An ethanol plant in Southwest Iowa is closer to being able to produce algae, most likely to turn into biodiesel.

This press release from Green Plains Renewable Energy says the company and BioProcessAlgae LLC, a joint venture between Green Plains, CLARCOR Inc. (NYSE: CLC), BioProcessH2O LLC and NTR plc., have executed a grant award agreement with the Iowa Office of Energy Independence for a $2.1 million research and development grant from the Iowa Power Fund to build a project to use the water, heat and carbon dioxide from the production of ethanol to make algae at Green Plains’ ethanol plant in Shenandoah, Iowa:

“Algae has the potential to become an important carbon sequestration solution, biofuel feedstock and feed product,” said Todd Becker, President and Chief Executive Officer of Green Plains. “If the pilot project is successful, BioProcessAlgae will move to expand the photobioreactor system to full commercial scale. We believe that this pilot project will be one of the first operational installations of a photobioreactor system at an industrial plant in the United Sates utilizing emerging technology out of the laboratory.”

The Iowa Power Fund grant provides matching funds to install a series of photobioreactor units at Green Plains’ Shenandoah ethanol plant. Water, heat and carbon dioxide will be recycled from the ethanol manufacturing process to support continuous algae production. The grant provides funding through the end of the first quarter of calendar year 2010 with installation of the pilot project expected in the third quarter of 2009.

Now, while the press release never directly says what the algae would be used for, one would have to assume it would be for biodiesel. BioProcessAlgae officials believe the photobioreactor system is a very important step toward system commercialization of algae technology.