IN 2004, the Bill & Melinda Gates Foundation pumped $42.6m (£21.5m) into Amyris, a tiny biotechnology company based on the edge of Silicon Valley. The foundation aims to bring “innovations in health and learning to the global community” and in Amyris it thought it had found a company that could tackle one of the world’s most deadly diseases, malaria.

Malaria affects 400m people a year, killing between 1m and 3m, mostly young children. Four years on, the investment is paying off. Amyris has found a way to provide a malaria treatment at a fraction of the usual cost. But, more importantly, in the process it has made discoveries that could revolutionise the fuels business.

The price of oil passed $70 a barrel last week, a nine-month high. In America, petrol prices have remained stubbornly above $3 a gallon (40p a litre). With the Middle East in turmoil, the dollar in the doldrums and global warming taking its toll, oil is not likely to get cheaper soon. It’s little wonder that Amyris has become one of the most talked-about companies in Silicon Valley.

To date the interest in alternative fuels has focused on ethanol – alcohol made from plants.

Using technology developed for its malaria treatment, Amyris is turning sugar cane into fuels that offer advantages over both oil and today’s alternative-fuel darlings, ethanol and biodiesel, according to John Melo, Amyris’s chief executive.

As former head of BP’s American fuels division, Melo knows a great deal about oil and ethanol. “Ethanol is a great start,” he said. “It’s what we have. It’s been around for 2,000 years. We’ve used it to get drunk for most of those years. The fact we can put it in vehicles is not a novel concept, it has been around a long time and it works. But is it a great fuel? Not really. Does it help the planet? Not really.”

He believes the real opportunity lies in a second generation of fuels that he hopes will reduce the world’s dependency on oil while producing less harmful greenhouse gases.

Amyris’s fuel is made from Brazilian sugar cane. Brazil is a world leader in ethanol, which now accounts for about 20% of its transport fuel. By using microbes related to yeast, Amyris is able to convert sugar molecules into fuels that are chemically closer to traditional hydrocarbon fuels.

According to Melo, ethanol is about 27% less efficient as a fuel than petrol. Amyris’s standard petrol product is about 9% less efficient. When it comes to jet and diesel fuels, Amyris’s products have the same, if not better, properties than fossil fuel, said Melo.

For example Amyris’s jet fuel operates at -57C. Current fossil jet fuel operates at -40C. The difference allows jets to fly at higher altitudes, better for airlines using the polar routes, and for military aircraft looking at longer missions.

“The end game is to have a renewable product without compromise,” said Melo.

Amyris is in talks with Virgin about using its jet fuel in the airline’s fleet and has had meetings with the Virgin founder, Sir Richard Branson.

Melo has just returned from Brazil, where he said a number of companies were excited about using Amyris’s technology to produce a fuel with higher energy content than ethanol.

Producing Amyris’s fuel from Brazilian sugar also has the advantage of generating significantly less carbon dioxide than most ethanol plants, said Melo.

The whole process of using sugar cane is more efficient. The waste product from the cane harvest – called bagasse – is burnt to generate power for the ethanol mill and in some cases extra power to put back into the electricity grid. Bagasse also helps to fertilise the cane fields.

Sugar cane has its critics – especially when rain forest is chopped down to create land to cultivate the crop. But its environmental impact is far less than that of traditional fuel production.

If the Americas exploit current technology and their own oil supplies, Melo believes they could soon be self-sufficient in transport fuel.

Amyris is going for a target equivalent to $40 a barrel and expects to be there by 2009 with full production by 2010.

But to get to market Amyris will have to fight off not only the powerful oil industry but America’s farmers, too. Ethanol has been a boon to American agriculture. Corn prices have soared and the oil companies have benefited from a 51 cent-a-gallon subsidy for mixing ethanol with fuel.

Biodiesel is narrowly defined in terms of a specific process, hampering innovation.

The status quo is a disadvantage to Amyris and other firms that are trying to create better green fuels, including a DuPont and BP joint venture and LS9, a Silicon Valley start-up.

“There are probably two or three oil companies in America today that are earning more money on ethanol than the whole ethanol industry combined,” said Melo. “I don’t think that was the intended consequence.”

Amyris has some pretty powerful foes. But it has powerful backers, too. The company’s board and financiers include Silicon Valley venture capitalist John Doerr of Kleiner Perkins Caufield & Byers, who started his stellar career at Intel in 1974, and Samir Kaul of Khosla Ventures, set up by Vinod Khosla, a Sun Microsystems co-founder and one of the world’s biggest backers of green technology.

Arnold Schwarzenegger, California’s governor, has been using his muscle to support green-technology developments in the valley.

It’s impressive technology, and impressive management, said Michael Liebreich, chief executive of New Energy Finance, a London-based researcher. “We are moving out of an era when there are only two transport fuels – petrol and diesel – and both come from the same source, to a period of great competition, innovation, and diversity of solutions.

“Whether we emerge at the other end with one solution or whether there will be multiple solutions coexisting forever remains to be seen,” he said.

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