Attention all developers of technologies for producing next-generation biofuels, particularly cellulosic ethanol: Canada may invest up to $200 million in your plant, as long as it’s based on Canadian soil and can turn local biomass into renewable fuel.

As promised back in March, the federal government here launched its NextGen Biofuels Fund yesterday, making $500 million available to companies looking to build large-scale demonstration production plants based on technologies that are beyond pre-commercial pilot phase. The aim is to kickstart the market for biofuels that are based on cellulosic biomass materials, rather than starchy food crops such as corn and wheat.

Cleantech.com is calling it the largest pool of capital in the world so far that’s dedicated strictly to biofuel projects.

It’s a progressive move, and — well, gotta give credit where credit is due — it’s a wise move from a Conservative government that has taken a beating recently on its negative stance towards Kyoto.

With oil dancing above $80 a barrel the timing of this fund couldn’t be better. While criticized for being costly and experimental, cellulosic ethanol is seen as the ideal transition away from corn-based ethanol because it can use cheaper “waste” materials that don’t compete with food markets, or dedicated crops like switchgrass that can be grown on marginal lands and don’t require much — if any — watering or fertilizaton. The trick is to get scale, and this is where the new fund comes into play.

Vicky Sharpe, CEO of Sustainable Development Technology Canada, the government-created body that will manage the fund, says applications are already being accepted and that the goal is to turn Canada into a jurisdiction for both next-gen biofuel production and, ideally, innovation. SDTC will cover up to 40 per cent of any accepted project, capped at $200 million, but the money is more investment than handout. That’s because the money is expected to be paid back over 10 years from the cashflow of a plant once it becomes operational.

This is the second fund managed by SDTC. The first, the $550 million SD Tech Fund, has been around for a few years and broadly supports late-stage development and pre-commercial demonstration of clean technologies. The goal with this SD fund is to bridge the funding gap that often exists before angels and VCs take interest in a company. The amounts invested are in smaller chunks, and only go to consortia that can contribute two-thirds of project costs.

For the new biofuels fund, all forms of biomass are being considered, including municipal solid waste, forest debris and agricultural residue. In Canada, companies such as Iogen, SunOpta, Lignol and Greenfield Ethanol are all targeting the space and expected to apply for funding, though SDTC made clear that foreign companies can also apply.

Measured on a per-capita basis, this is a huge whack of money for a country like Canada — and, as observers told me yesterday — it will go a long way in making the country competitive on the international biofuels scene.