The New South Wales Government has backed down on a plan to ban regular unleaded petrol, a measure which had been intended to force motorists to switch to ethanol-blend fuel.

The ban had been due to come into force from July, but concerns had been raised that as many as 800,000 people could not use E10 petrol in their cars.

Under the plan they would have been forced to buy more expensive premium unleaded fuel instead.

The scheme was part of a wider plan to ensure that 6 per cent of all fuel sold in NSW contain ethanol, with that mandate still to go ahead.

Leaked documents emerged last week showing Energy Minister Chris Hartcher argued against the ban in Cabinet, based on two pieces of advice.

The Australian Competition and Consumer Commission warned the plan could drive up petrol prices, while the state's Solicitor-General argued it may be unconstitutional.

Premier Barry O'Farrell had previously argued the plan was good policy, but he now says Cabinet has decided otherwise.

"What Cabinet changed overnight, after listening to the community, was the policy put in place in 2007 that would have seen regular unleaded petrol no longer available from July 1 this year," Mr O'Farrell said.

"Cabinet decided motorists should have a choice, particularly at a time when so many families across the state are facing cost of living pressures."

Opposition Leader John Robertson was part of the former Labor government that initially hatched the plan with Coalition support in Parliament.

He has welcomed the backdown, but now insists the blame rests solely with Mr O'Farrell.

"The Premier tried to keep his plan to increase petrol prices a secret, and he deserves no congratulations for doing what he should have done months ago," Mr Robertson said.

"Motorists are going to feel some relief but Barry O'Farrell can certainly not claim any credit for this. This debacle has provided a new insight into Barry O'Farrell. He's happy to increase prices as long as he thinks no-one is going to find out."

The biofuels industry says the decision has fuelled uncertainly that is impacting on investment into the sector.

Biofuels Association of Australia chief executive Heather Brody says the Government's wavering attitude to the industry is concerning.

"It's incredibly disappointing, not for the mandate per se but for the fact that the Government continues to vacillate on this decision," she said.

"It's very very difficult for an industry to grow and to have investment certainty when policy decisions backflip from month to month."

She says the evidence does not support critics who have argued there is not enough ethanol being produced to supply NSW's needs.

"I know a lot of people have put that up as an argument, but I have not seen any supply shortages few years at all," she said.