The fuzz is fungi. It grows because the growing medium, in this case peat pellets, is staying too moist. Let the growing medium dry out and the fungi should go away. While this sort of fungal disease generally does not harm the plants, there are other fungal diseases (collectively lumped together as "damping off" diseases) that grow in similar conditions that can kill your plants, and kill them quickly.

To prevent such fungal infections:

a) Avoid overwatering. The growing medium should be only moist, not soaking wet...not even kinda, sorta, soaking wet.

b) Ensure good air flow. I usually keep a fan running in the same room where the seedlings are growing---sometimes a ceiling fan, sometimes a small tabletop oscillating fan. Good air flow helps prevent disease.

c) Sometimes you can kill off the mold by sprinkling the peat pellets with either cinnamon or with cornmeal, both of which have anti-fungal properties. However, that's like putting a band-aid on a wound. You will have to stop overwatering the pellets and let them dry out more in between waterings, or the "wound" will recur.

d) Sometimes you can water the peat pellets with chamomile tea instead of water and that helps kill existing fungi or prevent new fungi from growing.

Peat pellets can be difficult to use. Peat holds tons of water and stays wet too long, and then when it dries out, it can be impossibly hard to re-wet and it just seems to shed water once it reaches a certain point.

Next time, try Jiffy mix which has other ingredients added to the peat. You also can get fungi with Jiffy mix and other soil-less mixes, but since there are more ingredients than just peat and those added ingredients improve drainage, the mix is a bit more forgiving of overwatering.

Thanks. I separated out the ones that already sprouted, so I'll let them dry out a bit more. I have some others that felt pretty damp, so I'll set them out too.

You're welcome.