Australian Biodiesel Group CEO Len Humphreys says fossil fuels are running out, oil prices will stay high and continuing political instability in the Middle East is making markets and policymakers nervous.

“Put all of that together and the world starts to gain a lot of interest in developing an alternative fuel industry,” Humphreys said.

Other factors driving investment in Australian biodiesel include favourable fuel excise relief for approved biofuels projects until 2015 and a variety of proven production technologies and potential source materials.

But these advantages also apply to most forms of bio-ethanol, an organically derived additive for petrol that can reduce emissions for vehicles running on unleaded petrol.

Bio-ethanol has been available in the US since the late ’90s as a fuel additive commonly sold as ‘E10’, a blend of 90% petrol and 10% ethanol. While some vehicles have been modified to accept blends of E85, bio-ethanol remains overwhelmingly a fuel additive, rather than a replacement.

Although biodiesel is commonly blended with regular diesel, diesel engines can also run using pure biodiesel, or B100, without any modifications. In fact, Rudolf Diesel’s first engine in 1893 was fuelled entirely by peanut oil.

So biodiesel can replace petrofuel at no additional cost to immediately improve environmental performance.

And now rising crude oil prices have made biodiesel appear to be a cost-effective alternative that guards against surges in the price of regular diesel.

While the major players in Australia’s biodiesel sector all cite these advantages, they use different production techniques and have different business plans.

In December, the Australian Biodiesel Group (ABG) completed an oversubscribed $A20 million IPO, providing the funds to push forward its biodiesel projects.

ABG already runs a 40 megalitre biodiesel plant in Berkeley Vale, New South Wales and has received approvals for its plans to build a 160 megalitre plant at Narangba in Queensland, producing a “high-performance” biodiesel made from animal fats (tallow) using its own patented technologies.

“We own the technology, so we won’t be paying a license fee when we build or operate our plants, so we won’t have the burden of a licensing fee added to our costs,” ABG’s Len Humphreys said.

Humphreys said investors also liked the potential to license the production technology to third-party biodiesel producers.

ABG claims its tallow-based biodiesel is not only cleaner than fossil-fuel diesel, but also more fuel-efficient, making it one of the most cost-effective and competitive alternative fuels available.

Fuel efficiency for diesel is expressed in a cetane rating, the equivalent of octane in petrol.

Humphreys said that while used cooking-oil based biodiesel had a marginally lower cetane rating than petrodiesel – about 50 – ABG’s tallow-based biodiesel had a cetane rating of around 70.

In an odd twist, outbreaks of Mad Cow Disease around the world in recent years had reduced the global demand for tallow, making it cheaper than the company had anticipated, he said.

While Australian biofuels firms would benefit from any federally mandated targets for biofuels consumption, ABG's biodiesel already had a distinct market edge, according to Humphreys.

“There’s the cost advantage and a lower emission footprint. In the case of pure tallow-based biodiesel, there is also a much higher rate of fuel efficiency,” he said.

The ability to reduce particulate emissions for bus and truck operators in urban areas could tip the balance towards biodiesel without the need for further biofuels mandates, according to Humphreys.

“Biodiesel is a very easy option because the vehicle manufacturers don’t have to do anything and the users don’t have to do anything,” he said.

While ABG remains confident that the existing political framework for biodiesel is enough to move forward on, emerging fuels hopeful Axiom Energy had to withdraw its oversubscribed $A37.6 million IPO after Treasury said one of its projects was not eligible for excise relief available to biodiesel developments.

Axiom’s initial business model projected 80% of its revenues would be derived from biodiesel made from plant oils, animal fats and used cooking oils, with the remaining 20% coming from a diesel product made from plastics diverted from landfill, according to Axiom managing director David Vinson.

Treasury imposes a full fuel excise of A31.1c per litre on any fuel used in a combustion engine. Excise relief provided to approved biofuels is supplied by other departments, such as the Department of Environment, through initiatives such as the Cleaner Fuels Grant Scheme (CFGS).

Despite the project's self-evident environmental advantages, Axiom was told it would not be immediately eligible for excise relief.

“[But Treasury] said we could go to other departments and apply for specific treatment in relation to excise offsets on that fuel,” Vinson said.

Axiom is currently trying to negotiate excise relief for its plastics-to-diesel proposal while preparing a new prospectus for 2006 based entirely on its biodiesel model, which is eligible for CFGS excise relief.

Vinson said Axiom’s biodiesel feedstock supply agreements remained in place and the company would still acquire and expand a biodiesel plant currently owned by a Victor Smorgon Group subsidiary, Vilo Assets Management.

While ABG and Axiom are trying to develop new technologies that could help establish a new Australian biodiesel industry, global investment firm Babcock & Brown looks at acquiring and developing existing projects.

B&B consolidated its renewable fuels interests with the listing of Babcock & Brown Environmental Investments (BEI) last year.

B&B executive director Greg Haustorfer works closely with BEI, helping to identifying existing projects that are likely to add to BEI’s renewables investment portfolio.

Haustorfer said the Clean Fuel Act of 2004 provides a proactive framework for future investment in Australian biofuels, particularly biodiesel.

“That was the basis on which we made our investment in Natural Fuels Limited (NFL). I think the legislative framework is good and the market indications for the acceptance of biodiesel are quite positive,” Haustorfer said.

BEI is the second largest shareholder in Natural Fuels Limited (NFL), which has already begun building a 150 megalitre capacity plant in Darwin.

Haustorfer said biodiesel’s long history, proven production technologies and the ease with which it could be introduced to market all gave the fuel a competitive advantage.

The Darwin NFL plant will produce diesel from imported palm oil using proven German technology, he said.

Overseas feedstock would give better supply security than locally produced sources as the availability of Australian crops fluctuated with the country’s frequent droughts, according to Haustorfer.