HAMBURG (Reuters) - Large new investment incentives will be needed to promote the development of alternative biofuels after the European Union's move to curb the use of fuel derived from food crops, a unit of Royal Dutch Shell Plc said on Tuesday.
The executive European Commission announced a major shift in biofuel policy on September 17, saying it plans to limit crop-based biofuels to 5 percent of transport fuel. Campaigners had argued that existing rules were taking food out of people's mouths.
In a biofuels study presented on Tuesday, Deutsche Shell said companies would need help with the costs of developing and producing new second-generation biofuels to meet that goal.
"Existing incentives are currently not sufficient to simulate the extensive and strategic new investment for the large-scale technical introduction of second-generation biofuels," Deutsche Shell said.
Biofuels made from food crops such as grains, sugar and vegetable oils, often called first-generation biofuels, had been expected to make the biggest contribution to meeting an EU environmental protection target that 10 percent of all transport fuel should come from renewable sources by 2020.
The EU's new proposals, however, envisage the remaining 5 percent of biofuel output to reach the 2020 target will come from biofuels derived from waste products, grasses, the inedible parts of plants or a range of other non-food feedstocks including algae.
"There will be possibilities to increase the use of second-generation fuels, however these targets are ambitious," said Joerg Adolf, chief economist of Deutsche Shell.
"We will need research and development of second generation biofuels. We will also need large production plants," he added. "Currently we have some second generation pilot plants but we will need production in millions of tonnes not in hundreds of thousands of tonnes."
Shell and others are researching several types of second generation fuel production.
"We see that such large scale industrial plants need three to four years lead time including planning, investment and planning permission," Adolf said. "I would not expect the major flow of new (second generation) plants to come on stream until after 2020."
This was partly why Shell regarded the latest EU plans as ambitious, he said.
Details of the new EU plans have still not been published, but Adolf said it was possible that the existing policy of double-counting the volumes of biofuels produced from waste fats towards the overall biofuels-use total could be expanded.
Second-generation biofuels are currently about twice as expensive as the fossil fuels they should replace, said Uwe Fritsche of German research institute IINS, which undertook research for the Shell study. Prices would need to be reduced.
"Some transport modes such as ships, aircraft and trucks need bioenergy to reduce their emissions because of lack of alternatives," said Fritsche. "Biofuels still have a role."
Shell did not call for an end to use of the controversial higher bioethanol/gasoline blend in Germany, called E10.
The German government in 2011 raised the maximum permitted level of bioethanol blended in gasoline to 10 percent from 5 percent as part of a program to protect the environment by cutting CO2 emissions, But the blend has struggled to raise sales and has been criticized as helping to raise food prices by consuming grain for its production.
The higher blend "has partly established itself in the market" and is expected to continue its development, Shell said.
(Reporting by Michael Hogan; Editing by Catherine Evans)