Investment costs for wood pellets capacity, both brownfield and greenfield, have increased by approximately 6% per annum over the last 16 years. This analysis, based on more than 50 projects in the US and Canada, reveals a significant rise compared to the general inflation rate during the same period (2.3% per annum). Industry experts attribute this surge in costs to bottlenecks in the supply chain for certain equipment and higher transportation costs.
While brownfield investments, which entail expanding capacity at existing pellet plants, have historically been considerably more economical (roughly 15% lower over the 2008-2024 period, adjusted for inflation), this advantage has diminished notably in recent years (less than 5% in 2019-2024).
The cost advantages of expanding existing plant sites primarily stem from existing infrastructure, utility connections, and, in some cases, buildings. On the other hand, hardware (equipment, machinery, storage facilities) and services (engineering, construction, and installation) constitute the main cost components, typically representing over 85% of the total investment cost. Greenfield plants also tend to be substantially larger on average than brownfield capacity, boasting an annual capacity of 400,000 tonnes versus 130,000 tonnes among projects completed or planned for startup in 2019-2024.
The average scale of new capacity has increased from 100-200 thousand tonnes per year in 2008-2010 to 200-300 thousand tonnes per year in 2022-2024, with plants exceeding 500 thousand tonnes becoming increasingly common. One driving force behind this trend is the pursuit of greater economies of scale. However, limited savings in capital investment costs concerning plant size have been observed. William Straus of FutureMetrics suggest that while significant economies of scale exist within the 20,000 to 200,000 tonnes per year range, there are marginal gains beyond 400,000 tonnes per year. The increased challenges associated with wood procurement at very large scales can outweigh any potential capital cost benefits.
As emphasized in our recent report, “European Wood Pellets – Fueling Europe’s Energy Transition,” Europe will continue to require large volumes of wood pellet imports, mainly from North America, to meet growing demand, primarily in the power sector. This demand remains a key driver of the capacity growth observed and expected, particularly in the US South.