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Wood pellets like these are made of sawdust that has been compressed and extruded through a narrow opening. The pellets can be used to fuel heating systems for homes or large public buildings with up to 50 per cent savings compared with diesel oil, a common energy source for heating in the North.

Pat Wellenbach/The Associated Press

This is part of a series looking at infrastructure projects designed to create economic opportunities in the North.

Louie Azzolini's boots crunch over the snow as he trudges to a small shed beside the building where he works. Pulling open a door he reveals what looks like an ordinary heating system, but instead of oil or gas it is fuelled by bullet-sized pellets of compressed sawdust. The sight has become increasingly common in the North.

"We heat 10-storey buildings with these things," said Mr. Azzolini, who is executive director of the Arctic Energy Alliance, a non-profit organization set up to help northerners reduce the cost and environmental impact of their energy use. "Almost every public building in Yellowknife is heated with wood pellets."

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Rocketing out of nowhere in less than a decade, the consumption of wood pellets in the Northwest Territories now tops 15,000 tonnes annually, according to government estimates.

The transformation has been driven by technology and by economics: a pellet boiler is typically 20 to 50 per cent cheaper to run than one that burns diesel, making wood an attractive alternative for northern consumers. While the cost of switching can be high – upwards of tens of thousands of dollars for a system – the difference in fuel cost means the initial investment can be recovered in five to 10 years provided the local infrastructure exists to supply wood pellets at a commercial scale.

The infrastructure question is crucial in the Northwest Territories where, for most of the year, warmth is not just an amenity but a necessity of life. "In Vancouver people don't worry about freezing to death," Mr. Azzolini said. "Here it's a safety and security issue."

But as the pellet market grows it has begun to shift the energy landscape in the North, where heating is also a major contributor to the high cost of living and a barrier to economic growth. It accounts for nearly a quarter of all the energy consumed across the NWT and, with no large-scale distribution of natural gas, the principal fuel source for most communities is diesel oil imported from southern Canada at premium prices.

It was this reality that led the territorial government to embrace wood pellet heating, starting with a correctional facility in 2006 and expanding since then.

"In Canada, we're the leaders in biomass," Mr. Azzolini said. Yet the region consumes just a small fraction of the pellets produced by the forestry industry in Alberta and British Columbia. By far, the largest share is exported to Europe, where pellet boiler systems have long been popular.

That popularity has been helped by the perception that wood pellets are carbon neutral because the carbon they release can be recaptured by replacement forest growth. While this equation assumes optimum forest management and leaves out the energy spent in processing and shipping, wood pellets remain a greener alternative than diesel and they are far less hazardous to handle.

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The chief drawback is that pellets need more storage space than oil for the same amount of energy produced. But once the fuel is delivered, modern wood pellet systems do the rest automatically, vacuuming pellets into the boiler unit as needed. Insurers have also not yet caught up to the technology, so insurance rates for homes heated by pellets can be higher.

"There's a misconception that you have to babysit a pellet boiler," said Brian Lickoch, who distributes wood pellets in the small community of Norman Wells, located some 800 kilometres northwest of Yellowknife. "That's not really true."

Norman Wells has a more pressing reason to look at switching to pellets. Until recently the town of 800 has enjoyed a rare advantage: a cheap source of heat courtesy of the excess natural gas that is a byproduct of local oil production. But Imperial Oil, which also uses the gas to power its own operations, has said the supply is dwindling and that it will soon stop selling gas to the town. The cutoff has already been applied to businesses in Norman Wells while sales to residential customers are scheduled to end in 2014.

As the town shifts to short-term alternatives such as imported synthetic gas (a mixture of air and propane), there is increased interest among business owners and residents in wood pellets as an alternative heating solution, Mr. Lickoch said. "The business is growing considerably."

In response, Mr. Lickoch is ramping up his capacity. Currently, he can store up to 550 tonnes of pellets, which he ships by truck from mills in Alberta to Fort Simpson and then barges down the Mackenzie River to Norman Wells during the summer months. This year he plans to expand his operations to accommodate 1,100 tonnes.

Like Norman Wells, Inuvik is facing a faltering local supply of natural gas, but with four times the population its dilemma is all the more pressing. Mr. Lickoch said he recently sold two wood pellet boilers that will be used to heat an apartment building there. Jan Larrson of Energy North in Yellowknife says the business model that is taking shape for wood pellet delivery to such remote communities provides a useful model.

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"What happened in the Northwest Territories can be adapted across Canada," he said.

Mr. Azzolini notes that while biofuel can't be the only heating solution in the North, he expects wood pellets will eventually grow to account for 10 to 15 per cent of the territory's energy mix. That would imply a three or fourfold increase in demand for pellets in the NWT, a prospect that has lately stimulated entrepreneurial interest in a home-grown pellet industry in the South Slave part of the south part of the territory.

"There's certainly potential for it to be viable," said Bryan Pelkey, an energy policy expert with the Department of Environment and Natural Resources.

Mr. Pelkey noted that biomass now supplies about one-sixth of the territorial government's heating needs and that a longer-term goal is to increase that portion to one half. Not so long ago, he added, building a government facility with wood pellet heating would have been seen as a special initiative. "Now, it seems biomass is just built into the decision-making."

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