The Harper government made good yesterday on its promise to boost next-generation biofuels with the launch of a $500 million fund aimed at jump-starting a large-scale demonstration of new technologies.

Industry proponents called the investment a massive commitment that will help ethanol producers wean themselves from food crops such as corn, while at the same time making Canada more competitive in the race to develop sustainable biofuels.

"We want Canada to be a jurisdiction that's recognized for this," said Vicky Sharpe, president and chief executive officer of Sustainable Development Technology Canada, an arms-length foundation created by Ottawa that will manage the new fund, called the NextGen Biofuels Fund.

The renewable fuel industry got a further boost yesterday after the price of oil briefly surged above $80 (U.S.) a barrel for the first time. By the end of the day, light, sweet crude had jumped $1.68 to close at a record $79.91 on the New York Mercantile Exchange.

Rising oil futures gave strength to the Canadian dollar, which gained 0.53 of a cent (U.S.) to close at 96.52 cent, a 30-year high.

Bliss Baker, vice-president of corporate affairs at Canadian ethanol giant Greenfield Ethanol, said new investment in biofuels and rising fossil fuel prices are working in concert to stimulate the market.

"Can we compete with gasoline? Well, today with oil at $80 a barrel we can," said Bliss, adding that on a per-capita basis the new fund is more substantial than comparable federal support in the United States.

"We're thrilled. It's going to mean a giant step forward for our industry and Canada. It puts Canada in the horse race internationally."

Andrew Kingston, CEO of Vancouver-based Dynamotive Energy Systems Corp., which converts wood waste like bark into a product called "bio oil," said the new fund is "timely and appropriate" and gives momentum to a trend gripping all developing countries.

The so-called first generation of ethanol production depends on starch-based food crops such as corn and wheat. The process is proven, and several production plants based on it have been built in Canada – although critics say the approach uses too much energy and plays havoc with food prices and supplies.

Next-generation or "cellulosic" ethanol involves the processing of the cellulose content in biomass, which can include everything from crop residue, such as wheat straw and corn husks, to forest debris and municipal solid waste. Even dedicated crops, such as fast-growing switchgrass grown on marginal lands, can be used.

Cellulosic ethanol, while expensive today, is considered the future of biofuels because it's more energy efficient to make and it relies on non-food materials that hold low value and are plentiful – particularly in Canada, with its vast forests and agricultural lands.

Companies such as Ottawa-based Iogen Corp., Biox Corp. of Oakville, SunOpta Inc. of Brampton and Lignol Energy Corp. of Vancouver are leading the market.

Even Greenfield, traditionally just a builder and operator of ethanol plants, has spent the past three years researching and developing new approaches to cellulosic processing. It plans to tap the fund.

"We have a decent critical mass of young Canadian companies that have done some really good work in this area," Sharpe said. "I don't think people have grasped what the bioenergy industry could look like."

The fund will target technologies that have moved beyond the pre-commercial pilot phase, and requires that demonstration facilities be located in Canada. Investment in individual projects is limited to 40 per cent, capped at $200 million, of total start-up costs.

And it's not a handout. After any facility becomes operational, companies are expected to pay back the money over 10 years from cash flow. "Companies can apply for this money any time," Sharpe said. "We anticipate some applications in the next three months."

Foreign companies looking to set up shop in Canada are welcome.