The team will work on scaling the ability to produce large quantities of a blue pigment-protein, called C-phycocyanin (C-PC).
The colourant, which is derived from spirulina algae, is the preferred source of natural blue for industry.
It is sought after to replace artificial colourants, which are unpopular with consumers. Global demand for natural blue dye is expected to increase ten-fold in the next 2 years from the food industry alone, to a market worth about £350 million.
A £200,000 award from the Industrial Biotechnology Innovation Centre (IBioIC) will boost a research partnership between industrial biotech firm Scottish Bioenergy and scientists at the University of Edinburgh, to develop a large-scale process to extract C-PC from the spirulina.
Natural blue dyes are challenging to create as there are few sources of blue pigment in the natural world, and formulations are difficult and expensive to create in large quantities.
Scottish Bioenergy, which specialises in commercial production of C-PC, has been working with experts in the University's School of Biological Sciences on collaborative projects since 2012. The partnership has been accelerated by ongoing support from Edinburgh Research & Innovation (ERI), the University's commercialisation and industry engagement arm.
Scottish Bioenergy has recently overcome important technical obstacles and challenges linked to the scale of production.
In this latest project, funded by IBioIC's Micro Accelerator Programme, the team will identify and optimise techniques for extracting the pigment protein, and to develop economically feasible methods for producing large volumes of C-PC. They will also engineer strains of bacteria to produce high yield and high purity C-PC.
The collaboration is one of three industrial biotech projects at the University which are backed by IBioIC Micro Accelerator funding, which are worth around £1 million in total.
Dr Alistair McCormick of the University of Edinburgh's School of Biological Sciences, who is taking part in the project, said: "We're pleased to be embarking on the next phase of development for this sought-after pigment protein. This is an interesting scientific and engineering challenge and we hope our results will play a significant role in meeting the demand for this valuable product."
DC Van Alstyne, CEO of Scottish Bioenergy, said: "This award is a real boost for science in Scotland at a time when there are increasing worries about the impact of Brexit on funding of scientific projects. We are delighted that this funding will enable us to continue working with the University and ERI on developing our capability to produce high quality C-PC to meet the growing demand from food, nutraceutical and pharmaceutical industries."
"We are grateful for the support from IBioIC and Edinburgh Research & Innovation. The support we've received has been excellent and has been a significant contributing factor in our growth so far."
Dr Lorraine Kerr, ERI's Commercial Relations Manager, added: "We are excited to be working with Scottish Bioenergy, who place great value on utilising academic partnerships to help them compete on a global stage. The strength of this industry partnership, and the other projects funded through IBioIC, should demonstrate the depth and quality of the University's expertise in the industrial biotech sector that's available to innovative companies, from SMEs to large corporates."