The new project, dubbed Omnivore, aims to employ technology which will allow the engine to run on any alcohols or gasoline.
Defra, the department for the environment and rural affairs, and Northern Ireland’s environmental department, are both sponsoring the Omnivore project.
Jaguar will be acting as a consultative partner and Queen’s University will be lending its expertise in engine simulation.
The first flex-fuel engine is expected to be built by January 2009.
Geraint Caslteton-White, head of powertrain at Lotus Engineering, said: “The requirement to operate on gasoline in today’s flex-fuel engines limits their thermal efficiency when operating on alcohol fuels.
“However, the physical and chemical properties of alcohols, when compared to gasolines, provide higher potential for better thermal efficiency. The engine will fully exploit the properties of both gasoline and alcohol fuels and maximise efficiency.”