But the investigation into the development of alternative fuels in Australia also concluded that future production and uptake of biofuels by Australians would be determined by production costs, continuing community acceptance and government subsidies.

It also found that biofuels were only one possible alternative to oil-based petrol and diesel.

Released today, Biofuels in Australia: A Growing Sector, said Australia’s biofuel production capacity is likely to exceed 640 million litres a year by the end of 2007, and could reach nearly 2.4 billion litres by 2010 if current plans are realised.

Joint study author and EnergyQuest chief executive Graeme Bethune said this capacity is sufficient to meet around 10% of petrol consumption and 5% of diesel consumption.

“The growth in capacity should easily be able to achieve the Australian Government target of 350 million litres by 2010,” he said.

“This would be equivalent to about 7.5% of the country’s petrol and diesel consumption, and about one third of Australian petrol and diesel imports.”

But Bethune said now is the time to act because there is a clear market opportunity for transport fuel alternative in the wake of high oil prices.

Biofuels were only one such option. LPG, compressed natural gas, gas-to-liquids, coal-to-liquids, LNG and shale-to-liquids could also seize market share.

“Most have higher costs than conventional sources, and none provides a perfect replacement [for oil-based fuels],” he said.

“It is likely a number of fuel alternatives will emerge. Our study aimed to assess to what extent biofuels can be part of that mix.”

The study also found consumer acceptability and the necessary distribution networks are also increasing at a rapid rate.

Ecco Consulting CEO and joint study author Mike Cochran said the biggest challenge for the industry in Australia is the rising cost and limited supplies of major feedstock like sorghum to produce ethanol and tallow to produce biodiesel.

“Furthermore, if production continues to grow to over 2 billion litres a year, Australia will need to revert to other grains otherwise destined for exports, such as wheat, for ethanol production, and to importing feedstocks such as additional palm oil for biodiesel,” Cochran said.

In the US, the use of corn in the booming ethanol sector has seen the country's corn prices surge despite a bumper crop.

Bethune said mandating biofuels, which the Queensland, New South Wales and Victorian governments are considering, could lead to biofuels being more expensive than conventional fuels, and would require feedstock to be imported.

“However, there is good potential in the longer term to reduce feedstock costs and increase availability through new technologies, many of which are being researched in Australia,” he said.

Bethune said these include production of ethanol from biomass and biodiesel from microalgae.