March 12, 2010

Selling heat -- by the pellet

TUX TURKEL

— By

Staff Writer

Steven Mueller is looking for 80 or so Maine businesses, schools and other large work spaces that want free wood pellet boilers installed. His company, International WoodFuels LLC, will install the units in line with existing heat and hot water systems, maintain the boilers and deliver pellets for free.

In exchange, customers must sign 10-year contracts to buy heat, which is measured by a meter just as electricity costs are calculated. The heat is guaranteed to cost less than fuel oil, unless oil falls below a base price. This year, the floor is $2 a gallon.

''We're not selling pellets,'' Mueller said. ''We're selling a solution -- metered, thermal energy.''

After months of quietly building a client base in Maine, New Hampshire, Vermont and Massachusetts, International WoodFuels is positioning itself to become a major player in the region's growing pellet fuels industry. The company has opened an East Coast headquarters in Portland. It claims to have millions of dollars in private capital and is preparing to build pellet-production plants in each of the four states, two of them over the next year. Its business model -- metered heat -- reflects practices in Europe and the more-familiar methods of buying electricity in the United States.

In Maine, International WoodFuels is entering an emerging, dynamic market. Three pellet plants are operating and a fourth is near completion. Entrepreneurs have begun installing boilers and delivering pellets to homes and small businesses. Demand has grown to the point where pellet mills are competing for low-grade wood supply with pulp and paper companies, and there's debate over whether the resouce is adequate to satisfy all markets.

These energy ventures, represented by the fledgling Maine Pellet Fuels Association, have gambled millions of dollars that New England consumers will embrace wood pellets over the long term, despite the current collapse of oil prices. One of them, Maine Energy Systems and its founder Les Otten, has begun installing heating systems and delivering pellets to homes in much of Maine.

Privately, some association members question how quickly any large, new player can secure a wood supply and put together the complex puzzle of plant construction, pellet distribution and boiler installation. A handful of recent pellet-fuel proposals in the region have fizzled out, they note.

Publicly, they wish Mueller well in turning his proposal into reality. But they also underscore that the existing companies represent more than just a proposal.

''My reaction is, 'It's interesting,' '' said Bill Bell, an association spokesman. ''But we're here today, folks.''

Oil dealers also will be watching to see what Mueller accomplishes.

Jamie Py, executive director of the Maine Oil Dealers Association, noted that wood pellets have lost their retail price advantage, with the current low cost of heating oil. But Py said he has too little information to judge the enterprise.

''Certainly it's competition,'' he said. ''But we have competition now with natural gas and we have customers that have duel-fuel capability.''

For his part, Mueller says International WoodFuels isn't really a startup company, but a progression. For 25 years, according to his biography and other sources, Mueller has developed scores of alternative energy projects in the United States, Australia and Europe, including biomass and cogeneration power plants in New England. The company's biggest challenge, he said, is getting large customers comfortable with the idea of buying heat, rather than equipment.

''The concept is pretty dramatic,'' he said. ''It's radical change, and people need time to think about it.''

Mueller declined to identify companies or institutions that have signed agreements so far, saying it was premature to release names. International WoodFuels has roughly half the 80 or so customers needed in Maine to build a plant, he said.

Here's how the company's vertically integrated plan will work:

International WoodFuels will buy logs from harvesters who follow sustainable logging practices. The logs will go to nearby pellet mills that the company is planning to build.

Mueller also declined to identify the Maine location until the deal is finalized, it is hoped within the next two months. The Maine mill is expected to be built next to an existing manufacuturing facility, he said, preserving existing jobs. The plant would be capable of producing 100,000 tons a year of pellets, cost $15 million to $20 million to build and directly create 30 or so new jobs.

In New Hampshire, Mueller met last summer with officials in the town of Freedom about locating a pellet mill at an old manufacturing facility there, according to selectmen's minutes.

Specially designed trucks will deliver the pellets to businesses, schools and other large buildings that burn more than 50,000 gallons of oil a year.

Engineers will determine the correct size for the European-technology boilers, which will be owned by the company and made by Viessmann Manufacturing Co. in Canada. They will be installed alongside existing heat and hot water systems.

The heat energy will be metered, just like electricity. The quantity will be based on predetermined heat and hot water requirements. The cost is calculated at a discount to fuel oil and by assuming boiler efficiencies. If heating oil costs $2 a gallon -- the base price this year -- the pellet heat will be priced 15 percent lower. At $4 a gallon, the discount will work out to nearly 19 percent, the company says.

Each August, a base price will be adjusted to reflect changing consumer and wood supply prices. A typical contract will run 10 years. After that period, the contract can be renewed. A customer also could buy the boiler, or have it removed.

This sort of arrangement, while novel in Maine, has been gaining interest.

Maine's Bureau of General Services sought proposals last year from companies willing to supply state buildings with wood-fired heat, while providing the equipment and fuel. The state didn't receive any bids, according to Chip Gavin, the agency's director, but plans to refine its request and try again. Gavin said he had an informal discussion with Mueller, but said he couldn't comment on the company's business model or prospects for success.

International WoodFuels' business model, however, has been scrutinized by Shawn Lechien, chief financial officer at GreenCore Capital in San Diego, Calif. GreenCore, which assembles investors interested in clean technologies, has put an undisclosed amount of money into Mueller's venture.

''I think it's going to be a very lucrative area,'' Lechien said.

The prospect that oil prices will rebound, he said, coupled with President-elect Obama's interest in alternative energy and policies to cap carbon dioxide emissions linked to climate change, makes this a good time to invest in the company. Mueller's track record, Lechien said, gives him confidence that International WoodFuels will produce above-average returns for investors.

As the domestic pulp and paper industry shrinks, Lechien said, wood pellets are emerging as a strong market for landowners with pulpwood.

''We believe the highest and best use for a log is a pellet,'' he said.

International WoodFuels also has an office in San Diego. Mueller said he picked Portland for an East Coast office last spring because of its proximity to the forest resource and Maine's leadership in sustainable harvesting and wood energy. The company has 12 employees in the region but is planning to scale up in the coming months to meet its goal of serving customers next winter. The global economic crisis has complicated the effort, Mueller said, making him reluctant to release more details now.

''We've been very slow about it,'' he said. ''You can't build a company of this nature overnight.''

Staff writer Tux Turkel can be contacted at 791-6462 or

tturkel@pressherald.com

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