A new road fuel made from wood chips and straw will be launched in Europe later this year from a pilot plant developed by Shell and Choren Industries, the German biofuel company.

The synthetic diesel, made using a novel biomass-to-liquids (BTL) process, will shift the biodiesel industry into a higher gear by using waste plant material instead of valuable food crops.

The pilot plant, near Freiberg, will produce 15,000 tonnes per year of synthetic diesel, which Choren has dubbed Sunfuel. Construction of a much bigger plant in Schleswig-Holstein, costing €500 million (£336 million) and capable of producing 200,000 tonnes of BTL, will begin next year in an effort to quickly bring the product up to commercial scale.

Massive political and regulatory pressure is building on energy companies to find low-carbon alternatives to conventional road fuels. However, increased use of first-generation biofuels, such as ethanol and biodiesel made from rape-seed or palmoil, has caused the price of food crops, such as corn, to soar.

The cost of BTL is high compared with oil at $60 to $70 a barrel, admitted Ken Fisher, vice-president for strategy at Shell, but the company is confident that it can bring down the price with much higher volumes.

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He expects full-scale production on a commercial basis by the middle of the next decade. “We would like to be the leading provider of second-generation biofuels,” Mr Fisher said.

BTL forms part of Shell’s portfolio of synthetic fuels, which it has called XTL, and includes gas-to-liquids (GTL) a diesel made from natural gas.

All the technologies are based on the Fischer-Tropsch process, invented in Germany in the 1930s to synthesise liquid fuels from coal. The process was initially uneconomic, but was used in Nazi Germany and in South Africa under apartheid when the country lacked access to crude oil.

The discovery of better catalysts and the rising price of crude is improving the commercial equation. Shell is building Pearl, a GTL plant in Qatar that will produce 140,000 barrels per day of synthetic diesel, an odourless fuel with zero sulphur emissions.

Shell has a second BTL investment in Iogen, a Canadian company that this week secured an $80 million (£41 million) grant from the U.S. Government to build a plant in Idaho, which will produce cellulosic ethanol from plant waste and straw. Shell has not disclosed its investment in BTL, but analysts think it may have spent $100 million on the two projects and will need to invest several hundred million more to bring BTL up to commercial scale.

Shell is already the biggest biofuel distributor in the world. The cost of ethanol rose 70 per cent last year as the market reacted to the regulatory pressure to reduce carbon and sulphur emissions.