Media attention and government policy has been focused on biofuels, particularly ethanol, but companies have also been looking at setting up gas-to-liquids and fuel-from-waste projects. In addition, the long-established LPG sector has been growing rapidly over the last 12 months.

These fuels are less polluting than standard petrol or diesel. LPG is already cost-competitive, and other emerging fuels can become cost-competitive if given initial government support, according to their advocates.

Backed by the Queensland sugar lobby, the ethanol industry has attracted more attention and has had stronger government support than any other kind of emerging fuel.

The Australian Government has provided more than $A36 million in capital grants, $A41 million in production grants and tax-free status for the fuels until 2011 for existing and potential biodiesel and ethanol producers, according to industry and resources minister Ian Macfarlane.

Macfarlane also won commitments from the oil refining majors to invest in ethanol. Caltex has already made good on its word by making an agreement with the Dalby Biorefinery to purchase locally produced ethanol, while Shell has rolled out a 5% ethanol premium unleaded blend.

While all fuels used with combustion engines attract the full fuel excise of 38.1 cents per litre under the advisement of the Australian Tax Office, the federal government offers approved biofuels a full 38.1c a litre rebate until 2011 in order to help establish a new biofuels industry.

After 2011, the amount of the rebate will decrease until 2015, at which time the government expects the net excise on biofuels to be half that of petro-diesel.

2005 ended with Prime Minister John Howard claiming Australia would most probably exceed the federal government's annual production target of 350 million litres of biofuels by 2010.

Mandated fuel blending is supported by the Australian Medical Association, which has called for binding targets of 10% ethanol in petrol and 20% biodiesel in diesel. This would "benefit our health without damaging our cars", said AMA President Mukesh Haikerwal.

A federal government report offered evidence to support this stance, finding that replacing petroleum with ethanol reduced air pollution and health problems more than at first thought.

But the Howard government has refused to mandate the use of biofuels, which some companies think is a necessary step in the creation of an Australian biofuels industry.

However, the government has moved to increase use of a 10% blend of ethanol in the commonwealth vehicle fleet.

State governments are also offering strong support to the ethanol industry. Queensland and New South Wales government fleets are using ethanol blends, and the Queensland government has also committed $A7.3 million over the next two years to support development of the state’s ethanol industry.

In Queensland, independent fuel retailer Freedom Fuels now offers E10 (10% ethanol) blends at almost 100 sites throughout the state.

But while ethanol is backed by powerful industry and political lobbies, biodiesel may have more to offer in the long-term.

Unlike ethanol, biodiesel can be used in proportions of more than 10% without damaging vehicle engines. In fact, diesel engines can run on 100% biodiesel.

Biodiesel is also a low-polluting fuel without the high levels of sulphur and particulate emissions found in petroleum diesel.

With the proportion of vehicles running on diesel continually growing, and diesel engines offering greater economy and efficiency than petrol motors, biodiesel could have a bright future.

Or at least, that’s what many investors think. Two Australian stock exchange floats involving biodiesel companies last year were very successful.

Australian Renewable Fuels (ARF) – a spin off from oil and gas player Amadeus Energy – lodged a prospectus for a $A15 million initial public offering in March.

The company successfully listed on the ASX on March 10, with plans to build two plants (in Western Australia and South Australia) with a combined annual production capacity of 88 million litres of biodiesel, derived from used cooking oils, animal and vegetable fats.

Then in December, the Australian Biodiesel Group (ABG), founded in 2001, successfully floated with an oversubscribed $A20 million initial public offering, with 75% of shares purchased by institutional investors.

ABG currently operates a biodiesel facility in Berkeley Vale, New South Wales, running at around 75% of its 40 million litre annual capacity. ABG says it has received all necessary approvals to commission a second, 160 megalitre facility in Narangba, Queensland by mid 2006.

Investment group Babcock & Brown has also entered the biodiesel sector. It listed B&B Environmental Infrastructure (BEI) on the ASX after Environment Infrastructure Limited entered into a conditional strategic Management Agreement with B&B Infrastructure Management to become its flagship environmental investment vehicle.

The restructured company also completed its acquisition of biofuels company Natural Fuels Australia (NFA).

NFA plans to commission a biodiesel facility in Darwin, Northern Territory, with an initial 150 megalitre capacity. NFA also intends to pursue biofuels interests in North America and Asia. NFA’s Darwin plant will use imported palm oil as its feedstock, the company said.

But another biodiesel outfit, Axiom Energy, had to withdraw its original initial public offering after the Australian Treasury advised the board that its proposed waste plastic-to-diesel project (constituting about 20% of the company's forecasted revenue stream) would not be eligible for the fuel excise relief offered to biofuels.

Axiom has said it planned to continue developing its plans for diverting non-PET plastics from landfill as a raw material for production of a low-emissions diesel. But this depended on a successful ruling providing excise relief from a non-Treasury federal department.

Meanwhile, Axiom aims to release a revised prospectus focused on its approved biodiesel production business model in early 2006.

Another form of low-polluting diesel that has excited interest in Australia is gas-to-liquids (GTL).

Federal opposition leader Kim Beazley said in July that the Australian government should reduce reliance on oil imports by supporting gas-to-liquids research projects.

"We want Australia's natural gas developed to make us more self sufficient in transport fuels and less vulnerable to future global oil shocks," Beazley said.

"Australia's competitors in the gas industry are way ahead of us, particularly in the Middle East where countries like Qatar already have major gas-to-liquids [GTL] projects making refined products for the global market."

One GTL player currently operating in Qatar and keen to get a foothold in Australia is South African giant Sasol.

Perth-based Sasol Chevron representative Tony Pytte has said company had been quietly working away in Australia for several years with support from federal and state governments.

“It's a matter of making a good deal with the right gas suppliers,” he said. “We are talking to suppliers now, but the discussions are confidential."

But GTL projects were massive and it could still be several years before a project was up and running, he said.

GTL diesel offers lower greenhouse gas emissions than gasoline without the high sulphur and particulate emissions of conventional diesel. Given these advantages and Australia’s huge gas reserves, GTL should have a bright future in this country, according to Pytte.