Chicago-based biofuel group Coskata yesterday confirmed it is searching for a partner to set up a multimillion-dollar ethanol conversion plant in Victoria.

It would be capable of producing up to 200 million litres of the fuel a year for use in cars.

These are the so-called emerging 'second generation' biofuel plants, which are capable of using waste products rather than grains as their primary feedstock.

Ethanol will be blended to make E85, a shandy of 85pc ethanol and 15pc petrol in the US.

Holden announced last week that in 2010 it will start selling "flex-fuel" cars that can run on any combination of ethanol and petrol up to E85, to help the country reduce its dependence on oil.

It will also launch a hybrid car.

Holden's parent company, US car giant General Motors, is a major investor in Coskata.

Coskata also claims that its ethanol will cost less than 40c a litre to produce, making it much cheaper than petrol.

However, cars running on E85 can use up to a third more fuel than if they were running on petrol alone.

Only two "flex-fuel" cars are currently sold in Australia – the Saab 9-3 and 9-5 Biopower models.

Owners currently wanting to run their cars on E85 must travel to a single petrol station in Hoppers Crossing, 30 kilometres west of Melbourne, to refuel.

Coskata chief operating officer Wes Bolsen told The Age the company was looking for sources of waste material in Australia that it could feed into the process.

This included:

• Food and garden scraps gathered from household waste collections.

• Wheat and barley straw.

• Waster plastics and worn-out tyres.

• Building scraps.

• Bark and offcuts from managed forest plantations.

The Victorian Government confirmed it had been in talks with Coskata.

"It's no secret that the Brumby Government has invested in second-generation biofuel research," a spokesman said.

Most of the new cars sold in Brazil are flex-fuel models and sales of flex-fuel cars has already taken off in the US.