The UAE is vying to be the first Middle East country to produce biodiesel using inedible oil instead of fresh food crop as feedstock by next year.

Dubai-based venture capital fund Alf Yad Limited announced yesterday that it is taking a majority stake in Emirates Biodiesel (EmBio), the company responsible for producing the commercial supply of high-grade biodiesel within the first half of 2009. Alf Yad's umbrella company Daman Investments manages the green fund.

Biodiesel is a non-petroleum-based diesel produced from organic sources such as vegetable oil, inedible oil and other biomass and can be used alone, or blended with conventional diesel in unmodified diesel-engine cars.

Shehab Gargash, CEO of Daman Investments, said EmBio is the second and "the most ambitious" investment in Alf Yad portfolio, which is slated to have 10 venture capital funds. He declined to give the size of investments "to retain the competitive edge" but said all Daman investments target 30 per cent internal rate of return (IIR) per year.

"Although we want to achieve something in local sustainable development, this is not a charitable proposition. This business is based on sound fundamentals," Gargash added.

EmBio was founded by Karim Aly and Wadah Abusin, two young Arab entrepreneurs who left their private equity and investment banking careers to create Ecobility Energy Solutions, the brain behind EmBio. EmBio seeks to produce an initial output of 3 million gallons of biodiesel per year, Abusin said adding that they would ramp up production as demand increases.

The biodiesel plant, currently being built in Al Ain Industrial Area, is due to be fully commissioned in the first half of 2009. The start-up production is also set to begin in the same period.

"The feedstock is something that we are geographically agnostic, as long as it is within the GCC and the neighbouring countries" Aly told Emirates Business. "Ultimately, we'd like to source our feedstock from as close as possible to us to have the lowest carbon footprint possible. By doing that we will also lower our transportation costs which means we can supply to market with a competitive price."

Biodiesel use and production globally are rapidly increasing. Fuelling stations make biodiesel available to consumers across Europe, and increasingly in the US and Canada. A growing number of transport fleets use it as an additive in their fuel.

Biodiesel, however, is often more expensive to purchase than petroleum diesel but this is expected to diminish due to economies of scale and agricultural subsidies versus the rising cost of petroleum as reserves are depleted.

Abusin said EmBio's products would be in line with international market rate and its introduction in the market would be critical for the UAE as well as to the region's future. "The majority of the infrastructure underlying the region's economic growth is diesel-powered," Abusin said. " Given the difficulty of making immediate major cuts to fuel subsidies, the GCC states are rapidly exploring ways to make greater use of alternative energy to meet the growing domestic demand. EmBio presents a viable solution."

Nadimeh Mehra, Alf Yad chief operating officer, added: "All the information that we are able to source pointed to the fact that renewable energy is the way forward. In addition, this project underwent a very diligent process, which goes hand in hand with venture capital, something that is very new to this area.

"We are delighted to have entrepreneurs that understand what venture capital means and what it can bring to the business and that is one of the reasons why we have chosen to invest with them. At the end of the day, we have to give back the investors what we have promised."

Last week, Gulf Finance House, Ithmaar Bank and Abu Dhabi Investment House also launched an investment vehicle that would see investments in biofuel.

Agricapital, a Shariah initiative with proposed authorised capital of $3bn and target paid-up capital of $1bn, will provide financing solutions food production, livestock, biomedicine, bio-fuels and agricultural technology. The three Gulf firms are considering Australia, China, Philippines, India and some of the North African countries to house these projects.