WINNIPEG, Manitoba - Canada's biofuels industry will ask the government early in 2010 to expand fuel blending mandates and production incentives, even as plants rapidly boost capacity to meet incoming targets, the president of the Canadian Renewable Fuels Association said on Thursday.

We absolutely would be looking at all those instruments as a way of ensuring we build out the additional capacity, Gordon Quaiattini said in an interview with Reuters from Ottawa.

Industry officials have not settled on the specific new targets they will request or when they will take effect.

Canada has given annual incentives for up to seven years to 24 biofuel producers, including Husky and Suncor, from a C$1.5-billion ($1.4 billion) program. The government considers biofuel attractive because it reduces greenhouse gas emissions.

The biofuels industry will also ask government to set Canada's first mandate for advanced biofuels, such as those made from algae, wood and grasses, which are not yet in commercial production, Quaiattini said.

We want to see the commercialization of that technology here in Canada, have those plants built in Canada and obviously have a market for that fuel here in Canada.

Canada's current biofuel supply will fall short when the first federal government mandate of 5 percent renewable content in gasoline takes effect in September 2010 and a 2 percent federal mandate for renewable content in diesel takes effect in 2011.

Canada will have to import 150 million to 300 million liters (39.6 million-79.3 million gallons) of ethanol during late 2010 and 2011 to fulfill the first mandates, Quaiattini said.

Canada currently produces 1.4 billion liters of ethanol annually, with the incoming mandates creating a need for 2 billion liters in total. Capacity for at least another 300 million liters annually is being planned.

Canada already imports some ethanol from the United States and Brazil.

Canadian plants produce 130 million to 140 million liters of biodiesel, with demand expected to rise to 500 million to 600 million liters.

While Canadian plants currently depend on annual subsidies, they could be profitable without the incentives within 10 years, he said.

As mandates continue to expand and the demand for the fuel expands, there's no question that that in itself will create the right economic climate for these renewable fuels plants to be sustainable economically, Quaiattini said.

Canadian plants make ethanol from corn and wheat and make biodiesel from animal fat, soybeans and canola. Growing demand for biofuels may attract farmers to grow more corn, oilseeds as well as grasses for advanced biofuels, he said.

($1=$1.06 Canadian)

(Editing by David Gregorio)

Canada Energy