Mathematics of Demand

The most obvious challenge the pellet industry will confront as we work to turn demand around is our lack of touchpoints with consumers when they are making home and space heating decisions.
By Tim Portz | May 24, 2018

In April, at the International Biomass Conference & Expo in Atlanta, I participated in my first biomass industry association roundtable to discuss the relative strengths of our industry segments, and the news of the day. I was joined onstage by colleagues from the Biomass Power Association, American Biogas Council, Biomass Thermal Energy Council and the Renewable Thermal Coalition.

The panel provided me another opportunity to talk about Operation 100k, the Pellet Fuels Institute’s strategic initiative to reestablish 100,000 as the annual floor for heating appliance sales. As I was preparing my notes that morning, I wondered if it would be possible to calculate what the market would look like had Operation 100k been launched a decade ago, and been successful. Very quickly, I had a spreadsheet open, and was populating cells with sales figures that I found in the June 2017 issue of Hearth & Home Magazine. I then built a formula that would calculate the overage and shortfall each year. Incidentally, pellet appliance sales eclipsed the 100,000 unit mark just one time in the past 10 years (141,208 in 2008). Even with 2008’s overage, the industry missed a 100,000-appliance-per-year average from 2008-‘17 by nearly 350,000 units. From there, I went to work on quantifying the annual impact of those missed sales.

To better understand the impact of our fuel manufacturer members, I calculated an estimated lost demand by assuming pellet consumption for each of those appliances at 2 to 3 tons per year, giving me a range of 700,000 and 1.05 million tons. At the average wholesale price of $185 per ton, that represents between $129 and $195 million in revenue, to say nothing of the $40 million to $60 million dollars of margin that our downstream retail partners would have generated (calculated from the average retail price per ton, less the average wholesale price per ton). Together, the total falls somewhere between $170 million and $250 million in lost revenue per year.

Our industry cannot afford to let another decade of lackluster appliance sales pass. Our journey toward 100,000 annual pellet appliance sales seems daunting in the face of the numbers from the past decade, but nevertheless, shoring up demand by focusing on appliance sales is priority one. Our members operate businesses that need to run as near to their production capacity as possible to maximize their profit potential. Operation 100k recognizes that, and puts market expansion right in the middle of what the PFI dedicates itself to.

The most obvious challenge we’ll have to confront as we work to turn demand around is our lack of touchpoints with consumers when they are making home and space heating decisions. Pellet manufacturers get involved in heating the homes of consumers only after they have decided upon a pellet-burning appliance. If a consumer selects an appliance that uses a nonpellet fuel source, wood pellet demand is unaffected. As an industry, we’ve got to figure out a way to get the value of pellet heat in front of customers earlier in their decision-making process. This is the challenge that PFI has resolved to overcome. The good news is that our members have strong relationships with the specialty hearth retailers in their markets. If our industry has any chance of meaningfully impacting the demand side of this business, we’ll have to revisit those relationships, and develop a strong argument for why and how retailers should and can move more pellet-burning appliances.

We don’t know all of the answers, and we’ll be the first to admit that, but the more that we think about this question of “How do we grow the market for our product?,” the more certain we are that it is the right one to be asking.

Author: Tim Portz
Executive Director, Pellet Fuels Institute