Tag Archives: infrastructure

By Anna Austin | July 16, 2013 PELLET EXPRESS: Sandri has four dedicated wood pellet delivery trucks that service about 100 customers. PHOTO: SANDRI References to chicken-or-egg scenarios are very common within many of the bioenergy industry sectors, and the bulk domestic pellet market is no exception.  While producers are eager to expand capacity, distributors desire to grow their businesses, and system manufacturers are dedicated to absorbing a bigger piece of the residential and industrial heating market pie, the industry remains in pursuit of a catalyst to foster this growth. The collective industry perspective suggests that catalyst is many more installations of central heating systems, but that is not as clear cut a solution as it seems. The industry needs to ready itself to assure customers of a headache-free, rewarding experience, so it’s also a question of which part of the supply chain should make the first moves and necessary investments. Costs All Around Jonathan Kahn, CEO of Geneva Wood Fuels in Strong, Mich., says his 80,000-ton mill does a few bulk deliveries to some locations—for example, 35 tons to a school or hospital—but overall, bulk delivery activity is very minimal. “The reality is that there are very few of those types of customers.” More people are heating with wood pellet stoves these days, he points out, but there are very few people who have invested in central heating systems, the initial capital costs of which are usually the deterrent. Along with the cost of the system is a storage silo and mechanical delivery system, in most cases, all together costing a typical homeowner between $8,000 and $15,000, plus the cost of a few deliveries per year (about 10 tons total) to keep their silo full. While that number seems huge, most will see a payback in just a few years. “In the old days, it was a big deal  to go from a wall unit to central air conditioning, and this is a similar type of decision,”  says Kahn. “In certain parts of the country, pellets are half the price of oil, on a Btu-equivalent basis. Someone willing to make the investment could probably have a payback in three to five years.” In the West, most homes that utilize pellets have freestanding pellet stoves or fireplace inserts, so the convenience of having pellets delivered to residences probably doesn’t play a monetary role at this point, or help justify cost, according to Western Oregon Wood Pellet owner Chris Sharron. Pellet fuel is sold at all kinds of retailers these days, including grocery stores, and consumers are making weekly trips to these stores anyway, he says. “Therefore, there’s no decrease in convenience, nor increase in cost, in picking up some bagged fuel during that trip.” On the wholesaler side of the equation, a new pellet truck can cost anywhere from $50,000 to $200,000, according to Kahn, and to make many deliveries in one run, the truck and trailer has to have a 20 to 30 ton capacity. “If it’s in a neighborhood, that size of a truck might be too big—you can’t have that going into someone’s driveway—so you have to have an 8 to 10 ton truck going out and making these deliveries,” he says. Additionally, silos can cost anywhere from $100,000 to $150,000. On the producer side, Sharron says due to highly competitive merchandising amongst retailers—such as Home Depot, Lowe’s and Walmart—retail prices for pellet fuel are currently fairly low. “Since WOW delivers truckload quantities (average 26 tons per load) direct to the individual store, the delivery cost per ton is [relatively low],” he says. “In contrast, the cost to deliver smaller quantities of bulk pellets directly to a residence is high. This is exacerbated in the West because of low population densities, and especially because there isn’t much urban use of pellet fuel, due to highly developed natural gas infrastructure. So there would not be much, if any, savings relative to direct delivery to the consumer.” One might think there would be a cost savings to producers for bulk versus bagged fuel, due to the eliminated cost of packaging, but for most pellet manufacturers employing automated packaging systems, the cost of packaging is also relatively low, Sharron says. “Therefore, although there might be a savings, it wouldn’t be significant—maybe somewhere in the $10 per ton range (the bag cost itself).” Aside from cost, another factor that comes into play for bulk consumers is fuel availability. “One can’t go to Lowe’s and buy bulk pellets, and they definitely don’t want to buy 200 bags of pellets to open and dump in their silo,” points out Kahn. “This is when an equipment distributor should be able to say, ‘We have a relationship with this mill, or several, so don’t worry, we’ll take care of getting them delivered.’ That’s a way make it a complete experience for the customer.” Such relationships—between system providers, pellet wholesalers and producer— may be key to making the whole bulk market model work. Market Model Since manufacturers, for the most part, don’t want to be doing pellet deliveries—with the exception of large industrial orders—the model the industry is trying to create is similar to the model that the heating and propane industry developed following World War II, according to Charlie Niebling, who served as general manager for New England Wood Pellet for seven years and is now employed with Innovative Natural Resource Solutions. “That’s where you have central fuel depots where pellets are shipped in, and there are dozens, if not hundreds, of wholesale retail distributors that manage the logistics of getting the fuel from the central location out into the landscape where the customer is,” he says. New England Wood Pellet began the process of launching the bulk delivery market back in 2003. “We were the only one doing it then,” Niebling says. “Somebody had to take the plunge, make the investment, and get something going.” The company worked to build a small clientele for the next several years, but ultimately wanted to focus on pellet production and not distribution. Niebling says since then, the industry has been slowly and steadily working to create a network of authorized distributors who invest in the satellite storage depots and delivery trucks. “We don’t