This paper examines the costs and benefits of producing biomass fuels from mallee eucalypts grown in low rainfall areas of Western Australia. The fuels examined are ethanol and renewable electricity. As a means of examining the competitiveness of these energy sources with conventional fossil fuels, we estimate the price gap between ethanol and petrol and the cost of producing a unit of electricity by conventional means versus biomass electricity. Both comparisons are made on an energy equivalent basis. The potential for future advances in processing technology is built into the analysis. We find that ethanol is not price competitive with petrol, even after considering environmental benefits associated with biomass fuels. This finding raises questions about the wisdom of pursuing a biofuels target, a recent policy of the Commonwealth government. The picture for biomass electricity is brighter. When carbon sequestration benefits are taken into account, the cost of biomass electricity is on a par with conventional power.