At the Confluence of Forest Health and Renewable Energy

As the pine beetle epidemic ravages Colorado’s stands of lodgepole pine, Mark Mathis and Confluence Energy stand ready to help clean up the devastation.
By Tim Portz | March 22, 2014

Recognizing that something had to be done with the millions of acres of dead and dying lodgepole pine trees in the mountains of Colorado, Confluence Energy LLC founder Mark Mathis started acquiring capital to build a pellet mill. Six years later, Confluence Energy’s interdependence with this unique feedstock continues. Mathis is now working to diversify the company’s product offering, maintain a stewardship contract with the U.S. Forest Service and fully integrate the operations of a recent plant acquisition, while making sure production stays tightly correlated with difficult-to-project regional demand.

How did you get your start in pellet production?

We got into production in 2008. At the time, there were a lot of political conversations going on about global warming, climate change and energy independence. Oil was at $147 a barrel and we had a pellet shortage in the U.S. I couldn’t buy pellets for my woodstove back in 2007 and 2008. So we did some metrics on utilizing beetle kill material as a viable, whole tree wood pellet input. It penciled out and so we started down the road to capitalizing the facility and finding a location.

How did you decide upon Kremmling, Colo., as a location for your facility?

We all understand that the pellet business, by nature, is relative to the feedstock. It made geographic sense. We looked at the progression of the disease and Kremmling was at the epicenter. There also was a desire to locate in a rural area. The metrics came together. The feedstock was accessible and there was also a desire by the state and local community to have a renewable energy component as part of their economic picture. It just made a lot of sense then, and it still does now. It was a good decision.

In 2013, Confluence was awarded a 10-year stewardship contract to remove and utilize stands of beetle-killed trees. What percentage of Confluence’s inbound feedstock comes from beetle kill stands?

It’s probably about 80 percent. We get some white fir and some other indigenous species, mostly conifer. For all intents and purposes, though, we live and breathe on dead and dying lodgepole pine.

Does pelletizing these beetle-affected feedstocks offer any particular production challenges?

Yes and no. The benefit is that when you are dealing with a single species you can enjoy some of what I call the Betty Crocker cake mix approach. Let’s say you are in Wisconsin, and you are dealing with deciduous and coniferous inputs. You are constantly working on the mixing ratio to produce a consistent pellet. Since we deal mostly with conifers, it takes a little bit out of the recipe. It’s more of an add water, stir and bake mentality. But there are challenges in a whole tree environment for size reduction that you don’t experience if you are dealing with sawmill residuals. It’s not anything that is insurmountable, it just has its own uniqueness.

Is there competition for those feedstocks from other forest products industries?

I think that is probably one of the biggest things out here. When we came into the market in 2008, we were the sole users of the material. There is this connotation that the material is free and it isn’t, but I will call it affordable feedstock. Since that time we’ve had three or four sawmills come into the region to make studs and one-by-fours from the material. We now have four mills competing for the same acreage that served just us four years ago.With 80 percent of the ground owned by the federal government, we live and breathe off that federal land. With the federal government being distressed and not funding things the way some of us think it should, we don’t see that improving in the future.

Can you talk about the importance of the coproducts Confluence offers to your operation and your business?

Gross margins aren’t very good in the pellet business and you are only generating cash flow about five months out of the year. You’ve got to fund your company for the other seven months and that is always a challenge. It’s hard to be consistent operationally when you shut down and start up as part of your normal operations. As a result, any kind of diversification with pet bedding or other coproducts helps take the seasonality out of the business. Certainly pellets are a high-volume commodity business, but these coproducts compete in more of a niche or boutique market that can potentially deliver better margins.

How is the market for pellets as a home heating option in the Mountain West? Have recent higher propane prices resulted in increased demand?

The biggest competitor to pellets is propane, natural gas or cordwood. We had some record high propane prices driven by seasonality and weather conditions this year. We saw a small increase in natural gas prices, which, in my opinion, wasn’t the biggest driver, but we did see shortages in propane and very high prices, which drive people in rural areas to pellets. Some pellet operators in the near Mountain West built insufficient inventories due to fiber access or plant break downs. Thus, retailers who earlier in the year had decided not to go with us called us back looking for pellets. That was a lot of volume and we were able to meet some of that demand. Most of our retailers exceeded their allocations. So we were put in a tough spot because we had our production plans and had secured X amount of fiber. Then with this surge of demand, we just didn’t have enough capacity to meet all of it, even though we are the largest producer in the region. I think it’s fair to say there were some needs that went unfilled.

Are there opportunities in the area to convert larger commercial or light industrial facilities to pellet-derived heat?

We have three or four facilities like that that we serve right now. You can only focus on so many things and they are a fraction of our gross revenues. Until we get higher natural gas prices or some sort of federal or state policy driver, we don’t see institutions or other facilities moving to a solid fuel. If there isn’t a regulatory driver, or a deep economic reason for private industry to go in the direction of renewables, they probably aren’t going to, and I believe you are fighting an uphill battle. Don’t get me wrong, it’s a good fight to fight, but there are easier battles out there to win.

Last year you acquired Rocky Mountain pellets, a producer in northwestern Colorado. How has the integration of that facility into Confluence Energy gone?

It’s gone better than expected. We had done some forecasting and it was a good acquisition for us. They were our No.1 competitor. We are potentially looking at doing more of those types of acquisitions.

What are your priorities for Confluence Energy in the year ahead?

I believe that pellets, in their own right, are a regional application. We are focusing on being that low-cost, high-quality provider and integrating some of the benefits of now having two plants. Both plants were doing some things right and wrong, so we’ve got some work there. Finally, our stewardship project is a priority. We have a 10-year contract for our wood fiber at a reasonable rate, and we want to make sure we execute on that.