But much will depend on the performance of palm-based fuels, industry officials have said, which are relatively untested compared with renewable energy sources developed decades ago such as rapeseed oil and ethanol derived from sugar cane.
Dutch firm Biox will build four power plants that will run on palm oil by-products, which it says are cheaper than other renewable energy sources used by European Union countries as they try to cut greenhouse gas emissions and crude oil import bills. "It's a trend we hope will extend to the whole of the EU biofuels sector," said Azizi Meor Ngah, chairman of the Malaysian Palm Oil Association.
Europe is short of diesel as it has underinvested in refinery production in recent decades while motorists are increasingly switching to the fuel instead of gasoline. The EU has set a non-binding target of 5.75 percent biofuel content by 2010.
Biox agreed last week to buy palm oil by-products, mainly distillates, from Malaysian plantation IOI Group Bhd from 10 years starting from 2007. This followed an agreement in early October to buy 100,000 tonnes a year from Golden Hope Plantations Bhd over the same 10-year period.
Rape oil is the preferred choice of the EU biodiesel industry because of its availability and quality, but fierce competition with the food sector has driven up its price by more than 100 euros over the past two months, to 610 euros ($737) per tonne.
Crude palm oil from Malaysia has risen 5 percent in value in the last two months to about $442 a tonne. Palm fatty acid distillates are trading at about $340 a tonne.
Crude palm oil and olein, its main edible product, are processed into palm diesel or the methyl ester used in diesel engines. Palm biomass, such as palm tree components, and distillates, can make instant fuel for industrial burning.
Fediol expects palm oil and its products will make up 20 percent of the EU's biodiesel in the next five years. To do so, it would have to claw away some of the market share of rape oil, which now accounts for about 85 percent of the EU's biodiesel.
The EU now imports about 3.5 million tonnes of refined and crude palm oil a year, mainly from Malaysia and Indonesia. This is set to rise by about 1 million tonnes next year as two new Malaysian-owned palm oil refineries come on stream in Rotterdam.