The rise and fall of a green-energy superstar

That was two years ago. The Epes facility is still under construction, but Enviva is in bankruptcy court.

Demand hasn’t been an issue. Renewable-energy subsidies in Europe and Asia encourage electricity generators to burn wood instead of fossil fuels. U.S. pellet exports are on pace to exceed last year’s record.

Enviva’s problem is that it promised buyers more pellets than it could make, and for cheaper than it ended up costing to produce them. Then it made a disastrous trade to try to cover the shortfall.

The roughly $350 million trading debt that ensued—owed to a German power producer that is one of its best customers—forced Enviva to file for bankruptcy protection in March so that it could shed debt and try to renegotiate supply deals it says are no longer profitable.

Enviva’s financial collapse has jolted some of the nation’s largest clean-energy investors, adding to the list of financial disappointments for the ESG investment sector, which raised trillions of dollars for funds that promise to invest with environmental, social and corporate-governance goals in mind. Some firms, such as startup electric-vehicle makers, have gone bankrupt, while high interest rates have hammered even businesses with proven technologies, such as solar power producers.

Scientists and environmental groups have raised questions about the climate claims put forth by the wood-pellet industry. Burning wood, many scientists and environmentalists say, is less efficient than burning fossil fuels, emitting more carbon to generate equivalent energy. Demand for pellets, they say, causes trees to be cut down that would otherwise remain standing—and removing carbon dioxide from the atmosphere.

The rise of coal in the 1800s saved Western Europe’s forests from being wiped out for firewood, “but the solution to replacing coal is not to go back to burning forests," said a 2018 letter to the European Parliament signed by 772 scientists.

Pellet proponents say the climate math is more complicated—that carbon dioxide emitted burning wood from Southern pineries is reabsorbed over time by the next crop of trees that is planted. That makes pellets not just renewable, they say, but a carbon-neutral source of energy. Plus, they say, many pellets are made from mill waste and the scraps left behind at logging sites, which would emit carbon if left to rot.

Investors in the pellet industry wagered on wood qualifying for renewable-energy subsidies and displacing coal at power plants.

A few years back, private-equity investor Riverstone Holdings characterized Enviva as a big winner among its otherwise struggling renewable-energy bets. Then the value of its 43% stake in Enviva shriveled from roughly $3 billion in 2022 to less than $20 million.

Activist investor Jeff Ubben’s Inclusive Capital Partners, once Enviva’s second-largest shareholder, lost more than $200 million liquidating its biggest position after the bad trade was disclosed, according to securities filings. Ubben’s social-impact investing firm has stopped making new investments and is returning cash to investors.

Power producers from Germany to Japan are counting on shipments from Enviva to keep their customers’ lights on, as well as to meet renewable-energy mandates. Enviva has continued to operate while it sheds debt and reworks long-term deals with customers.

The plant in Epes is scheduled to open next year. It was financed with tax-free bonds for green-energy projects and public money meant to boost employment along a desolate stretch of the Tennessee-Tombigbee Waterway. Another plant, planned for Bond, Miss., is on hold.

One of Enviva’s biggest customers, U.K. power producer Drax, says it is owed more than $75 million for missed deliveries. Drax’s power station in the English countryside consumes about 7 million metric tons of pellets annually. It has been increasing its own pellet production, including a recent $50-million expansion of its Aliceville, Ala., mill upriver from Epes. But Drax still needs to buy pellets from Enviva.

“We’ve been very focused on making sure that our supply chain is intact," Drax Chief Executive Will Gardiner said in an interview. “We can manage the risk regardless of what happens to them."

Enviva declined to comment. When the company sought bankruptcy protection, interim CEO Glenn Nunziata said the filing would allow Enviva to trim debt, cut costs and get its mills running more efficiently. That process, he said, would leave Enviva “a stronger company with a solid financial foundation and better positioned to be a leader in the future growth of the wood-based biomass industry."

Green power?

The race to reduce greenhouse gas emissions has expanded the market for pellets—dried sawdust pressed into cylinder form—from wood-stove enthusiasts to giant utilities eager to shift away from fossil fuels.

Enviva was founded by University of Virginia business-school classmates and bankrolled primarily by Riverstone. Enviva bought its first pellet plant in 2010, in Amory, Miss.

Corey Glenn, now Amory’s mayor, worked for the original owners, who were private investors with local ties. The original plan had been to produce pellets for use in grills and wood stoves from the sawdust and shavings from nearby sawmills. The introduction of European Union renewable-energy subsidies afforded pellet producers the opportunity to sell by the boatload rather than the bag.

The Amory plant processes only sawdust and wood chips. After Enviva bought it, Glenn helped the company identify places for new facilities, which now also consume whole trees.

