Cupertino, Calif.-based AE Biofuels (OTC: AEBF) said today it started construction on an integrated cellulose and starch ethanol commercial demonstration facility in Butte, Mont.

The company said the 9,000 square foot pilot plant is expected to be fully operational in the second quarter of this year.

"This is an important step as we optimize our integrated cellulose process technology for large-scale commercial implementation," said Eric McAfee, chairman and CEO of AE Biofuels.

The company is going up against some heavy hitters in the cellulosic ethanol game, including Warrenville, Ill.'s Coskata, which recently teamed up with Detroit auto giant General Motors (NYSE: GM) to commercialize a cellulosic ethanol from waste system (see Khosla-backed Coskata, EcoMotors come out of stealth).

 And in November, Broomfield, Colo.'s Range Fuels broke ground on what would be the first commercial scale cellulosic ethanol plant in the U.S. (see Range Fuels' Mitch Mandich breaks ground).

AE Biofuels' McAfee said, "Our technology has been shown to significantly reduce the consumption of energy and water in the production of ethanol, and allows us to utilize a combination of non-food and traditional feedstock inputs."

The company said the new plant will use its Ambient Temperature Cellulose Starch Hydrolysis enzyme technology to optimize process conditions for multiple feedstocks.

According to AE Biofuels, the facility will be able to handle non-food feedstocks including switch grass, grass seed straw, small grain straw, and corn stalks alone and in combination with a variety of traditional starch and sugar sources.

In December, AE Biofuels completed the construction of a 50 million gallon per year nameplate biodiesel refinery in Kakinada, India.

The company is also constructing a refinery and a glycerin upgrading facility to produce and market pharmaceutical grade glycerin in India.