Virent Energy Systems has been working with Shell since 2007 to develop biofuels from plant sugars and the two companies launched a pilot plant at the end of last year.
They have now expanded their joint research programme to look at creating biodiesel from by-products of crops such as sugarcane and corn, rather than the traditional ingredient of vegetable oils.
The companies hope to use Virent’s BioForming process to turn plant sugars directly into a biodiesel with the same properties as conventional fuel.
It would not need special infrastructure and could be transported through existing pipelines. The fuel could also be blended with normal diesel in higher concentrations than other biofuels.
Shell has increased its biofuel investment further by committing more funding to ethanol production through its jointly owned subsidiary Iogen Energy.
The company also recently expanded its non-renewable operations, buying natural-gas explorer East Resources for $4.7bn (£3.2bn) at the end of last month.
Comment: The UK is closer to deindustrialisation than reindustrialisation
"..have been years in the making" and are embedded in the actors - thus making it difficult for UK industry to move on and develop and apply...