The Australian Renewable Energy Agency, the University of Newcastle, Ethanol Technologies Limited (Ethtec), Muswellbrook Shire Council and Chinese investment company Jiangsu Jintongling Fluid Machinery Technology (JTL) have partnered in a project to use “groundbreaking advanced biofuel technology” to produce up to 270,000 litres of biofuel per year.

The “revolutionary” Ethtec process will free farmers from having to choose whether to use crops for food or fuel production, Ethtec senior biotechnologist Dr Geoff Doherty said in a statement released on Tuesday by the University of Newcastle, as the federal government announced $11.9 million towards the project.

“Ethtec technology will eliminate the food versus fuel tension... and also give farmers a second source of income,” he said.

Australian Renewable Energy Agency chief executive Ivor Frischknecht said Ethtec’s innovation was to produce bioethanol from low-value “second generation technology” products such as sugar cane waste, forestry residue and cotton gin trash.

“All of Australia’s ethanol is currently first generation, sourced from wheat and sugar cane,” Mr Frischknecht said.

“Demand for ethanol in Australia is expected to increase by about 500 million litres each year until 2030, with mandates in Queensland and NSW. The next phases of the project are important in making advanced biofuels a viable option to support emission reduction for the transport sector.”

The Muswellbrook facility on council land on Thomas Mitchell Drive will demonstrate a new process to produce bioethanol and assist in commercialising the fuel.

“The global demand for biofuels is expected to triple by 2050, with most of the growth to be met by ethanol, so technological breakthroughs that make producing ethanol from waste more efficient is game changing,” Mr Frischknecht said.

Ethanol currently makes up just 1 per cent of Australia’s fuel consumption.

Federal Environment and Energy Minister Josh Frydenberg said $11.9 million in government funding through the Renewable Energy Agency would allow Ethtec to make additional improvements to its technology and facilitate its broader rollout.

Former Liberal Party leader and renewable energy advocate Dr John Hewson, an advisor to the project for several years, said the government funding was “very exciting news” because of how waste-produced ethanol could be used.

“There has been a lot of publicity around electricity security lately but what many people don’t realise is that oil is responsible for around 40 per cent of Australia’s energy use,” Dr Hewson said.

“This announcement makes it clear that the renewable energy agency is committed to funding development of renewable transportation fuels as a means to mitigate greenhouse gas emissions.”

The University of Technology Sydney’s Institute for Sustainable Futures said the project showed potential to “transform the Upper Hunter into a national biorenewables hub”.

Ethtec’s senior research engineer Andrew Reeves said the Upper Hunter provided a unique opportunity to develop an advanced bio economy.

“If you look around the world at successful bio renewable hubs, they all have two important things in common: an existing skills base and an economy in transition,” Mr Reeves said.

“The vast land holdings associated with industrial buffer zones and rehabilitation sites provide a unique opportunity to develop an advanced bio economy in the region that works alongside existing mining, power and agricultural operations.

“The Upper Hunter has substantial infrastructure resources which makes investment in the region very attractive. The existing grain rail network that connects the Upper Hunter with the NSW wheat belt has the potential to deliver millions of tonnes of under-utilised crop residues to the region.”

Muswellbrook mayor Martin Rush said the project was a major economic development initiative for the region.

“Council has worked alongside Ethtec and the University of Newcastle for the past two years to initiate this project here in the shire,” Cr Rush said.

“We welcome the significant contributions from all partners involved at all levels of government and industry to host an initiative like this in the Upper Hunter. This project demonstrates the significance of council’s Job Creation Fund in supporting new diversified economic activity in the shire.”

The council is working closely with the University of Newcastle’s International Centre for Balanced Land Use to support the development of a regional scale bio economy sector, he said.