"There is big demand for biofuels and people started converting their engines to run on the new fuel," said Henry Aberson, director of Dutch firm Solar Oil Systems which last month opened the Netherlands' first biofuel plant.

"We sell our fuel at 65 cents a litre," he told Reuters.

Filling stations in the Netherlands sell diesel made of crude oil at about 1 euro ($1.24) per litre and petrol at some 1.3-1.4.

The Netherlands has so far been slow to follow a trend in other European Union countries, mainly Germany, France and Britain, where biofuel production capacity has been expanding sharply in recent years.

EU countries have pledged that biofuels, which turn organic matter like vegetable oils, grains and sugar cane into energy, would make up 2 percent of their total fuel consumption this year and 5.75 percent by 2010.

Solar Oil Systems and a group of Dutch farmers invested some 700,000 euros in machinery at the Dutch first biofuel plant in Delfzijl in northern Netherlands, which has an annual production capacity of 3.5 million tonnes, Aberson said.

The plant will process Dutch-grown rapeseed into fuel and sell it mainly in the domestic market.

"We plan to build eight more plants in the Netherlands and several in Belgium. The total capacity is seen at 75 million litres a year," Aberson said.

Another Dutch company, Sunoil Biodiesel, and German investors are building a biodiesel plant in Emmen, northern Netherlands, with an annual capacity of 30,000 tonnes.

Sunoil Biodiesel director Ben Duitshof said the biodiesel made of rapeseed would be sold mainly in Germany. The plant is expected to start production in March or April next year.

TAX INCENTIVES

To encourage bigger production of biofuels made mainly of rapeseed, the Dutch government said late last month that it would introduce tax incentives in 2006, most probably exempting biofuels from excise duty.

Investors and energy analysts say the lack of biofuel production in the Netherlands until recently was mainly due to the lack of tax breaks, unlike in other European countries such as Germany.

Solar Oil Systems's Aberson said the government had freed the Delfzijl plant's output from excise duty and the company was now seeking a similar exemption for the rest of its projects.

The Dutch Agricultural Economic Institute (LEI) said in a recent report that tax incentives were also necessary to raise the acreage under rapeseed in the Netherlands, which was currently not enough to keep up with rising demand.

Low returns on rapeseed compared with other crops such as wheat, lowered the acreage to 1,000 hectares in 2002, LEI said.

Plantings are expected to jump to 5,000 ha this year because of increased demand from the new biofuel plants, Aberson said.

His company is building filling stations for biofuels and trained mechanics to convert engines to run on the new fuel.