Big River Timbers near Grafton has secured government funding for the project, which it says will halve its $500,000 power bill.
Director Jim Bindon says the idea came from a trade show in Germany a decade ago and he expects the rest of the industry to follow.
"We believe that we've got an obligation to try to utilise the resource that we use to its absolute maximum and I think the timber industry has been long criticised for not utilising its waste stream as well as it could," he said.
"Our view is that generating power is probably the best was to utilise that waste - certainly [with] electricity costs, we don't see them going down in the future."