Update 1
District Heating & Cooling from a Waste Wood-Fueled Combined Heat and Power (CHP) Plant in Spearfish, SD
A combined heat and power, or cogeneration plant for district heating/cooling (Reference 1) located on or next to the Spearfish Forest Products sawmill site could economically distribute hot water (typically at ~200 deg F) via insulated underground pipes to nearby large users of heat.  For example, one pipeline path following a more or less straight line could serve (ordered by increasing distance) the drying operations of the sawmill, Black Hills State University (BHSU), which is adjacent to the sawmill, West Elementary School, the Middle School and tied for farthest at about 1 mile, the High School, the Hospital and Safeway Grocery.  Another pipeline path following a somewhat less direct route for about 1.3 miles along Jackson Blvd, the main artery connecting the university with downtown, could serve the sawmill, BHSU and the downtown area.  Similar to the order in which sewers were installed long ago, the first users connected would be those that can benefit most by being on the system.  Also similar to the sewer system, it would be unprofitable to serve distant users in low building density areas for a rate as low as for nearby users in high building density areas (but cities tend to charge the same sewer rate anyway).  

Compared to natural gas heating, burning low cost sawmill waste wood and/or slash in a single plant would deliver heat at a substantially lower (& more stable) cost, yet pollution would at worst be only slightly higher (Reference 2).  The availability of very inexpensive heat would be attractive to other businesses for which heating/cooling is a significant expense such as greenhouses for year-round fruit and vegetable production or a biorefinery.  Heat can also be used to produce chilled water for air conditioning and refrigeration (using the ammonia absorption cycle), distributed via underground insulated pipes from the central plant or produced at each building.  Downtown St. Paul, MN obtains chilled water, hot water and electricity from its central wood-burning CHP plant (Reference 1).  To make best use of the plant's full capacity and ensure that there will always be enough hot or chilled water available, that plant has large insulated water storage tanks.  Although the main justification for such a plant in Spearfish would be its inexpensive production of hot and chilled water for nearby users, the high temperatures produced by burning wood or syngas (from gasification of wood) permit the efficient generation of electricity--a high-value byproduct that can be sold to the grid and distributed over longer distances.  It would be a shame to waste such high temperatures by merely heating water to a bit less than its boiling point.  By producing electricity as well as heat/cooling, a CHP plant maximizes use of invested capital and makes efficient use of nearly all the energy value in the wood, whereas a typical generating plant is not close to any population center and just dumps over half of the energy in the fuel to a river or the atmosphere.  Unlike wind turbines that produce electricity only when the wind blows, wood-fueled CHP plants can operate continuously and do not require expensive new electric transmission lines (though they do require underground insulated pipes to distribute hot and chilled water).  

2006 Black Hills Biomass Feasibility Study
A recent study (Reference 2) considered wood-fired heating of individual buildings, or in the case of BHSU, of the existing district heat network of buildings, but the idea of including other large users of heat/cooling in Spearfish in the network has not been proposed before.  Including more large users in the district heating/cooling system and locating the plant next to the source of fuel would improve the economy of scale, make capital available from at least a couple of sources and lower the delivered $/BTU cost to all users.  Specifically, Reference 2 did not consider several factors each of which would lower costs: having users other than BHSU on the same district heating system, producing cooling and electricity as well as heat, locating the plant on or next to the sawmill grounds (waste wood is very inexpensive but transport cost is significant) and obtaining capital from other users in addition to BHSU, yet still found the BHSU project feasible.  Reference 2 showed that the Black Hills can supply enough sustainably-harvested wood for many such projects.  By also providing an economic use for forest products that would otherwise be left to rot or be burned in place, air pollution and the cost of maintaining a healthy forest are reduced. Unlike burning natural gas or coal, burning sustainably-harvested wood is carbon neutral--it does not increase atmospheric carbon dioxide levels (References 3, 4).  

