Biofuel company HAMR Energy wants to use forest waste to produce renewable methanol, which can be converted into sustainable aviation fuel, renewable diesel and other low-carbon liquid fuels.
The waste includes sawdust, bark, woodchips, thinnings and other material left over after harvesting and processing.
Announcing the funding in Adelaide on Wednesday, Climate Change and Energy Minister Chris Bowen said the government wanted to "turn a hard-to-abate sector into a how-to-abate sector, reducing emissions in aviation".
"It's not just about emissions, and in fact, it's not even mainly about emissions," he said.
"With such a difficult international supply chain when it comes to fuel, building sovereign capability … making more of our own fuel, ticks so many boxes,"
HAMR Energy co-founder David Stribley said the funding would allow design work to continue over the next 12 months and head towards construction.
"That will lead to the first refinery being built in Australia in the last 40 years," he said.
Australia's first large-scale methanol-to-jet SAF refinery would be built in the Port Adelaide area and produce 140 megalitres of sustainable aviation fuel each year.
It would anchor a supply chain that includes a biomass processing facility and a renewable fuels methanol project, both in Victoria.
HAMR Energy expects to create hundreds of construction jobs and 300 ongoing roles.
Mr Stribey said the process of turning forestry waste into fuel broke down biomass to its molecular level, "and then we build that back up into a jet fuel".
"Unlike traditional oil and gas, where you take a big molecule and shrink it down, we do the reverse here, where we build that up," he said.
The Australian Renewable Energy Agency funding will support engineering and development work across the supply chain, from aggregating plantation forestry waste and producing low-carbon methanol through to the production of sustainable aviation fuels.
SA Premier Peter Malinauskas said his government was in negotiations with HAMR Energy on the specific location of the proposed refinery, which he said would be worth $2.5-$3 billion.
"Taking that biomass and turning it into a sustainable aviation fuel represents one of the front-end peak opportunities that we have to get more economic value added," he said.
