The move by Land Energy Girvan Ltd includes increasing the capacity of its combined heat and power plant and upgrading its pellet line in Girvan.
The company said at least 10 new full-time jobs would be created.
The drive to increase capacity and boost productivity has been backed by a £250,000 Scottish Enterprise grant.
The business plans to increase its output of premium grade wood pellets from 60,000 tonnes to 90,000 tonnes per year.
Scottish Energy Minister Paul Wheelhouse said: "This welcome investment is projected to create 10 new jobs and safeguard 28 existing jobs in the Scottish supply-chain supporting generation of renewable, biomass energy, and will reduce biomass customers' reliance on imported wood pellet supplies."
Land Energy Girvan Ltd managing director John Westmacott, said: "The UK premium wood pellet market has grown rapidly in the last five years and is now worth £100m per annum.
"The new investment in the Girvan plant will ensure that Land Energy continues to be a leading player in this market as it continues to grow."
A producer of wood pellets for the renewable energy market is to invest £6.4m in expanding its site in South Ayrshire.