New ETS charges and images of the Gulf of Mexico oil rig catastrophe are giving impetus to the fledgling bio-fuels sector.

Growing on crop land, in sewage ponds and most importantly, in forests, is the raw material for keeping New Zealand running. But making a dent in the $8 billion spent on fossil fuels for our transport fleet is still years away.

Solid Energy's bio-diesel plant in Christchurch can produce just four million litres a year, a drop in the bucket of the 3 billion litres of diesel used annually. Just 700 barrels of crude a year is squeezed out by one of the country's most advanced algae-to-oil setups, while those doing the groundwork to turn wood into ethanol have yet to directly power one vehicle.

While even the major oil companies are investing hundreds of millions of dollars in alternative fuels in the United States, investment here is at boutique levels compared with the overall spending on transport.

Experts say the future will bring a mixture of fuels and smaller, more efficient engines. The slow turnover rate of the vehicle fleet meant all new technologies such as electric vehicles were less viable than bio-fuel that could be pumped into the tank with no modifications or just tweaking. Further down the road is the possibility of fuel from the country's huge lignite reserves or from gasified coal deposits.

Energy Efficiency and Conservation Authority chief executive Mike Underhill said New Zealand had one of the highest per capita sources of alternative energy.

"If you're relying on imported fuel for most of your transport energy then you suffer the fluctuations of the international marketplace. The challenge is that we're such a small country and we can't create demand."

Underhill said another challenge was to get the markets in synch.

"You get a local guy enthusiastic about producing bio-diesel or bio-ethanol but where's the market they put it into. Is it important? Yes. Is it going to happen next year? No."

Underhill said some negative reaction provoked by offshore drilling around New Zealand was informative.

"There's plenty of oil left, but in the sea it's getting more and more risky to get than when it was just bubbling out of the ground.

"In most countries they have few alternatives to oil - in New Zealand we have a lot."

New Zealand had much to gain from being seen as a smart country.

"The tourist industry is keen to be seen as carbon friendly. What we are pushing strongly is there is a straight energy benefit but the co-benefit is how you brand your product."

Gull has been selling blended fuel since 2007, this year pumping its five millionth litre of bio-ethanol. The company's sustainability manager, Karl Mischewski, said now that motorists had been hit at the pump by the impact of the Emissions Trading Scheme, the company was hoping to get better traction on bio-fuels.

"While all other prices go up, biofuels will be better priced in the market. Let's hope it's going to be a shot in the arm."

Gull puts up to 10 per cent of ethanol into its petrol so the ETS impact is tiny for now.

"In a perfect world if we could sell 100 per cent bio-fuel it should be 3c to 5c cheaper," he said.

Gull's ethanol comes from whey, a byproduct from cheese production by Fonterra. The dairy company has more than 80 per cent market share for the sale of bio-ethanol in New Zealand and that not sold as bio-fuel is supplied to foreign and domestic markets as an energy drink ingredient or for industrial uses.

Mischewski said most modern vehicles can use bio-fuel with no problems but there were still image issues.

"Not all bio-fuels are created equal. One of the problems tends to be that there's an urban myth that says all bio-fuels are bad, they're all from chopping down trees in the Amazon. We have to be careful that we're not tarred with the same brush."

ALGAE: FROM POND SCUM TO AVIATION FUEL

There's an awful lot of sharks in this world, most of them in dry land.Chris BathurstWhen algae-to-oil pioneers Solray Energy had Boeing turn up at their plant in 2007 they knew they were on the right lines.

This year an invitation to bid for work for the United States Defence Department means they could be on the brink of the big time, helping feed the military's voracious appetite for an alternative to oil-based fuel. Aviation gas costs US$600 a barrel in Afghanistan and the company is working on a portable processing plant that could produce compatible fuel from pond scum for much less.

Any deal could mean worldwide attention for the company whose highest profile so far has been brewing algae fuel for a lawnmower started by Energy Minister Gerry Brownlee during a media launch last summer.

It's a big leap from a lawnmower to an Apache helicopter but Solray's chief executive Chris Bathurst said the basic crude oil base from algae is the same.

Solray Energy and its public sector partners have spent about $4 million on a processing plant that converts almost any plant matter, including algae, to fuel.

Algae to oil technology has been around for several years, but the challenge is being able to successfully depressurise the high-pressure sludge which is having the oil heated out of it under extreme pressure. It can also run continuously, meaning less new heat is needed to keep the process working. "We've solved that with machinery that we've got a patent on. There's an awful lot of sharks in this world and most of them are in dry land."