2008 Forest Service Proposal: Electric Generating Plant in Spearfish
The U.S. Forest Service is considering construction of a 10 megawatt electric generating plant in Spearfish that would burn 200,000 tons/year of waste wood from the Black Hills National Forest.  Their proposal (Reference 5) describes the Spearfish plant as "likely the most bold and significant move to renewable energy being considered by the agency at this time. This proposal is directly on track with the Chief's emphasis and strategy for biomass utilization, as well as green house gas reductions."  The proposal states that the capital cost of the plant would be approximately $43 million, that it would be sited in Spearfish (just a guess: on the sawmill grounds?) and it would have estimated annual revenues of about $13 million from power and steam sales.  There is no mention of making low temperature (~200 deg F) waste heat available for heating buildings in Spearfish.  In fact, because they intend to use a condenser with their steam turbine, production of electricity is their main interest and the approximately 30 megawatts of waste heat (assuming heat to electricity conversion efficiency of 25%) less the steam sale amount, presumably to the sawmill, would be dumped to the atmosphere via the cooling tower.  30 megawatts of waste heat is enough to heat 10(ten) Black Hills State Universities in the winter, so it could likely go a long ways towards sawmill drying purposes + heating BHSU + the public schools + Spearfish Hospital + downtown buildings + the Dorsett Home, etc.  If Spearfish citizens believe a better use of the dumped heat would be for district heating of Spearfish buildings to displace natural gas, the Forest Service must be contacted ASAP to convince them that this can be a win-win situation so their proposal can be modified accordingly.

Spearfish is Unique
Because the energy density from a sustainably-harvested Ponderosa pine forest is very diffuse (at most only about 0.043* thermal watts/square meter of forest land), wood could provide only a tiny fraction of U.S. power demand and unless the power plant is very close to the wood collection area, transportation costs would make wood a more expensive fuel than coal or natural gas.  Therefore, this is an idea not applicable to most of the country.  Spearfish, however, is quite unique--it is a small town next to a huge forest and the largest sawmill in the state is close to the buildings mentioned above so fuel transportation costs and underground piping costs would be low.  Building a wood-burning (or wood gasifying) combined heat and power plant in Spearfish makes economic sense.  It would reduce heating/cooling costs to Spearfish, keep money now paid to far-away natural gas suppliers within the Black Hills and support a local industry.  With the imminent addition in 2009 of two new large users of heat (the BHSU science building and the replacement for East Elementary School) comes an opportunity for Spearfish to make a decision: burn more natural gas or use this new project to begin the reduction in heating costs for many users.

* Calculated using the sustainable-harvest amount: 800,000 tons/yr of non-saw timber quality from 1.37 million acres (~0.49 cords per acre per year) from Reference 2 and the heat value of ~10.64 E6 BTU/cord for Ponderosa pine.  "Saw timber" means 6 inch or larger diameter and it is this that yields the salable products of sawmills.  A fraction of this amount is sawmill waste (150,000 green tons/yr for the Spearfish sawmill) and would be available at a very low cost.  

 
References
1) "In the Pipeline: District Energy and Green Building", Environmental Building News (March 1, 2007):  http://www.buildinggreen.com/auth/article.cfm/ID/3585/

2) "Biomass Feasibility Study, Black Hills Region, South Dakota" (September 29, 2006): http://www.state.sd.us/doa/forestry/publications/Biomass-Report-Final.pdf  (~1 MB)

3) "Transforming Lives for 125 Years", BHSU President's Budget Message January 2008: http://www.bhsu.edu/Portals/0/about_bhsu/president/budget-doc-jan-08-1-15.pdf (~5 MB)

4) See the Global Warming or CO2 pages of the website "Coal2Nuclear": http://coal2nuclear.com

5) Forest Service-"Off the Grid", A Path to Net Zero Energy Consumption published October 7, 2008: http://www.fs.fed.us/sustainableoperations/documents/2008_SLP5_ALP_Report_20081006.pdf (~2.5 MB)