This explains your CO. In the solid fuel (non coal) boilers that I have experience with, it is virtually impossible to run at 1% O2 and not smoke and produce CO. They go hand in hand. The smoke is an indication of LOI, and where there is smoke, there is probably CO.
Your basic problem is the air inleakage, and its effect on your O2 trim control and boiler performance. If you can fix it, you can run closer to minimum O2 levels, what ever that ends up being.
You did not mention what type air preheater you have, but in a bagasse boiler, I would guess the APH is tubular. When you can inspect it, you should look for leakage caused by loose tube to tubesheet joints, not the most likely problem, and erosion wear, to me the most likely problem. As you certainly know, bagasse ash is quite abrasive, so erosive wear in the APH is a fact of life.
Your cold FD air is positive pressure, and your flue gas stream is negative at this point, hence the ease of leakage of the air into the flue gas through even a small leak path.
Another place that tubulars can leak is right at the point where the cold air enters the tube bank, because sometimes the tubes at that point are cold enough to produce condensation on the flue gas side, which accelerates corrosion at that point (if it doesn't cause plugging due to ash collecting on the wet tube surface.) Especially if it constantly goes through a wet-dry-wet-dry cycle.
Other problems can be split tubes at the weld seam, and similar imperfections and mechanical problems associated with any type of metal tubing.
But, it can also be in the casing and/or ducting before or after these components, and, I would hazard a guess that downstream of the economizer there is even a higher O2 level, due to the fact that your FW piping has to penetrate the casing at some point, and generally that is not a prefect seal unless someone really has paid real attention to this area.
It could be a combination of all the above.
By the way, a little cold air leaking into a hot flue gas stream will load up an ID fan real quickly. This too, can mean that the fan can reach its limit 'pumping' (if you will) cold dense leakage air, and not pulling furnace draft. If you have plenty of ID fan capacity (rare in my experience) then this just gives you more exhaust steam for the evaporators and pans due to the additional HP required to 'pump' the leakage.
Pumping air in-leakage instead of furnace gas would explain your difficulty in maintaining your steam pressure.
So, either find the leaks and fix them, or just bias your controller at an O@ level that shows that you are just on the threshold of producing CO. (Assuming you can still make steam production.)
If you will permit an anectdotal story, it is one that you will relate to as an electrical, and one that taught me a great lesson as just a pup of an engineer.
While at a paper mill on a start up of a bark fired boiler (similar conditions to burning bagasse-and one of my first boiler start ups) a new ID fan with a 1000 HP motor and a hydraulic coupling type speed control had been installed along with some other air pollution control equipment, and it was time to put the unit on line.
Every time the ID fan motor was started (which was after the fires had been started and steam pressure established using the FD fans only) and brought to speed, it tripped (or was tripped after reaching a time limit) out on (very) high amps. This happened several times over about a half a day period of time, and since my part of the project was associated with the fan and the liquid drive, I already had concerns about the significant climb in the oil temperatures in the drive. We were literally 'curdling' the oil. (As a mechanical, I wasn't worried about the motor, but the electricals were.)
We had finally reached the start up limit for the motor, where in if we weren't successful on this try, we would have to give up for the day, let it cool, and do it all again tomorrow, (Sunday).
So, we were in the control room, as before, and as the start up procedure proceeded, and the motor was started and the fan was being brought up to speed, we were getting the hellishly high amps on the motor one more time, I heard the power plant manager quietly say to an operator "go to every door on the boiler, and when you find the one that is open, close it."
We, including me, were all standing there staring at the amp meter for the ID fan, on pins and needles, and all of a sudden the amp reading dropped significantly to a very comfortable reading. Then, within a few seconds, the radio came on, and the operator reported that he had found a door open on the economizer outlet and had closed it. The manager replied "thanks, but we saw it when you did it."
Point of this tale is to point out that one door, probably a standard 18" X 18" door was more cold air than a 1000 HP motor could pull and still bring the ID fan to speed.
I related this story to another client in another wood fired plant during a 'back end package' start up, and after a few years when his maintenance people came in and told him he needed a larger motor for the ID fan because it wouldn't pull the load, he remembered my story and said "go find the leaks". He told me that they found enough small leaks to equal just about one fully open door. They didn't buy a new motor.
So in your case, imagine your leaks as an open door, and wherever they are, get them fixed.
Then you will be able to operate where you want to.
I have been a little detailled here because I notice you are electrical, and when I ask the occasional electrical question, I want the same when you answer me.
Good luck,
rmw