What are the limits of growth for North America's pellet industry?

By Kolby Hoagland | December 06, 2013

In an upcoming feature articles in the Q4 issue of Pellet Mill Magazine, “Blazing New Trails in Pellet Project Development” by Tim Portz, the substantial increase in production capacities of plants that are under development and actively under construction has diverged dramatically from the average production capacities of existing plants in the North America. Based on industry data that Biomass Magazine tracks, the average production capacity of the fourteen plants currently under construction is nearly 6X greater than the average size of existing plant across North America. The drastic upswing in plant capacities has been caused by the strong demand from Europe and the ever increasing domestic heat market. The industry is undoubtedly going through a period of rapid growth that is changing the nature of how plants are developed, built, and operated. The 6X increase in size is posing difficulties and new challenges to developers and builders alike. This week’s DataPoints looks at the nature of growth in the energy sector and potential limits for the size of a single plant in the pellet industry.

History has shown that energy production systems have real limits of the size for a single plant. While energy developers attempt to maximize economies of scale for production, the limits of growth are often reached only by reaching them through the development process. Theoretical maximum of an energy product does not take into account the externalities that ultimately limit the growth of the energy product. A good example of an industry finding this limit and experiencing significant growth in their market is the wind industry.

While the largest wind turbines currently being built are in the 5 to 10 MW range, the wind industry has expanded 13X over the last 10 years primarily with turbines roughly 2 MW in size. Vestas, GE Energy, Gamesa and other turbine makers had 60,007 MW of capacity in the U.S. in 2012 with an average turbine size of 1.94 MW. Turbines sizes above 2 MW dramatically increases the cost associated with their fabrication, installation, and maintenance. The larger turbines, which have had a long development time, are not widely being pursued for large onshore development because the larger units increase risk to a point that developers back away. The innovative design strategies, stronger materials needed in fabrication, and logistical nightmare of wind instillations of turbine in the 5 to 10 MW range increases capital cost (CAPEX) and ultimately the cost of electricity (LCOE) for a project.  While the larger turbines have found a home in off shore installations, the on shore wind industry found its sweet spot in the 2 MW range based on the numerous design constraints, externalities, and general growing pains encountered throughout the industry’s expansion to 60,000 MW last year.

The pellet industry is distinctly different from the wind industry in many ways except for in the fact that they both have limits to economically efficient size of an asset. The 6X expansion in the average size of a new pellet plant not only indicate an expansion of the industry, but also changes boundaries and strategies pursued to bring a plant from development to commercially operable. As with any energy industry that experiences this type of expansion, growing pains will occur. Developers and investors will need to clearly distinguish between the growing pains of an advancing industry and the upper limits of the economic sweet spot for the size of a pellet plant.

The harvest parameters of a plant’s wood basket and the neighboring wood industries will set the theoretical maximum for the size of pellet plants across North America, but there is much to be learned from the fourteen companies that are building the new generation of pellet plants to meet export demand from Europe. The road block and externalities that the pellet industry is experiencing will create standards and norms for the further development of North America’s pellet industry for decades to come.