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You'll want to head to vwdiesel.net forum, in the IDI section for more info about old, mechanically injected diesel. Most mod people do don't only increase power, but usually increase efficiency. I've read tremendously about the AAZ lately (I bought one last fall) so I can sum it up for you :
First, biodiesel IS damageable to only one part of the AAZ engine, the injection pump. Low sulfur fuel damage the seals of the pump. However, replacement seal kit are now resistant to this, so you can get your pump resealed. Quite costly tough, you'll surely wait 'till the pump start dripping, but don't wait to long or you'll run into trouble.
Second, a TD engine will always be less efficient than a TDI. Direct injection is more efficient. But you can increase it's efficiency quite easily, unlike the TDI which require a computer. First you'll want to tune your max fuel and and give a couple of turn to turbo actuator arm bolt in order to reduce the time it takes to the turbo to engage. There's complete guide for basic tuning that can be done with little modification.
Third, you can add/change stuff to increase fuel efficiency. Switching the 5 gear to reduce the ratio is well documented and will lend you some nice economy on highway driving. Adding an intercooler is another, low cost solution that works fine. Cold-air intake are an easy job. A lot of people will say that cone shaped air filter will increase airflow, but you're better off keeping the stock air box with a high efficiency filter and replacing the tubing with better flowing one.
I could keep on for a long time, but I'll let you read, you'll learn more about diesel this way. Diesel engines are unstoppable machines that simply needs to be well maintained. Don't cheap out on oil and filters , do your maintenance on regular schedules and keep it clean.
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