acknowledge in the filing that it would be more expensive to relicense and operate the plant than to build new renewables.

BMW plans to take the battery packs out of used i3s and repackage them as home stationary battery systems. This makes sense. Properly engineered and managed, lithium ion battery packs can provide 10, even 15 years or more of service. Taking them out of cars, when degradation in the packs might start showing up as decreased range for drivers, and moving them into home environments where the sensitivity to duration probably will not be so touchy, is a smart secondary use. This will also improve the resale/terminal lease value of the cars themselves, since the packs will have ongoing value as stationary storage. Interested to see how the economics shake out with respect to resale values, pricing on the home battery systems, and the cost of a used i3 with a newly installed battery pack. Since the highly complex, maintenance-intensive internal combustion engines and transmissions of fossil fuel vehicles don’t exist in BEVs, I see no reason why resale values can’t and shouldn’t be higher for BEVs than for IC cars.

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