Building Demand Through Community Energy

Oregon promotes wood energy clusters, creating demand to support forest restoration.
By Sue Retka Schill | June 29, 2014

Today, Bruce Daucsavage has more wood fiber than he knows what to do with. But, it was only a couple of years ago that after running out of timber supply from the nearby national forest for the third time in the past decade, Daucsavage, president of  Malheur Lumber Co., decided to close the last sawmill in Grant County located in John Day, Ore. “Those were dark days,” he recalls. A week after his announcement, he was called into Sen. Ron Wyden’s office where 50 people wanted to hear what it would take to keep the mill going. There were state and federal officials, foresters, environmentalists.

That was 2012. The closing of Malheur Lumber threatened to halt progress in a collaborative effort begun in 2006 to bring together often-at-odds groups with very different ideas on how to manage the Malheur National Forest. After several devastating forest fires, foresters and environmental groups were beginning to agree that forests need to be managed differently to reduce fire hazards and foster healthier forests. The closing of several mills during the recession meant local and state governments were interested in saving jobs and stimulating economic development. For Malheur Lumber, staying in business meant stabilizing wood supply so it could continue to manufacture the pine boards needed by its long-time customers in the window manufacturing business.

Within a year, contracts on a 10-year stewardship plan for forest restoration were signed, and now, a year and a half into the contract, Daucsavage is looking for ways to utilize the abundant fiber supply. “Our forest stewardship contract, a $69 million 10-year agreement, is being looked at as a model of forest management nationally,” Daucsavage says. The concept is controversial, he adds. Only about 30 percent of industry nationwide supports the concept, and local governments are wary. While county governments get a percentage of timber sales in the old system, under the relatively new stewardship contracts they lose that. For Grant County, though, saving jobs and seeing its unemployment rate cut in half counterbalanced any loss in timber shares, he adds.

Ensuring a fiber supply is only one part of the challenge. Forest restoration means finding markets for large quantities of wood not suited for boards, but pellets weren’t necessarily the obvious solution. In the Northwest, pellet producers rely solely upon sawmill residuals for feedstock and Malheur Lumber’s pellet mill was the first designed to handle small-diameter wood. Integrated into the sawmill, the pellet mill used the chipping and drying systems from the main plant. Debarking wasn’t an issue, Daucsavage explains, as the sawmill’s equipment can handle logs down to 3 to 6 inches in diameter. Logs under 6 inches, though, aren’t suitable for their main product—dried pine boards used by window manufacturers.

The pellet mill was built before the stewardship contract was in place, when the stability of fiber supplies was still uncertain. Bear Mountain Forest Products helped with the project design and the initial marketing efforts. “We took baby steps,” Daucsavage explains. The $6.2 million pellet mill started out at a 12,000-tons-per-year production level. Now, with plentiful fiber, Daucsavage says the company is investing $800,000 to expand drying capacity and boost the annual pellet production to 18,000 ton. At the same time, the company is planning a $3 million to $4 million investment for a 40 percent expansion of the sawmill. Once that’s in place, and more is learned about pellet marketing, the company will evaluate further pellet expansion. 

Andrew Haden was the project manager for the pellet mill project, which at the start was handled by a spinoff of Bear Mountain Forest Products, A3 Energy Partners. He has since founded Wisewood Inc. to continue his work on wood energy clusters. The pellet mill project served as a catalyst for the installation of four pellet energy projects in the area that are now serving as a model for a regional cluster approach, he says.

Built with the help of U.S. Forest Service funding alongside state funding, Grant County Regional Airport became Malheur Pellet Mill’s first customer to heat a 14,000-square-foot building with bulk pellets. “At a cost of $325,000, the biomass system was not an economic slam dunk for the new, efficient building,” Haden says. “At an annual cost of biomass of just over $5,000 and a calculated heating savings of about $7,500 per year over fossil fuels, the simple payback is almost 30 years. However, the airport construction was funded by state and federal grants, some of which were specific to biomass.”

The second project made economic sense even without grants. Blue Mountain Hospital utilized oil-fired heating and hot water systems in its 50,000-square-foot facility. The project landed a grant from the American Recovery and Reinvestment Act for the pellet boiler conversion, which brought the simple payback on the $450,000 investment to about five years, Haden reports.

Two area schools—Grant Union Junior/Senior High School and Prairie City Schools—also developed economically sound projects. The 12,000-square-foot Grant Union is seeing a savings of $50,000 per year for heating, putting the simple payback for the project at about 10 years. Nearby Prairie City Schools replaced its five aging fossil fuel boilers, only three of which still functioned to heat its three-building campus, with a single pellet boiler to provide steam and hot water. The school experienced a $65,000 reduction in heating costs in the first year of operation, putting its simple payback at about 10 years as well.

Funding for the school biomass projects was done with interest-free loans through Qualified Zone Academy Bonds. The bank that administers the loan receives a tax credit in lieu of interest, Haden explains, and Malheur Lumber provided the required 10 percent local match by offering a long-term discount on fair market price for pellets that amounted to a $50,000 credit over five years. 

Getting bulk clients has helped Malheur Pellets get established.  About 30 percent of its pellet production is going to nine facilities, Daucsavage reports. In addition, pellets are sold to retailers as far east as Boise, Idaho and south to Lake Tahoe, Nev., although not as far west, due to competition from well-established Oregon pellet producers. The company is also exploring alternative markets for pellets outside of thermal heating applications. He adds that he would love to expand into exports to Southeast Asia, “but we need to be larger. I need to talk to some of the other producers of pellets and see if we can get a consortium together to meet the needs.” A cooperative effort would help build the needed volume, as well as aid in getting a port facility established. “We could never do it on our own,” he says.   

As Daucsavage considers the future for Malheur Pellets, Haden is on to his next project. Building on the cluster approach for installing multiple pellet boilers in John Day, the team at Wisewood is developing a project for Burns, Ore., on the south edge side of the Malheur forest. Haden is exploring a different financing approach. Instead of each individual school or institution owning its own boiler, Wisewood is in the process of assembling multiple projects into a single financing package. The goal is to access the Federal New Markets Tax Credit program, available to economically distressed census tracts. “Due to the complexity of the NMTC program, there is a natural threshold in terms of scale in order to overcome relatively large transaction costs associated with this method of financing,” he explains. Wisewood is looking at adapting the district heat concept, creating a new entity to install, maintain and operate multiple boilers, with some heating multiple buildings. Individual energy users will sign a long-term heat contract, paying for the system and its upkeep over a period of years. “This arrangement takes away the often burdensome upfront cost barrier from the customer,” Haden says. The biomass systems being designed in Burns will utilize local hog fuel rather than pellets, he adds. “However, the approach to financing the cluster of projects could be easily applied to pellet boiler installations.”

The projects around Malheur National Forest are prime examples of several wood energy cluster projects being developed in Oregon to promote forest restoration and economic development. New partnerships and feasibility studies are underway around Bend and in Wallowa County in the northeast, says Matt Krumenauer, with Oregon’s Department of Energy. His office and the U.S. Forest Service work together to support the wood energy clusters. “In 2009, we had three facilities using biomass, now we have 19. People are able to see these facilities now, and it’s really making a difference.”

Author: Susanne Retka Schill
Managing Editor, Pellet Mill Magazine