* 12 mln euro project uses waste water to cultivate algae
* Algae biofuels have benefits, not competitive yet
LONDON, March 5 (Reuters) - Water management company Aqualia plans to launch a commercial-scale demonstration project using waste water to cultivate algae for biofuel production, which could fuel 400 vehicles, the firm said on Monday.
Spain's Aqualia, owned by construction and services company FCC, in collaboration with European partners, has already started construction of algae culture ponds at a waste water treatment plant in Chiclana, northern Spain, which should be able to produce 500 litres of biodiesel a year and 1,500 cubic metres of biomethane.
The project will cultivate fast-growing micro-algae by using the nutrients in waste water and converting it into biofuels like biodiesel and biomethane which can be used in transport fuel.
If 3,000 kilograms of dry algae a day can be produced with an oil content of 20 percent, the project will be ramped up to commercial-scale size of 10 hectares to produce 200,000 litres of biodiesel a year and 600,000 cubic metres of biomethane - together enough to fuel 400 cars, Aqualia said at a briefing.
"Today we are wasting resources and producing useless sludge. Now we can use it to produce biofuel and have a positive impact," Frank Rogalla, innovation and technology manager at Aqualia, told Reuters.
Micro-algae has benefits over first generation biofuel crops like palm oil, sugar cane and canola, said Rogalla. It can be grown in as little as three days and has needs less land than other biofuel crops.
"Oil productivity can be 10 to 20 times higher than from any known plant," Rogalla said.
More than half the 12 million euro ($15.9 million) project has been funded by the European Commission, which is aiming for 10 percent of energy used in transport in the European Union to be derived from renewable sources by 2020.
Analysts doubt the EU will be able to meet its 2020 targets for cutting transport fuel emissions if it excludes some biodiesel feedstocks which could release as many climate-warming emissions as conventional diesel.
Most biofuels are currently derived from land crops, including sugar cane, maize and vegetable oil, which have been criticised for competing with food production for water and land resources, prompting the search for alternatives.
Some of the alternatives being explored - called second generation biofuels - come from wood, waste, grasses and agricultural residues and from algae.
However, algae biofuel has only been demonstrated at small scale and has not been cost effective. Many researchers estimate that production of micro-algae biodiesel on a commercial scale is at least ten years away.
With an oil yield of 25 percent typical for many algae species, the industry would need to be scaled up at least 300 times to produce 5 percent of the diesel used in the UK in 2009, according to a UK government report in 2010.
Algae biofuels would also need to be able to compete with the price of conventional oil.
"We need to decrease the cost of production by five times to be competitive with oil," Rogalla said.
"We think it could be competitive with fossil fuels by 2015, but I could be wrong by a year or two."
The race is on to develop the first commercial-scale plant. The United States government has invested $78 million into algae biofuel research.
"I think we will be the first in Europe," Rogalla said. ($1 = 0.7557 euros) (Reporting by Nina Chestney. Editing by Jane Merriman)