give them exclusive territories because we want to foster some degree of competition, but also because there can’t be three or four businesses right now top of each other, because there isn’t enough market [demand],” he says. He points out that the industry consists of multiple different types companies that are dependent on each other—pellet manufacturers, distributors and heating system providers—but typically, there isn’t common ownership. One exception to that is Sandri, a bulk pellet distributor and heating system supplier, which bought New England Wood Pellet’s commercial pellet boiler business Propel in 2010. At the time, Jake Goodyear, Sandri vice president of operations, was an employee at NEWP, but moved to Sandri with the sale of Propel. He says for a company like Sandri, it hasn’t been too difficult to expand its capabilities to bulk pellet deliveries. “Sandri has been in oil delivery for 60 years, so it’s totally normal for us to deliver fuel, to pick it up from somewhere and deliver it to the end customer.” Sandri has four dedicated vehicles that deliver to around 100 customers, the majority being commercial, and schools constitute the single largest customer. While industry growth has increased during the past couple of years, Goodyear says it’s been almost entirely subsidy driven. “It’s been a very difficult environment in which to sell new, high-capital cost technology, just because of the economic times,” he says. “There have been some subsidies available that have helped the business grow, mostly state-level, but our industry did get some stimulus funds as well.” Even for a fairly large fuel distributor like Sandri, making a $250,000 investment in a delivery vehicle to try to grow a market around it doesn’t make much financial sense. “We have to get a lot of these [systems] installed before there’s a reliable supply available,” says Goodyear. So what may be the best tactic to grow the market, thus justifying investments? Looking Ahead As is the case with other technologies, there are always early adapters who decide to switch to something new, simply because they believe it’s the right thing to do. “Not necessarily because they’re going to save money, and for the first five years, that was the customer base,” explains Niebling. “In 2008, when energy prices went through the roof, we saw a lot of interest from other people who were primarily focused on saving money, especially heating oil and propane people…the recession took a lot of wind out of that market development for two reasons—the energy crisis came down as dramatically, and people didn’t have the money for the upfront capital costs, which are very high compared to oil or natural gas systems.” As Goodyear pointed out, the Recovery Act funded some installations, Niebling says, emphasizing the importance of tax credits to jump start the market, especially the passage of the recently introduced Btu Act. Goodyear says one of the biggest problems today is that there just isn’t a lot of knowledge of the existence of pellet heating systems. “It will take much more than going around and knocking on doors…the industry needs to do more to promote itself and raise awareness of the existence and benefits of biomass heating, and pellet central heating, in particular.” He agrees with Niebling on making the case to legislators that funding installations would be a worthy use of state or federal dollars, and would help alleviate the chicken-or-egg issue. “If you have the volume, the costs are going to come down rapidly. The same scenario happened for solar, when significant state and federal subsidies greased the skid and got the volumes up, so the manufacturing costs came down, hence end user costs. European countries have seen success in using  incentives, as well as public promotion and strict mandates/laws. “For example, Denmark passed a law making it illegal to install a fossil heating system if one lives within an area that has access to district heating,” says Niebling. “In Austria, you can’t build a new building with a fossil fuel heating system. While we can’t do those things in the U.S., because it’s totally against our political tradition and culture, and those mandates would never get off the ground, we can certainly do the incentives.” Sharron notes that he believes there will always be a bagged fuel market, even if bulk delivery takes off. “Many pellet stove users initially bought the stove to save money on their heating costs,” he says. “Many of these people live paycheck-to-paycheck and can afford, relative to cash flow, to buy bags of pellets as they need them, but they cannot afford to have a 1-ton-plus bin filled all at once.” Aside from commercial and industrial opportunities, growing the bulk market has to begin with homeowners making the investment in pellet burning systems, thus increasing and geographically concentrating demand, Sharron concludes. “From an investment standpoint, this will make it easier to pencil for everyone. The fuel is already available, and at a very competitive price versus most alternative, even if the consumer has to go pick it up themselves in bagged form. Cost and convenience can only improve with increased demand and consumption, therefore, home delivery of bulk fuel is likely to develop. When that day arrives, the consumer will enjoy the best of both worlds, relative to cost and convenience.” For now, however, the industry will continue to prime itself for when the market develops—while advocating itself to lawmakers and educating the public—and the companies working to make it happen will likely continue to take the necessary risks, even if it isn’t yet lucrative, or even profitable. “I don’t think anyone’s making any money distributing bulk pellet fuel right now, there just isn’t enough density of demand anywhere,” says Niebling. Small successes are being achieved however, in some places with the right landscape, such as Maine. “Several companies there have taken some risks, and we’re slowly seeing development of the infrastructure,” Kahn adds. “We’re talking hundreds of thousands of potential candidates in Maine alone—the potential is huge.” Author: Anna Simet Managing Editor, Biomass Magazine asimet@bbiinternational.com 701-751-2756 Continue reading →