Cows do it. Elephants do it. Termites do it best. They munch on a plant or piece of wood, break the tough plant cell walls, and burn the sugar for energy. That's cellulosic biofuel.

But what appears elementary chemistry in the animal gut is crazily difficult - and expensive - to repeat in a factory. How to convert plant cellulose into alcohol is the next big challenge. However, with the kind of money and science being poured in, we could be just a year away from commercial sales. Since we can't digest cellulose, production of cellulose does not compete with the production of food.

Ethanol from corn was a no-brainer because you can easily convert starch into sugar and then alcohol. With cane juice, you are a step closer. But cellulose is a tough molecule to crack.

It takes five steps. First, chop a plant and mix with water to make a slush. Second, extract cellulose from this slush. Three, add some enzymes and convert the cellulose molecules into sugars. Four, remove lignin from the sugar. Lignin is what helps plant cells transport water and also makes wood burn longer. Five, ferment the sugar into alcohol and distill it into fuel.

From what I understand, it is "cellulose deconstruction" or how efficiently you break down the cellulose into sugars using enzymes; and how well you use yeast and other micro-organisms to ferment those sugars into ethanol differentiates one lab tech from another. If you can reduce the lignin through "cellulose architecture", even better. Nature has provided termites, cow, sheep, elephants with special enzymes or enzyme-making bacteria that break down cellulose without a fuss at room temperature. But it isn't easy in a lab.

So money is pouring into enzyme technology. Because they're hard to make from scratch, scientists generally extract them from micro-organisms that produce them naturally. But the trick is producing the enzymes cheaply enough at an industrial scale and speed. Right now enzymes that destroy plant cell wall tissue cost 30 to 50 cents per gallon of ethanol compared to 3 cents per gallon for corn. The US Department of Energy hopes to reduce this cost to $1.07 per gallon by 2012 to be effective.

Some industrial biotech boffins are trying to build the ultimate microbe in the lab, one that could combine the two key steps of the process. Others are using "directed evolution" and genetic engineering to improve the enzyme-producing micro-organisms currently in use. Still others are searching new and better bugs and yeasts through "pathway engineering". It's bio-construction versus bio-tinkering versus bio-prospecting in the industrial biotechnology market, all with the single goal of creating the perfect enzyme and yeast cocktail.

Meanwhile, cash continues to pour in. DuPont and biotech firm Danisco's Genencor division this week committed to spending $140 million to launch a joint venture to develop and sell cellulosic ethanol technology. The joint venture expects to enable production of commercial volumes of cellulosic ethanol in four years.

They are just the latest of a growing number of large companies that are investing in cellulosic ethanol. Others include General Motors; German car maker Daimler, which is teaming with Archer Daniels Midland and Germany-based Bayer CropScience, to research the use of jatropha as a feedstock for biodiesel production. Most chemical or oil companies you will find have tied up with agricultural commodity trading companies such as ADM, Cargill, EDF&Man, ConAgra, Louis Dreyfus, Tate & Lyle for complete backward integration.

So what's in it for India? Plenty. Praj Industries is one of those at forefront of global advanced biofuel research. The company is checking out crop residues, local grass, corn stover, bagasse or left over straw from cane and sweet sorghum, and distiller's grain from corn that is fed to animals. It's bullish on Indian grass varieties as they have less lignin, need less inputs and are easy to grow.

Praj believes algae offer even more promise. Algae double in three days, can use salty water, don't have lignin, can grow organically, and produce 500t per hectare biomass. Algae don't just create energy from the sun. They do it more effectively than anything else save photovoltaic panels. And, as you may have guessed, they're a lot cheaper than photovoltaic panels.

In fact, if you feed algae sugar instead of sunlight, they really flourish. Algae contain 45% oil, which can be extracted in the bed itself and taken to a biodiesel factory. Praj will start growing algae using photobioreactors in a couple of months.

The bigger takeaway from Praj's R&D is the potential for advanced biofuels in India. By using molasses, India has insulated itself from any blame in the food-vs-fuel debate. But with crude oil at $125/barrel, we could all do with more biofuel.

India grows about 200 mn tonnes grains annually. That means 600 mn tonnes stalks, straw, dried leaves. Part of it is fed to animals, but mostly it is burnt as fuel or left to rot in the fields. If 10% is collected by ethanol factories, the gains could be tremendous. Plus extra farmer income. More importantly, we won't need 400 mn tonnes of thirsty sugarcane.

Algae are even better because they are cost-effective, high-yielding and not fussy. That means encashing all those difficult bits of land that won't grow anything else.

In a perfect world we should be scouting for an alternative to the internal combustion engine rather than struggling with alternative fuels for it. Meanwhile, my vote goes to algae oil. They say the left-over green stuff is great for the skin and protein supplements.