Shell and German biofuel company Choren Industries are developing a pilot plant in Germany to produce biofuels from wood chips, straw and other waste products rather than valuable food crops, according to a report in the Times.

The pilot plant, near Freiberg, will produce 15,000 tonnes per year of diesel and is intended to come online later this year. In an effort to fast-track commercial production, Shell and Choren will next year begin building a much bigger plant in Schleswig-Holstein, costing €500 million ($A840 million) and capable of producing 200,000t of BTL diesel.

Shell has admitted that at $US60-70 a barrel, the cost of BTL is high compared to oil, but the company said it was confident that economies of scale could bring down the price, according to the Times report.

Most biofuels currently in use are made from food crops such as sugar, palm oil, soy beans and corn, which have put pressure on food prices. The biofuels industry and researchers are now talking of “second-generation” fuels that will be sourced from waste products or non-food crops grown on marginal land.

Late last month, Shell also secured a $US80 million grant from the US Government to build a cellulosic ethanol plant in Idaho that will use plant waste and straw as feedstock.