* McCain, Inhofe move to restrict spending in bill
* Bipartisan group plans fight when bill hits Senate floor
* Grassley blames 'Big Oil' for biofuels backlash
By Roberta Rampton and Susan Cornwell
WASHINGTON, July 17 (Reuters) - U.S. senators who support the Pentagon's push to expand its use of biofuels said they have a plan to answer critics who argue the fuel is far too expensive to help develop at a time when the military faces massive cuts.
The battle on Capitol Hill comes as the U.S. Navy's "Great Green Fleet" prepares to run military exercises in the central Pacific that will, on Thursday, feature its first operational test of biofuels.
The U.S. military is the world's largest single buyer of oil. The Obama administration has argued "Green Fleet" spending on biofuels could help boost production to commercial levels, eventually lowering prices for alternatives to oil, and reducing dependence on supplies from the Middle East.
For Thursday's demonstration project, the Navy paid more than $26 per gallon for the fuel, made from renewable sources like algae and chicken fat, a $12-million outlay that sparked congressional anger.
Republican critics of the biofuel plan, led by senators John McCain and James Inhofe, found enough support within the Senate Armed Services Committee in May for two proposals that could limit additional spending.
The measures would stop spending on fuels that cost more than conventional fuels, and prevent spending on refineries that would help scale up production of still-experimental fuels. They were added to a bill authorizing defense programs in 2013.
'SUBSTANTIVE DEBATE' AHEAD
But "Green Fleet" supporters are fighting back.
"We have bipartisan support to undo the work of the committee," said Senator Mark Udall, a Democrat from Colorado who is leading the charge.
When the defense authorization bill reaches the Senate floor, Udall said biofuels supporters may try to amend it to expressly authorize the Navy to develop biofuels to power ships and aircraft - or they could hold a vote to remove the McCain and Inhofe provisions.
"It will be a substantive debate," Udall told Reuters. "I think the story, when it's told, will generate wide support" for defense spending on renewable energy, he said.
Senators Susan Collins, a Republican, and Jeanne Shaheen, a Democrat, wrote an opinion piece in Politico earlier this week signaling their support for overturning the Armed Services panel's biofuels changes.
"We hope to correct that short-sighted mistake when the bill reaches the Senate floor," Shaheen and Collins wrote.
Senator Carl Levin, the Democratic chairman of the Armed Services Committee, said he also hopes to see a change.
"They are going to try to put it back, which is great. I'm all for it," Levin told reporters outside the Senate.
A new six-figure television advertising campaign by military veterans is targeting lawmakers in six states - starting with Senator Rob Portman in Ohio - who voted to restrict military spending on biofuels.
The campaign is organized by the Truman National Security Project, a left-leaning advocacy group on military, energy and foreign policy issues.
MCCAIN: FIGHT WILL CONTINUE
McCain told Reuters he knows colleagues who support biofuels will try to overturn his spending curbs.
"But we will continue to fight," McCain said. "I was just reading, it's the cost of one destroyer - $1.8 billion extra - they want to spend on this green technology.
"The fact is, I just do not believe that we need to spend that kind of money on it," McCain said.
Inhofe wrote to President Barack Obama on Wednesday urging him to push Congress to repeal restrictions on military spending on fuels made with coal or natural gas, a measure that was part of a 2007 energy law.
That would "introduce more competition" into the military fuels market and bring down costs, Inhofe said in his letter.
Republican Senator Charles Grassley said the military should be allowed to continue its "investment" so the United States can develop more alternative fuels.
"Nobody would doubt that there's a lot of money maybe wasted in the process of research, but there's more good comes out of it than bad," Grassley told Reuters.
Grassley, known for his backing of ethanol made from corn grown in his home state of Iowa, said he believes the powerful U.S. oil industry is behind a series of efforts to pare back government support for biofuels.
House Republicans have proposed cutting Agriculture Department programs aimed at developing new types of biofuels, and are also questioning a federal mandate that ensures refiners blend gasoline with ethanol and other biofuels.
"It's Big Oil. They don't want any competition. They want to control everything," Grassley said.
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