State-owned science companies, Scion and Agresearch and their research partners Carter Holt Harvey and US-based company Verenium Corporation, are using a $7 million government grant to work towards refining ethanol from pines.

They have already used a $1 million grant for a feasibility study which earlier this year showed the nation's wood, wood waste and pulp residues could keep a bioethanol refinery supplied, and that there is a big enough domestic market to support a refinery.

"Biomass can make a significant contribution to New Zealand's future energy supply without compromising arable or high quality pastoral land," said Scion chief executive Tom Richardson.

Now the new money will be used over the next three years to develop the technical programme for ethanol production, focus research and develop a collective strategy to turn the project into a commercial reality.

Dr Richardson said the latest grant is critical to continuing work on using domestic biofuels, with research such as pilot-scale trials of existing lab-scale research on pre-treatment and enzymatic processing.

Verenium -- whose enzymes have been used in the research to break down the cellulose in the pine wastes -- recently signed a deal for its enzymes to be used in a Japanese-owned refinery in Thailand, which will exploit sugarcane waste (bagasse).

Dr Richardson has said New Zealand has 830,000 hectares of steep, erosion-prone, low-producing grass and shrublands that could be used for "energy forests" without threatening land used for pastoral farming and other agriculture.

A commercial refinery is expected to cost about $400 million to build.

The Government wants carbon neutrality in the electricity sector by 2025, in the "stationary energy" sector by 2030, and in the transport sector by 2040.

Based in Cambridge, Massachusetts, Verenium already operates one of the United States' first cellulosic ethanol pilot plants, and is firing up a larger plant Jennings, Louisiana, that will produce 1.4 million gallons (5.3 million litres) of ethanol a year.

The company is looking at sites in Florida, Louisiana and Texas to hopes to build another six 114-189 million litre ethanol plants, at a cost of roughly $US200 million each.