Enviva looked for places where pulp mills had closed and left voids in the market for trees too small or otherwise unfit for lumber. “With the secular decline in paper and pulp, that hasn’t been hard," co-founder and then-CEO John Keppler told The Wall Street Journal in 2022.

By 2022, Enviva had 10 plants near six ocean ports in the Southeast, and had plans to build six more, beginning in Epes.

Most pellets are sold under long-term contacts at set prices, but there is a small market of on-the-spot deliveries. As with coal and natural gas, spot prices for pellets surged after Russia invaded Ukraine in February 2022 and Russian fuel exports were banned in Western Europe.

To meet the growing demand, Enviva was trucking more tree trunks to its mills, raising questions about its claims that it used mostly waste from someone else’s logging jobs.

In October 2022, short seller Blue Orca Capital circulated a report challenging Enviva’s procurement and sustainability claims. It argued the company wasn’t earning enough to continue paying its dividend without borrowing more or selling new shares that would dilute existing investors’ stakes. Blue Orca wagered that Enviva’s stock would fall.

“Enviva is the latest ESG farce, a product of deranged European climate subsidies," Blue Orca wrote, arguing that the company was overstating the environmental benefits of its pellets. “Evidence of greenwashing in the company’s procurement processes undermines not only Enviva’s suitability as an ESG investment, but future demand for its product."

Enviva responded that the report “contains numerous errors, repeats previous unsupported speculation and gross mischaracterizations, and draws specious, misleading conclusions."

Enviva’s facilities were racking up air-quality violations and drawing complaints from neighbors about noise and sawdust. Some plants were plagued by mechanical problems that reduced output.

When Enviva couldn’t produce enough pellets to fulfill its contracts, it bought them in the spot market for shipment to customers, said the interim CEO, Nunziata, in a filing in the bankruptcy case. When spot prices surged, that was no longer an option, he said, describing events before he joined the company.

Enviva disclosed in its 2022 financial report that it had agreed to pay $141 million to customers to reschedule or cancel deliveries.

It didn’t disclose at the time a deal with German power producer RWE that was shaping up to be a big money-loser. Enviva had agreed to buy pellets from RWE, intending to resell them for even more. But mild winter weather eroded demand and tanked spot prices, meaning Enviva would have to resell the pellets for much less than it agreed to pay RWE.

Another blow came in March 2023 when a tornado wrecked Enviva’s plant in Amory.

Enviva executives tried to allay investors’ concerns the following month in a meeting at the New York Stock Exchange. They said the company would maintain its quarterly dividend and continue to build plants, according to a transcript.

A few weeks later, Enviva said it expected to lose about five times as much in 2023 than it previously forecast, and that it would stop paying a dividend. Its stock fell 67% that day.

Soren Aandahl, founder and chief investment officer at the short seller Blue Orca, said in an interview that Enviva was “bleeding cash, and they were doing it in an environment that was pretty much the most favorable environment for them as possible."

Last November, Enviva revealed the money-losing RWE trade, which hadn’t been disclosed to its board when it was made. A special board committee enlisted law firm Baker Botts to investigate, Nunziata said in a bankruptcy-court filing.

Riverstone, whose founders and two other appointees hold four of Enviva’s 13 board seats, has become a creditor, claiming unspecified “damages caused by violations of the federal securities law." Riverstone cited shareholder litigation alleging that Enviva misrepresented its procurement and environmental record and made misleading statements about plant equipment failures.

Last month, Enviva proposed a plan to exit bankruptcy that would leave existing shareholders with just 5% of the stock in a restructured company.

Local fallout

Enviva’s storm-damaged plant in Amory is running again, but the company has left unpaid bills around town. Contractors, two hardware stores and the municipal utility, which says Enviva owes it $161,000 for water and power, have filed claims in the bankruptcy court.

Downriver in Epes, which counts fewer than 300 residents, hopes remain high about the plant under construction. Census data show that only about 30% of residents have jobs, half the national rate. There is plenty of wood: more than 5 million acres of timberland in a 60-mile radius around town.

Enviva’s decision to build where a wood-flooring plant closed in 2019, and to hire more than 80 people, was celebrated as a big win for one of the poorest parts of the U.S.

To pay for the construction, Enviva tapped Alabama and federal economic-development funds and sold $250 million in tax-free green bonds through the Industrial Development Authority of Sumter County.

Economic development officials are now working to draw a dollar store to Epes to give mill workers a place to spend money, said the industrial development authority’s Allison Brantley.

After filing for bankruptcy protection, Enviva executives assured local officials that construction remained on pace and that it would meet its financial obligations, Brantley said.

In bankruptcy court, though, creditors from western Alabama have lined up. The Sumter County Tax Collector seeks nearly $97,000. The industrial development authority wants more than $1.1 million that it says is Enviva’s share of the cost of dredging the port, which has been dormant since the 1990s.