A new generation of biofuels is set to radically overhaul the non-fossil fuel market, providing both opportunities and challenges for the auto industry.

Until recently, the question of biofuels has been limited primarily to biodiesel and bioethanol made from crops such as grains, soybeans and palm oil. Their appeal is based on several fronts: Biofuels, in general, not only produce fewer greenhouse gases than petroleum-based fuels but are more widely available, as well.

The European Union, known for being slow to adopt alternative technologies, has energetically embraced these new fuels.

Biodiesel currently represents about 80% of EU biofuel use. In 2005, biodiesel production jumped 65% to nearly 3.5 million tons (3.2 million t), up from 2.1 million tons (1.9 million t) in 2004.

But EU energy policy makers are optimistic new types of second-generation biofuels obtained from ligno-cellulosic or “woody” sources, such as straw, timber, woodchips or manure, will further reduce Europe’s dependence on petroleum.

At present, these fiber-rich materials only can be converted into liquid biofuels, such as synthetic diesel and di-methyl ether, via advanced experimental processes that use high temperatures, controlled levels of oxygen and complex chemical catalysts.

In addition, German researchers at the University of Muenster are using genetically modified bacteria to produce a plant matter-based form of biodiesel known as “micro-diesel,” allowing a third-generation of biofuels to push into the market.

According to the EU, the potential for these various bio-refinery concepts will be put in the context of market conditions, and possible financing mechanisms will be examined. But the EU’s thinking clearly is directed toward engines that no longer run on fossil fuels.

Scientists now are beginning to study the impact this concept may have on automotive manufacturing, while also examining the prospects for mass production and changes auto makers might have to make to their designs to accommodate these new fuels.

Ford Motor Co., which has been prominent in acknowledging the potential impact of vehicle emissions on the climate, welcomes the EU’s biodiesel initiative. However, it has a number of reservations.

“The fuel industry and automotive sector must further increase the market penetration of alternative fuels through a substantially increased offer in accordance with the EU biofuels directive, easier availability and enabling vehicle technology,” a Ford of Europe spokesman says.

“Policy makers must set the right regulatory framework through intelligent legislation and taxation and provide research and development support for vehicle technologies and alternative fuels,” he adds.

However, rather than adapt vehicles to new fuels, Ford says scientists will have to develop fuels that work on existing engine designs.

Volkswagen AG has reached a similar conclusion on engine adaptability and is calling for a tax model that promotes second-generation biofuels.

“The present assessment regarding the sustainability of first- and second-generation biofuels is entirely unsatisfactory, both in economic and environmental terms,” VW CEO Bernd Pischetsrieder says.

VW is leading a European consortium of 32 interested partners, including four auto makers and two oil producers and plant manufacturers, to investigate, develop and analyze a variety of technologies for producing biofuels.

Called Renewable Fuels for Advanced Powertrains, the project runs until 2008 and seeks to generate high-grade synthetic fuel using synthesis gas at a price point near that of conventional diesel fuel.

Despite these developments, Ford says the EU likely will fail to meet its targets for biodiesel production of 5.75% market share by 2010. The auto maker suggests a more realistic goal would be an equivalent of 10% energy content by 2015 and 15%-20% by 2020.

Meanwhile, the planned development of a hydrogen fuel-cell economy conflicts with that of next-generation biofuels.

“There’s a political understanding that we should wait for so-called second-generation biofuels, which are again perceived as the perfect interim solution,” the Ford spokesman says.

“Politically, there seems to be a perception that the hydrogen economy is relatively close, but the issue really is that the technologies are still very much in their infancy and are little more than pilot projects,” he says.