EU set an ambitious program on renewable energies until 2020. Biomass will play an important role. Within the biomass sector, wood pellets are an upcoming biofuel market. Recently wood pellets are commonly made of by-products of sawmill and wood processing industry, especially for small scale heating appliances. The availability of sawmill by-products depends on the demand of sawnwood products. Sawmill is the bottleneck in the pellets logistics chain. The question is, in what extent raw material supply is able to meet the rising demand on wood pellets and what are possible alternatives to "classical" wood pellets. Therefore an assessment of European forestry and sawnwood industry on the basis of several surveys was made. The results are compared with an estimation of pellets demand according to the biomass targets of EU policies. An analysis of total costs for pellets production shows the influence of raw material costs. The expected demand for wood pellets for medium scale heating, derived from the objectives of the EU climate and energy package, will not be covered by the standards of corresponding premium wood pellets. Even in the minimum scenario (10% of biomass heat demand is covered by the use of pellets and here again about 50% of that exclusively in small scale heating), 14 million tons of pellets will be required. The pellets supply that was derived from the sawmill industry forecast amounts to 8 million tons. The raw material supply has to be widened. Pellets have to be produced from forestry residuals, from short rotation plantation on agricultural farmland and from agricultural products like grain, different types of grass, agricultural residuals etc. New standard for non-wood pellets has to be developed to create a transparent and efficient market for different types of pellets for different purposes. Boiler technology has to be improved for alternative pellets types to meet the regulations of flue gas emissions and to meet the technical requirements for more aggressive components.