Answer: It could be your peat pellets are too wet or dry and that's what's causing the pepper leaves to drop. I never really liked growing plants in peat pellets because of this, but if you've had success then keep using them. If you're letting the pellets get light brown between waterings, then they may be drying out too much. Place the pellets on a tray containing warm water about 1" deep. Let the pellets absorb enough water and then leave them until the water dries up in the tray. By bottom watering this way, you'll avoid the overwatering and drying out of the seedlings.
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