Pellet Project Development

Pre-Feasibility

A pre-feasibility study assesses the key conditions for a pellet production project, with a focus on determining the availability, quality, and cost of raw materials. It also defines the plant’s size and processes, serving as the foundation for further project decisions. The study’s main objective is to evaluate the economic feasibility of the project and is crucial in making investment decisions. It covers essential aspects such as raw materials, plant sizing, investment costs, energy supply, and target markets.

Dimensioning of the plant and investment costs

The plant’s capacity hinges on two primary factors: the availability of raw materials and the availability of capital for investment. It is crucial not to overbuild a pellet plant beyond the available raw material supply.

When matching plant size to available capital, it’s important to keep in mind that:

• The costs of establishing a pellet factory are typically significantly higher than the expenses for key components like raw material feeding, the pelletizing machine (press), and the cooler. These costs vary depending on the type of raw material. If the raw material is wet, it necessitates drying, an energy-intensive process involving additional equipment such as dryers and heating sources like furnaces or boilers.
• Additional processes may be required for the raw material, including debarking (for round wood), chipping, and grinding before pelletization, incurring extra investment.
• Consideration should be given to the type of packaging required, as packaging machinery can impact costs but also streamline sales and distribution.
• Costs will also arise for constructing the factory building, preparing paved ground for raw material storage and protecting pellets from rain.
• Infrastructure elements like power connections (transformers), access roads, and water and sewer systems contribute to overall costs.
• Pellet production presents safety challenges, as wood dust can lead to fires and explosions. Many pellet plants have experienced incidents due to inadequate safety measures. Dust from organic materials can pose health risks to employees, emphasizing the importance of dust removal with induced airflow from critical areas such as hammer mills, pellet mills, and coolers. Implementing safety equipment like spark detectors and automatic flame extinguishers significantly reduces fire hazards.
• Adequate working capital is essential to cover expenses for raw material procurement, spare parts, operational costs, and inventory that isn’t sold immediately.
• The prefeasibility study should provide a rough estimate of all the components necessary for building a pellet plant, thereby offering insight into the total investment costs.

Energy Supply

Pellet plants demand a significant amount of electrical power to operate their machinery, making a reliable and robust electric supply a critical requirement.

When raw material requires drying, the energy needed for this process can be as much as ten times greater than what’s needed for the pelleting itself. Typically, pellet plants rely on low-quality raw materials to generate heat.

In some cases, large pellet producers establish their power plants, utilizing residues like bark to generate both electricity and heat for drying the raw material. While this approach increases investment costs and complexity substantially, it often enhances the project’s overall economic viability.

Target Markets

During the pre-feasibility study, an essential task is to investigate potential target markets. In principle, three distinct target markets should be considered:

1. International Industrial Markets: Typically, industrial pellets are derived from wood and serve large power plants. However, delivering to industrial customers can be challenging, as they often require shipments in large vessels, each holding 30,000 tons or more. This can strain cash flow, and technical issues can occasionally disrupt deliveries. Additionally, industrial pellet buyers often demand sustainability certifications, necessitating extensive documentation of raw material origins and all energy flows for transport and production.
2. International Domestic Heating Markets: These markets are primarily for wood pellets and come with stringent quality requirements, verified by ENplus certification.
3. Local Markets: Local markets for pellets offer several advantages over international ones. They have lower transport costs, less strict quality requirements, and reduced risk due to lower dependence on a few large customers. Moreover, pellets made from agricultural residues can find use in local markets for cookstoves, making them less export-oriented. To foster a local market before investing in a pellet plant, it is advisable to initiate market development with imported pellets.

Feasibility

The feasibility study builds upon the findings of the pre-feasibility study and involves comprehensive project planning. It is strongly recommended to establish contracts, pre-contracts, or at the very least, Letters of Intent (LOIs) with key partners, such as raw material suppliers, power suppliers, and potential customers.

Technical documentation, including mass and energy balances, process flow sheets, plant layout, and forecasts of operating costs (including power and heat consumption), spare parts, consumables, and labor costs, is essential. The planning process should encompass infrastructure and buildings and include a thorough risk analysis.

The outcome of a feasibility study should yield a cost estimation that falls within a 10% margin of the final project costs. 

A feasibility study must include a detailed marketing strategy and should be sufficient for a “bankable project”, i.e. a project that is sufficiently detailed in planning to represent a credible business case.

Plant Establishment

In essence, there are two primary approaches to consider:

1. EPC Contract: One option is to enter into an Engineering, Procurement, and Construction (EPC) contract. This comprehensive agreement covers engineering, component procurement, and plant construction. While this approach minimizes risks for investors, it typically results in higher costs, about 20-30% more than a project managed directly by the investor with the aid of an engineering consultant.
2. Engineering Consultant: Alternatively, investors can engage an engineering consultant to design the pellet factory based on raw materials and site specifications. The consultant will gather cost estimates for all project components, manage permits, equipment procurement, and oversee construction. It is vital that the consultant is compensated fairly by the investor and does not accept commissions from equipment suppliers. Inexpensive consultants may prioritize supplier commissions over recommending the best equipment for the project. The benefit of this approach is generally lower overall costs compared to an EPC contract. However, the drawback is that seeking recourse from engineering consultants if the project doesn’t meet expectations can be challenging, leaving the full risk with the investor.

As a rough guide, planning costs for industrial plants typically range from 5-10% of the total investment. Pre-feasibility and feasibility studies typically represent around 1-2% of the total project costs. Therefore, before seeking bank loans, investors should allocate up to 3% of the total investment for initial planning. Additional planning costs may arise during project development and may be partially covered by equipment suppliers for detailed engineering, etc.

The complexity of building a pellet plant is often underestimated. To mitigate potential planning mistakes that could result in substantial additional costs or project failure, it is highly recommended to engage professional consultants with a proven track record in pellet plant construction. Cutting corners on planning expenses is typically the costliest mistake an investor can make.