Fuel-tech start-up Cobalt Biofuels opened a demonstration plant this week in Mountain View, California and says it will begin to commercially produce biobutanol, which is a liquid fuel that can be transformed into jet fuel, a green chemical for making polypropylene, or an additive for gas or diesel.

Biobutanol, butanol made from biomass as opposed to fossil fuels, already has approval for use in fuel blends for vehicles under U.S. Environmental Protection Agency guidelines.

Cobalt and others have claimed that biobutanol has an advantage over ethanol, which has been known to have corrosion issues in some older fuel systems and pipelines and is conventionally used in fuel blends and in newer cars with ethanol-ready engines. Biobutanol can be used as a standalone fuel even in conventional gasoline car engines, in addition to being used in gasoline and diesel fuel blends.

At the press conference - which was attended by California Governor Arnold Schwarzenegger, Silicon Valley heavyweights, and clean tech company executives - Cobalt Biofuels CEO Rick Wilson told the audience that now that the company is producing biobutanol at its pilot facility, it will be able to scale up to a commercial facility within the next two years, and “multiple facilities” by 2014. Wilson said that the company’s fuel, which can reduce carbon emissions by 85 percent compared to gasoline, already costs below the price of petroleum to produce and can be blended with any fuel — gas, diesel, ethanol — or can be used as a bio alternative to chemicals.

Biobutanol is more chemically similar to gasoline than ethanol, meaning it can be burned in existing car engines and transported in the current gas pipelines. There is also a large market for cheap biobutanol in industrial chemicals. Cobalt uses non-food sources to make its biobutanol, including woody biomass.

Cobalt says it has brought down the cost through three processes: microbe development, fermentation management and fluid separation. Cobalt says it can tailor its microbes for different regionally available feedstocks, optimizing its process for deployment anywhere. It’s also trying something novel, that of forgoing the standard batch fermentation process and instead managing the fermentation process at peak production for long periods, boosting output and cutting operating costs.

The company has raised at least $25 million from backers including LSP, Pinnacle Ventures, Vantage Point Venture Partners, The Malaysian Life Sciences Capital Fund, @Ventures and Harris and Harris.

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