Ethanol blending programme may hit supply bottleneck after successful run

Doubts crop up over the viability of achieving 20% ethanol blending

India’s programme of blending petrol with ethanol has brought industry and farmers together for mutual benefit, but lately, the government’s optimism on this is being played down.

The Centre is fairly confident that owing to the programme’s pace and investments in the sugarcane and grain-based ethanol segments, the target won’t be difficult to achieve.

But some industry players have cast a shadow on this.

For the 2022-23 ethanol-supply year ending October 2023, the country has already achieved a blending target of 11.75 per cent till early July.

To achieve a target of 20 per cent blending, India will need around 10.16 billion litres of ethanol by 2025.

Estimates say the requirement could also be around 13.5 billion litres if demand from the chemical industry is factored in.

Of this (ethanol purely for blending purposes), around 6 billion litres will have to come from sugarcane-based molasses.

The rest, or around 4.16 billion litres, has to come from grain-based sources, largely broken rice, maize and rice supplied by Food Corporation of India (FCI) at concessional rates.

NITI Aayog pegs ethanol capacity by 2025 at 10.16 billion litres while it estimates that another 3.34 billion litres will be required for other use.

Till early July 2023 (of the 2022-23 ethanol supply year that will end in October 2023), around 3.51 billion litres of ethanol had been supplied by sugarcane- and grain-based sources.

Around 2.85 billion litres, or roughly 82 per cent, of that supply was from sugarcane-based sources and 0.66 billion litres, or 18 per cent, from grain-based ones.

Sugarcane-based ethanol suppliers have contracted 3.90 billion litres of ethanol in the 2022-23 supply year. By early July, they had already delivered around 2.85 billion litres, or around 76 per cent of their target.

In contrast, grain-based ethanol players have contracted around 1.64 billion litres and supplied just around 40 per cent.

It remains to be seen how grain-based ethanol makers manage to meet their contracts as a key source of raw material, concessional rice from FCI, has been stopped for now.

Switching to other raw materials, such as broken rice or maize, is challenging. This is because distilleries want oil marketing companies (OMCs) to pay them on par with the rate at which they purchase ethanol from sugarcane-based molasses as their production costs have gone up due to rise in broken rice and maize prices.

Industry players said that ethanol produced from sugarcane is being purchased by OMCs at Rs. 65.61 per litre in the 2022-23 supply year that ends in October 2023. This is a rate determined by a panel and cleared by the Cabinet Committee on Economic Affairs (CCEA).

In contrast, the price fetched by ethanol produced from Food Corporation of India (FCI) rice is Rs. 58.50 per litre in 2022-23 supply year. For maize, it is Rs. 56.35 per litre and broken grain Rs. 55.54 per litre.

The rates are ex-distillery, on which transportation and goods and services tax (GST) are added separately.

According to a statement by Indian Sugar Mills Association (ISMA), the price of ethanol from molasses should be raised to Rs. 69.50 per litre for the 2023-24 supply year.

The ethanol price paid by producers of sugarcane-based molasses is fixed according to a formula and also by a decision of the Cabinet. The ones that are produced from grain-based sources are mutually agreed upon.

Grain-based distilleries are seeking a revision of the price at which OMCs purchase ethanol from them. This will help at least recover a part of their production cost.

Grain-based distilleries have invested approximately around Rs. 9,000 crore in facilities while another Rs. 22,000 crore is required to achieve the targeted of 74 million capacity by 2025. The Rs. 9,000 crore has been invested to create a capacity of around 2 billion litres.

If the matter isn’t settled quickly, big investments promised in the sector could become challenging. And, most importantly, the blending programme could derail.

Apart from FCI supplies drying up, grain-based ethanol makers also face a problem of raw material availability.

A report by Arcus Policy Research, released a few months back, showed that among non-sugarcane sources, maize will continue to face a deficit. This is due to high demand from other dependent industries such as alcoholic beverages and poultry.

“Besides, price parity between crops and volatile yields and returns to maize farmers will throw up intense challenges for retaining and growing acreages under the crop,” said the report.

The report advocates considering the viability of importing ethanol at least for meeting the needs of non-fuel blending sectors and also investing on improving crop yields, which won’t happen overnight.

Sugarcane

Apart from grain-based ethanol, supplies from sugarcane are looking shaky too.

Industry sources said a prime reason for this is an expected drop in sugar production in 2023-24 due to uncertain weather in major producing states.

ISMA estimates sugar production in the 2023-24 crop season to be around 31.6 million tonnes, 3.7 per cent less than 2022-2023. If sugar production goes down, diverting more for ethanol making could be challenging.

Once sugar production goes down, molasses production also drops. Also, a section of the industry said if sugar production drops, the industry may find it difficult to meet its own ethanol commitment for 2025.

So far, out of the estimated 7.6 billion litres of ethanol required from sugarcane for achieving 20 per cent blending by 2025, capacities of around 5.50-6 billion litres is already in place.

In contrast, out of the 7.4 billion litres of ethanol required from grains, around 2 billion litres of capacity is already in place.

Given that grain-based ethanol started much later than sugarcane-based one, this is an impressive progress.

“To cover up for the possible shortfall from grain-based sources, an additional 1.5 million tonnes of sugar has to be diverted for making ethanol by 2025. This would be over and above the estimated 5.5-6 billion tonnes diversion. In a scenario when overall production of sugar could come down, expecting additional diversion could be slightly unrealistic,” said a senior industry official involved in the blending programme.

On the whole, the programme has come under cloud due to problems in availability of raw materials – be it molasses or grains.

And, the Centre needs to fix this quickly and clear the doubts. Or else, the fate of millions of farmers growing sugarcane, maize or rice could come under the radar if blending targets are missed.

According to NITI Aayog's estimates, foodgrain demand is projected to far outstrip supplies by a whopping 49 million tonnes by 2032-33.