A network of researchers from around Australia, China, Japan, Korea, Europe and the US will collaborate on work at the new institute at Technology Park in Bentley, Western Australia.
Federal Resources Minister Martin Ferguson launched FETI and the institute's biofuel research and development facility.
Institute director Professor Chun-Zhu Li said FETI would ensure Western Australia continues to deliver ground-breaking research into the areas of renewable and fossil fuel energies.
"This institute sees government, industry and educational institutions work together to address national needs for fuels and energy to deliver improved energy security and reduced CO2 emissions.
"We believe that FETI will become an international centre of excellence in the field of energy science and engineering."
The key research areas include bioenergy science and engineering, fuel cell technology, energy storage, coal science and technology, natural gas conversion engineering, interdisciplinary energy science and engineering and environmental impacts of energy processes.
Speaking at the launch on Thursday, Ferguson said: "I offer my congratulations to Professor Li and his team for their hard work, dedication and for their success in this cutting edge field.
"The Australian government recognises the potential of both biofuels and the significant role they could play when it comes to ensuring our energy security, both now and into the future.
"The innovative technology developed by the institute has potential applications for what is certainly something that I, as energy minister, consider to be one of our greatest challenges - competitively priced, lower-emission energy."
The facility was jointly funded by the federal Department of Resources, Energy and Tourism, the WA government, Curtin University and project participants.