PORTLAND – Maine’s biomass energy industry is running red hot, with the state’s 11 wood-burning plants running near capacity or undergoing upgrades.

Soaring oil and natural gas prices, combined with state-mandated markets for green power in southern New England, are stoking investment in wood-fired electricity and providing an unexpected boost to Maine’s rural economy.

Three years ago most of the biomass plants built across the state to generate power from waste wood were off line for months at a time, and a couple shut down permanently. By 2002, an industry that once generated enough electricity to light 250,000 homes and employed hundreds of workers was fighting for its life.

Not only are the plants now running full-tilt, developers are even planning a new $80 million plant in Athens with enough capacity for 40,000 homes. It will be built in the same location as a smaller biomass plant that was dismantled last year.

“It was unthinkable two years ago that someone would build a new plant,” said Stephen Hall, plant manager at Stratton Power Station. “The thought was that nobody’s going to build in this industry for a while.”

Foreign oil embargoes in the 1970s prompted the federal and state governments to pass laws encouraging energy production from renewable resources, such as wood and water. That spurred a new industry in Maine and the construction of more than two dozen biomass plants.

Some are at paper mills, where they help supply energy for production, a few are at sawmills for onsite power, and the rest are stand-alone wood burners that won lucrative contracts with utilities.

The market has undergone changes over the years, and is again undergoing a transformation.

Natural gas prices are soaring, taking away the competitive advantage from newer gas plants. At the same time, government policies aimed at encouraging the growth of environmentally friendly power plants are again favoring biomass. The biggest push involves financial incentives recently created in Massachusetts, Connecticut and Rhode Island.

Several states, including Maine, require that a percentage of power sales come from renewable energy sources. Because Maine generates more power than it needs, it can ship excess electricity south.

Recently, southern New England states have begun to reward generators who can produce renewable power that meets specific guidelines. They are eligible to earn a premium, on top of the price they are paid for the electricity.

Connecticut, for instance, offers a price premium through 2009 for biomass plants that emit lower levels of air emissions. The premiums are so lucrative that plant owners in Maine are investing millions of dollars for less-polluting boilers and other upgrades, so they can qualify.

“It’s a good thing for Maine,” said Hall, who is president of the Independent Energy Producers of Maine. “We get the benefit of cleaner air, and these plants survive to be part of the economy.”

But Hall and other experts caution that the current expansion has limits.

These plants swallow more than 1,000 tons a day of sawdust, waste wood and construction debris, so a reliable supply is critical. Also, developers are cautious as they weigh their risks, knowing that energy prices and public policy can change fast.