Z Energy is banking on biodiesel users paying a premium for the fuel it plans to produce at an Auckland plant using animal fat.
The fuel company plans to spend $21 million on a biodiesel plant at Wiri that would process tallow from the meat industry.
The plant will produce 20 million litres of biodiesel a year which can be blended with traditional mineral diesel.
Although that's just a fraction of the billion litres of diesel the company sells a year, Z could double biodiesel output if the venture proves successful.
Chief executive Mike Bennetts said the biodiesel - to be blended with traditional mineral fuel - would cost up to 2c more a litre.
"For the plant to be economic all the way through it's probably 1c to 2c a litre more but that's just about 1 per cent that people pay at the pump." Bennetts said government subsidies worth about 2c a litre of biodiesel had been phased out about 18 months ago and the economics of biofuel remained challenging.
"We appreciate that others have tried and failed to bring domestically produced biodiesel at this sort of scale to the New Zealand market."
Z Energy had refined and investigated the plan rigorously over the past four years, was not trying to grow a feedstock supply and the core of its business was in distribution and marketing, he said. Tallow would be secured with long-term contracts which would minimise price fluctuations. The price of tallow varies on international markets depending on demand from the soap and candle-making industries.
Z said its biodiesel would satisfy the highest New Zealand and European fuel specifications.
Bennetts said it had spoken to commercial customers who had expressed commitments to take initial production.
"We expect strong customer support for a high-quality, genuinely sustainable biodiesel and indeed our decision to proceed is at least partially based on these indications of support."
While Z was minimising risk through feedstock supply-chain agreements, Bennetts said the success of the project would be determined by how much customers value "a cleaner, more sustainable alternative".
Initial production would likely be allocated to commercial customers who would typically use the biodiesel in B5 to B20 (five to 20 per cent biodiesel to mineral diesel) blends in heavy vehicles but the company expected to also supply upper North Island retail sites with a B5 biodiesel blend.
One notable biodiesel failure was Solid Energy's foray in 2007.
The state-owned enterprise bought Canterbury Biodiesel, spent $17 million on a canola oil plant but sold the business last year after investing a reported $62 million.
Bennetts said fuel was Z Energy's core business.
• Z Energy plans to spend $21m on a biodiesel plant at Wiri.
• Facility will process tallow from the meat industry.
• Plant will produce 20m litres of biodiesel a year.