A Primary Growth Partnership study has confirmed the technical feasibility of producing biofuels from forestry waste.
The government met half the cost of the $13.5 million Stump to Pump project, led by pulp and paper processor Norske Skog and fuel company Z Energy.
It identified the potential to develop a biofuel industry from sawdust, bark and other forestry residue.
Meanwhile, the Bioenergy Association said organising a guaranteed supply of raw material is a key part of getting a wood-based biofuel industry up and running.
Executive officer Brian, Cox said the Stump to Pump project, has provided valuable pointers to what needs to happen now to turn the idea into reality.
"We know from the number of forests and farm forestry that there is enough feed (wood material) that can be used. The crucial issue is getting it so it's turned from a waste product into a fuel."
He said that means thinking about how to work collectively to get economies of scale.
He said having a number of farmers working together to enter into a contract to a biofuel producer is something that the rural sector needs to be working on.
Ministry for Primary Industries PGP Director Justine Gilliland said a further two to three years' work now lies ahead.
"Having gained the confidence that it is technically feasible, the next stage that the industry partners will be taking forward is firming up the commercial viability and making sure the products can meet specifications, for example, for New Zealand fuels."
Government funding has also finished for another PGP project, investigating ways of reducing and eventually replacing the highly toxic chemical, methyl bromide, used to fumigate logs.
It is being phased out internationally because it is an ozone depleting substance which has also been linked to some diseases.
Ms Gilliland said the project found that methyl bromide treatment rates could be reduced by 40 percent.
"The Environmental Protection Agency has set a deadline for 2020 for no release of methyl bromide and the work that's been completed in this programme will now allow the industry to basically keep going with looking at alternative treatments and ways to reduce emissions to meet that deadline," she said.