Blazing New Trails in Pellet Project Development
The North American pellet production complex is pivoting dramatically. While this is understood across the industry in general terms, a close examination of the plants and projects tracked by Pellet Mill Magazine reveals a radical departure in size and scope is emerging when existing pellet mills are compared to those under construction or in various stages of preconstruction development.
Of the 156 operating pellet mills in North America, only seven have production capacities that exceed 300,000 tons per year. The average production capacity of the remaining 149 is just under 60,000 tons per year. These smaller facilities are typically situated near existing forest products manufacturing facilities, converting sawmill residuals and logging waste streams into pellets that are sold largely in the domestic retail marketplace. The average production capacity of the 14 facilities currently identified as being under active construction is nearly 350,000 tons per year, or about six times the size of the average existing pellet mill. The funnel of pellet mills in various stages of preconstruction project development tells a similar story. Of the 27 pellet facilities in this category, the average capacity is nearly 300,000 tons per year and half of these planned facilities have capacities exceeding 350,000 tons.
While there are pellet facilities being planned and built with output capacities that align with the industry’s current averages, the vast majority of the 41 facilities either under construction or in development are being designed to produce pellets at export volumes.
There is widespread agreement in the pellet industry that the industry is in the early stages of this production platform transition. “The pellet industry at high production capacities is just now beginning to develop,” says Malcolm Swanson, vice president of engineering at Astec Inc.
As the transition unfolds, differences are emerging in nearly every facet of pellet production, from the size and scope of the wood basket that feeds a facility to the off-take agreements that are crucial to getting a facility financed.
These differences between conventionally scaled pellet facilities and the emerging export-scale facilities can be spotted first in how the woodyards that feed the plants are operated. “At the smaller volumes, you’ll see a lot of manual feeding and blending systems for your raw products. At a lot of your chip yards where you have multiple species represented, you’ll just use a standard bucket loader to feed your process,” says Justin Price, principal at Evergreen Engineering Inc. “When you start scaling these facilities up, you get to these larger, more automated stacking systems and you have to start thinking of your capital costs and how you want to operate the facility. You can’t just put six guys out in the yard. You have to start looking at automation in blending and storage.”
This departure from more manual systems drives real cost into a project. “Woodyard equipment, including chipping, would run in the neighborhood of $15 million, although the size and complexity of the system could impact that number quite a bit in either direction,” Swanson reports.Ben Easterlin, senior vice president at Enova Energy Group, a clean energy company actively developing export scale facilities, echoes these assertions stating, “Your whole supply chain and logistics infrastructure is different. It plays a major part in your financing and day-to-day operations. Additionally, it’s a large component of your op-ex (operating expenses).”
Increased scale drives increased cost all the way through a pellet facility, even boosting the export-scale facilities into different regulatory categories than their smaller precursors. Operating export-scale plants recently discovered emissions were exceeding limits and not just coming from the drying infrastructure but, surprisingly, the dry hammermill and pelletizing lines. Volatile organic compounds (VOCs) are created and released as wood flour is heated and introduced into the pellet dies. “In the industry, the current best available control technologies are the RTOs and RCO units that are out there and available in the marketplace,” Price says. The regenerative thermal and catalytic oxidizers, (RTOs and RCOs) capture and destroy VOCs. “This is a prime example, as we scale up, of how we run into those types of risks.”
A New Financing Paradigm
As installed pellet production capacity migrates towards facilities that produce upwards of 500,000 tons per year, their associated construction costs climb to a point where outside investors and lenders must be secured to move a project forward.
Offering a rule of thumb for quickly estimating the equipment costs associated with plant construction, Astec’s Swanson notes, “equipment cost is about $1 million per ton per hour of pellet production capacity. This includes woodyard, chipping, production and load out. The average may be a little higher than that, now that backend VOC control has entered the equation and this number does not include site work or construction.”
Such costs are driving these new facilities out of the reach of the local lending community that historically has financed construction of smaller pellet mills. Additionally, with the exception of pellet mills being funded by the utilities they will ultimately supply, these export-scale facilities will not be supported by balance-sheet financing.
As a result, pellet project developers must also engage in extensive capital drives. Invariably, pellet project developers and their investors must make a decision about who ultimately will take on the risk associated with a project. Lenders and investors want guarantees that their investment is a sound one and the pressure for developers to adequately de-risk a project mounts.
An incredible amount of a project’s risk profile can be found in the construction and commissioning phases. Developers can choose between two paths to build and commission a production facility. They can act as their own general contractor and take on the risk themselves or they can engage a qualified engineering, procurement and construction company (EPC) and pay a premium for the EPC firm to carry the risk for them.
Explaining the differences between the two approaches, Price notes, “Obviously the lowest cost is moving in to a design, bid, build approach, but that requires the operators or owners to have enough credit or cash to make the purchases themselves.” Recognizing that the pool of interested parties capable of financing a pellet mill themselves is quite limited, he continues, “The investors and developers that realize the opportunity in the market and are looking at it, may or may not have enough cash to support that bid/build approach, so they are going to seek more financing and they are going to need more guarantees. Thereby, they will have to move to an EPC approach simply because of the ‘what-ifs.’”
Expanding on the crucial role that EPCs will play as this industry continues to deploy capital, Easterlin says, “The reason you would use an EPC is the financial communities are not used to financing this process. They want to see someone that can guarantee the actual delivery schedule and that the machines actually work when they are put together. It’s a production guarantee, in essence. They want some kind of financial credit behind that guarantee.”
EPC companies demand a premium for this type of guarantee, and developers and their investors must balance the overall cost of this method of risk abatement and questions of project equity with the costs associated with an EPC wrap. For Easterlin, the use of EPCs is all but assured as the industry moves forward. “There are some investors out there that will invest without an EPC contractor, but they are few and far between,” he says. “And they are not going to do it without taking majority ownership in the project.”
Clearly, pellet production is entering a new era. While the facilities producing pellets for local and regional sale continue to innovate and work to build markets, the vast majority of new investment in the space is being garnered by facilities being developed to capture long-term off-take agreements measured in the millions of tons over the life of the contract. Pellet production has become a high-stakes investment as the cost of construction is measured in the hundreds of millions of dollars. The question now becomes which developers, financiers and builders will be able to confront the known and unknown challenges associated with pellet production at this new, grand scale and capture enviable market share for themselves and their investors.
Author: Tim Portz
Executive Editor, Pellet Mill Magazine