Shell plans to launch a new fuel made from wood chips and straw 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.

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. “We would like to be the leading provider of second-generation biofuels,” he said.