Southern Europe and Ireland could see increased production of ethanol, a biofuel, from sugar beet or grains because they are inefficient sugar producers that could use EU funds to convert existing sugar factories into ethanol plants.

Analysts say the least efficient sugar factories in Europe could be converted into ethanol plants, using sugar beet or grains as inputs, to serve a growing biofuels market as crude oil prices soar. An EU directive aims for 5.75 percent biofuel use by 2010.

Currently bioethanol production in southern Europe and Ireland is marginal.

According to German analyst F.O. Licht, total ethanol output in Italy is estimated to stand at around 150 million litres a year, including 5-10 million for fuel use; and in Spain around 351 million litres a year, including some 220 million for fuel.

Currently ethanol production for fuel use in Portugal, Greece and Ireland is zero, Licht says, although there is minor production in Greece and Ireland for other industrial uses.

"You can't start a biofuels industry without any government support," said Licht analyst Christoph Berg, noting that sizeable biofuels industries in Europe, such as Germany's, had received state backing.

GOVERNMENT INCENTIVES

Stefano Masini, environment spokesman for Italian farmers' union Coldiretti, said EU reform would mean it made sense to transform sugar plants into ethanol factories, but that this was not economically viable and would require government incentives.

Under the EU sugar reform plan, inefficient sugar producers can receive EU funds to convert sugar factories into ethanol plants that use either sugar beet or grain as inputs.

"Probably, in Italy some of the industrial capacity will be switched to transforming ethanol, but we want to know what incentives will be introduced," Masini said.

"In Italy bio-diesel is more profitable. It's clear Italy will have more bio-diesel than bio-ethanol production (under current laws)," he added.

Bio-diesel is made from soy, sunflower and rapeseed and mixed with normal diesel fuel.

Italy now has 19 sugar factories. Italian sugar output is expected to plunge 50 percent in five years as reforms kick in.

Sugar- and grain-based ethanol made in Italy would be aimed at serving Italian fuel consumers via blending with petrol.

In Spain, Manuel Perez Becerra, secretary general of the Andalusian Beet Growers' Association, said that with current technology more energy is required to produce a litre of alcohol from beet than can be extracted from it once made.

Without tax breaks or subsidies of some sort it will not be viable to produce ethanol from sugar beet, he added.

"The government has to think how much from the tax on fuel it will remove from alcohol (for fuel)," he said. "If it doesn't, it will be impossible to produce ethanol profitably."

Jesus Rivera, a technical expert for the farmers' association ASAJA, said: "If there are state incentives, anything is possible, but without subsidies ethanol's development is very hypothetical. I wish it were feasible because it would be a way out for the (sugar) sector."

Greece's state-run Hellenic Sugar Industry (EBZ), which operates five sugar plants mainly in northern Greece, said it would decide in 2006 whether to move to ethanol production.

"We are examining the agricultural and industrial details and we have not yet started market research," said Nikos Maslaris, director of Agricultural Services at EBZ.