The company says the final product has the same chemical composition as fossil fuels and is compatible with the existing refining, distribution and fleet infrastructure.

An initial plant was built in 2005 principally to break down toxic organic chemicals into harmless hydrocarbons.

A larger plant was built in 2008 and is supplied by algae grown and harvested by Niwa's high rate algae growth ponds within the Christchurch City Council Waste Water operation at Bromley.

Heavy airline losses mean alternative fuel research for aviation is on the back burner but a deal with the US military could be a multi-million dollar game changer.

By tomorrow Bathurst must submit a proposal for a portable unit for use on battle fronts to Science Applications International Corporation, a scientific, engineering and logistics firm that works closely with the military. He estimates the broken-down plant would fill 11 large containers, although a bulldozer would need to dig a pond.

Bathurst estimates that if all the sewage ponds in New Zealand were farmed for algae around 15 per cent of transport demands could be met, leading to his growing interest in processing wood.

WOOD: CARS RUNNING ON TREES

Scientist Elspeth MacRae is at the forefront of Think Big biofuel - research that could end our dependence on oil.

The head of bioproduct development at government research company Scion says New Zealand could easily be self-sufficient in transport fuel from trees. It's just a matter of timing.

"A lot depends on who is going to take the risk to plant and how much is going to be redirected from current planting."

Research into fuel from wood started in New Zealand at the time of the late 1970s oil crisis, and while the product from Scion has not powered one single car, there are no serious technical barriers to producing large volumes of ethanol from wood and plant waste.

One Scion scenario shows that by establishing 1.8 million hectares of energy forests, an area roughly equivalent to the current plantation forest estate, the country could substitute 65 per cent of imported fuel with biofuel by 2035.

By using some of the lowest value marginal land and low-value logs from existing forests the country could save $4.8 billion a year on assumed oil prices of $120 to $140 a barrel.

Scion is stepping up from the laboratory and early pilot work to spending millions of dollars on a full pilot plant at its Rotorua base as interest in the fuel from wood grows. About 50 scientists and technicians are working on the project.

The results of the coming pilot trial will be used to model the economics of a 90 million-litre-a-year commercial facility. While the process was proven there is nervousness about large-scale financial commitment to planting pine trees over decades.

"For people who want to invest they need proof of concept, particularly the forestry industry," said MacRae.

The organisation worked with government agencies around the world.

"We're looking at how we can speed things up by putting it through their pilot systems and seeing what will happen when they add their technologies to it."

Around the middle of the decade there was doubt about the viability of wood-based fuel because of cheap oil, she said.

MacRae said Scion was not wedded to any one fuel type. Ethanol was a good benchmark product but "bolt-on bugs" could brew other chemicals, including bio-butanol.

CANOLA OIL: FROM FARM AND FRYER

Biodiesel New Zealand can process about four million litres a year - a fraction of the three billion litres of mineral diesel used annually - but says it is a "stepping stone" to bigger things.

The Solid Energy subsidiary's nifty recycling scheme helps keep fish and chips healthier and reduces by half carbon dioxide emissions compared with hydrocarbon-based diesel.

The company started by processing used vegetable oil collected from restaurants and food makers but is now increasing its emphasis on extracting oil from locally grown canola.

The oil is sold for frying food first and then when passed its used by date is picked up for processing into biodiesel at the company's Christchurch plant.

Biofuels made from corn and sugar overseas suffered a backlash several years ago from those worried about food being displaced but Biodiesel NZ says its canola grown by contractors is different.

It uses non-genetically modified plants from Europe and is ideal as a break crop, said the company's chief executive, Andrew Simcock. It is planted one in three years and breaks up and conditions the soil for wheat and barley.

The company has several thousand hectares of the crop growing in the South Island and Manawatu with its distinctive yellow flowers.

When its seeds are processed they produce one third oil, the rest is a cake that is used as a high protein supplement in animal feed and fertiliser.

The oil is supplied to fleet operators, a Lyttelton-based fishing fleet and tourism ventures whose owners appreciate its operational and maintenance advantages over mineral diesel. One fishing boat is running on pure biodiesel, the blend for trucks, buses and vans is up to 20 per cent.

Simcock said the 42.5c a litre government subsidy, and its parent company providing the $20 million processing plant, means Biodiesel NZ is able to break even in day-to-day operations.

"It's about stepping stones - we've got a model that works environmentally and economically."


This story has been corrected from an earlier version. Biodiesel NZ uses non-genetically modified plants from Europe, not genetically modified plants.