Here's a simplified diagram of our pellet stove. There's a hopper for pellets on the left, the burn box on the right, two separate fans (the left, purple, one for the crucible, the right, green, for blowing hot air into the house), and of course the exhaust pipe in black.
The crucible is where all of the real action happens. With just a few pellets it is able to generate a lot of heat and burn the pellets at incredible efficiencies. In fact pellet stoves are exempt from the EPA's smoke emissions requirements because they put out so few pollutants.
How do they do this? The answer is pretty simple, pellet stoves burn in "inferno" mode all of the time. It's just a smaller, more manageable inferno. Combined with the relatively consistent and low moisture content fuel the stove is able to pretty much burn each pellet up completely. It does this by blowing a jet of air across the burning pellets creating a little blast furnace.
You achieve something similar in a wood stove when you open up all of the dampers and allow the fire to pull in lots of air to fan the flame. This puts out lots of heat and burns the logs quite thoroughly, but you will also be burning through the available fuel quickly and generating more heat than you can transfer into the room.
A pellet stove is able to control how fast the fuel is added. Think of a pellet stove as a normal wood stove with little micro-logs that are automatically fed into the stove by some micro-wood-stove-gnome.
Micro is actually a pretty good description of the pellet wood stove process. By breaking the fuel into small, manageable units you can add a little bit of electronic smarts, some sensors, and micro-manage the stove to extract the exact amount of heat desired while wasting as little fuel as possible.
To do this with a wood stove you crank down the damper, restricting the flow of air. It's just the opposite with a pellet stove, you leave the air alone and reduce the amount of fuel by slowing down the auger. The fuel burns normally but it puts out less heat since there is less of it burning. No smoldering involved.
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