Today, backed by attractive subsidies from governments that see it as a way of helping them meet tough carbon reduction targets, this nascent sector is tipped to go mainstream. An added attraction is that, unlike other forms of renewable energy such as solar and wind, which provide power intermittently, biomass provides stable baseload power.With many coal plants due to be phased out to meet environmental legislation in Europe, utilities are looking to co-fire coal with biomass or convert their plants to burn only the latter. A recent report by Bain & Company, the consultancy, forecasts that global demand for biomass will grow at a compound annual rate of 9 per cent to 2020.

This expansion is not without controversy. Environmental campaigners argue that burning biomass in power stations may actually hinder attempts to tackle climate change. Fears are also rife about sustainable sourcing, especially as the market grows.

“It’s the oldest trick in the book to use wood as an energy source,” says Brian Potskowski, European power analyst at Bloomberg New Energy Finance. “Now there is the added political element of governments having to meet renewable energy targets. The question is, is it carbon neutral? If biomass was excluded as a renewable source of energy, then governments could not meet their targets.”

EU nations have to cut carbon emissions by 20 per cent by 2020 compared with 1990 levels and increase the share of renewable energy in the mix to 20 per cent. The burning of biomass is included in all these targets.

However, it is not a zero-pollution option. Cutting and transporting the wood creates greenhouse gases, as does burning it. A report by the Institute for European Environment Policy found there is no reason to believe the required emissions reductions will be achieved with the current biomass policy.

Proponents of biomass argue it can deliver significant carbon savings relative to fossil fuel, even after taking account of the energy consumed in harvesting, processing and transport. Utilities say biomass can be sustainable when forests are managed properly and growth is in excess of harvest.

Dorothy Thompson, chief executive of Drax, the owner of the UK’s biggest coal-fired plant, which is converting three of the six generating units at its Selby plant in North Yorkshire to biomass, insists it is a sustainable industry.

She adds: “Unlike burning fossil fuels, which adds new carbon to the atmosphere, burning biomass only releases the carbon removed from the atmosphere when the plant was growing. Often, the models that imply there is a carbon payback time are based on the nonsensical assumption that a plant is first burnt and only then grows.

“The biomass we use comes from sustainably managed forests where, among other things, overall growth matches, or is in excess of, harvest.”

“The prices energy companies can afford to pay for biomass mean they are often the buyer of last resort, so much of the bioenergy also comes from wood other industries have not been able to use. This means foresters get value from wood, or by-products, that would otherwise decompose and produce some of the worst greenhouse gases,” she says.

Drax’s first converted unit is due to be up and running later this year and the last by 2016. This will create 2,000MW of capacity, making Drax one of Europe’s biggest clean energy generators. The company is already a leading importer of wood pellets, which it burns with coal. Its move follows subsidy changes in the UK announced last July that make it more attractive to fully convert coal-fired power stations into biomass, rather than co-firing or building brand new dedicated plants.

Drax’s transformation means it will end up importing substantial amounts of wood pellets a year. The company plans to upgrade port facilities and build new wood pellet plants in North America.

The demand for wood pellets in Europe will reach 29m tonnes in 2020, up from 8m in 2010, according to the report by Bain. Yet the majority of Europe’s needs, about 66 per cent or 19m tonnes, will have to be imported from outside the continent, mainly from North America, Russia and Brazil, the report says.

Environmental campaigners worry about the sustainability of this sourcing. “The biomass sector is a disaster in the making. It is a very inefficient way to use a varied resource,” says Matt Williams, climate change policy officer at the Royal Society for the Protection of Birds. “We would prefer to see combined heat and power plants that are small scale and use local resources,” he says.

Another difficulty is that the industry’s supply remains opaque, says Mr Potskowski. There is “no standardisation for pellet prices”, which makes it difficult to understand the feedstock costs. As a result, many utilities, including Drax and Germany’s RWE, are themselves securing feedstock by building plants.

With biomass coming to the fore, investors in utilities will need to make sure they are aware of the risks and rewards. Given its importance in the UK power market, Drax’s progress will be closely watched. So far investors appear comfortable with the proposed transformation. After dropping to £4.42 in July after the news of the subsidy changes, the shares edged back to £5.62 per share on January 20.