By Aaron Gray-Block

AMSTERDAM (Reuters) - Dutch life sciences group DSM said the development of second-generation biofuels is nearing a major breakthrough with commercial production just a couple of years away that could open up a market worth $5 billion a year.

Second-generation biofuels are increasingly being seen as a preferred alternative to first-generation fuels, which drew criticism after sparking food inflation because they are made from food crops such as maize, sugar cane and rapeseed.

DSM is developing both yeast and enzyme products to firstly convert cellulose from waste plant matter into sugar and then ethanol, which is used as a motor fuel.

It recently unveiled an enzyme technology that can improve the efficiency of biofuel production from second-generation sources, such as agricultural waste like wheat and corn stalks.

Although it is an industry still in its infancy, DSM is confident the market is set to finally open up.

"We see refineries being built, particularly in the United States, in the next two years. So by 2014 or the end of 2013 we see a meaningful market with maybe about a dozen second-generation biorefineries," DSM board member Stephan Tanda said.

"In the beginning it will be small, but we see it growing at least as fast as first-generation fuels. We are absolutely at the tipping point."

Spanish ethanol producer Abengoa started building in September a second-generation biofuel plant in the United States, while U.S.-based rival Poet said in July it will open its first commercial-sized cellulosic ethanol plant in 2013.

In an April report, the International Energy Agency said by 2050 biofuels could provide 27 percent of total transport fuel, playing an important role in reducing carbon dioxide emissions as part of a shift toward more environmentally friendly fuels.

But it said improvements were needed in efficiency, cost and overall sustainability and substantial further investment in research was needed to make biofuelscommercially viable.

Tanda said DSM, the world's largest vitamins maker, aims to tap into a market that will supply yeast and enzymes to second-generation ethanol producers in a sector that could be valued at $3 to $5 billion annually within 10 years.

Claiming a major step forward, DSM said last year it had developed a unique technology that uses yeast to efficiently ferment two types of sugar into ethanol.

"Very few competitors can do that, which means we are talking at least to about two-thirds of the players to supply the yeast for their bioethanol," Tanda told Reuters on the sidelines of a biotechnology conference in Amsterdam.

DSM has already conducted trials with Abengoa using its yeast technology, but is also developing an enzyme technology that can break down cellulose found in plants into sugar, which can then be treated with its yeast technology.

The enzyme technology competes with that of U.S. firm DuPont, which closed a deal to buy Denmark's Danisco in May, and Danish rival Novozymes.

Still, DSM's technology is more costly than its rivals and the company is aiming to close the gap before the new cellulosic ethanol plants become operational.

The Dutch group is targeting 1 billion euros in annual sales from its business units biomedical and biotechnology by 2020, with each unit contributing about half of that targeted amount.

Tanda said the cellulosic ethanol market could be worth $50 billion in sales globally per year by 2022.

(Reporting By Aaron Gray-Block; Editing by Mike Nesbit)