Lack of remunerative rates, policy changes tether ethanol blending

Six months into India’s latest ethanol supply season, the needle on blending biofuel with petrol hasn't moved an inch. The blending ratio in the first half of the November 2023-October 2024 ethanol supply year (ESY) averaged 12.1 per cent — flat from the entire ESY 2022-23. That compares with a 1.9 percentage point gain in 2021-22 from 2020-21 and a 2.1 percentage point gain in 2022-23 from the previous ESY.

The slowdown in ethanol output carries consequences — hurling the 20 per cent ethanol-blended petrol (EBP) target by 2025-26 out of range — leaving India dependent on more polluting, expensive fossil fuel imports.

India’s ambitious plans for an agri-derived ethanol-fuelled transport sector rest on the twin pillars of remunerative rates and agricultural yields. Unless rates are strengthened and yields improved, distillers have less of an incentive to produce the biofuel and commit investments toward new distilleries.

“Ethanol procurement prices for ethanol manufactured from sugarcane juice/B-heavy molasses have yet to be revised by the government,” said Deepak Ballani, director-general, Indian Sugar and Bio-Energy Manufacturers Association (Isma).

“The current pricing structure does not adequately reflect the production costs and the significant investments made by the sugar industry to enhance ethanol production. Isma has made requests to the government for the same, and we believe that a comprehensive and sustainable solution is required for the long term,” he added.

Rates for ethanol produced from sugarcane juice and B-heavy molasses must increase by Rs 2.52 per litre and Rs 1.43 per litre, respectively, for ESY 2023-24 from a year ago and by Rs 5.01 per litre and Rs 5.54 per litre in ESY 2024-25, according to Isma estimates. These are based on previous government prices, the increase in fair and remunerative price (FRP) of sugarcane, as well as production costs.

The ethanol procurement price for ESY 2024-25 must be increased to Rs 73.14 per litre and Rs 67.7 per litre, respectively, because of the increase in FRP of sugarcane as well as the cost of production, Ballani said. The price for ethanol derived from C-heavy molasses should also increase to Rs 56.28 per litre in 2023-24 and to Rs 61.2 per litre in ESY 2024-25 from Rs 49.41 per litre.

The sugar industry supplied more than 83 per cent of ethanol in 2021-22 and 73 per cent in 2022-23. Going forward, Isma expects the ratio to settle at 55-60 per cent.

While the FRP for sugarcane to farmers is announced by the government every year, the minimum support price for sugar has remained unchanged for more than five years, said an Isma executive.

It’s important to fix the minimum support price and ethanol prices along with FRP every year to establish financial viability. The revenue share ratio (of sugar) for Indian cane farmers is 75 per cent, which is far higher, as opposed to 70 per cent in other important cane-growing countries, the executive added.

The lack of remunerative pricing has prompted some major industry players to review their investment plans, which further accentuates the shortfall in ethanol capacity. Assuming a 70 per cent utilisation rate, India as of December 2023 faces a 6.2 billion litre (bl) shortfall in ethanol production capacity, analysts said.

For instance, in January, the grain ethanol manufacturers association sought a Rs 10 per litre increase in the price of maize-based ethanol but secured a hike of only Rs 5.79 per litre, Business Standard reported.

“The sugar industry is capable of meeting the ethanol supply to meet the 20 per cent EBP target and even beyond, subject to stable policy and investment in sugarcane production stabilisation," said Prabhakar Rao, president of Isma.

“One can draw a road map to a 55 per cent or even 60 per cent ethanol supply contribution, but it is contingent on policy interventions and farmer support,” he added.

“We are hopeful the government will address the feedstock and profitability challenges in 2024-25 as it remains committed to EBP targets of 20 per cent by 2025-26," said Dhruv Sawhney, chairman and managing director, Triveni Engineering & Industries, one of the country’s biggest integrated sugar manufacturers, in the latest earnings statement.

The government has pushed for big ethanol blending targets — which, owing to the additional income generated for farmers, is a potential political windfall — without considering the vagaries of weather, low crop yields, and a burgeoning population that consumes more sugar, industry executives observed.

Such an aggressive expansion of ethanol capabilities needs better agricultural management. India requires 29 million tonnes (mt) of sugar annually, which is increasing by 1.5–2 per cent per year.

A 20 per cent blending target requires close to 10 bl of ethanol, of which 5.5 bl has to come from sugarcane; 1.32 bl will go towards alcohol for industrial and portable purposes in 2024-25, according to Isma.

Cane production needs to be enhanced from the current productivity of 76 tonnes per hectare 83 tonnes per hectare in the next five years, and the cane productionarea must increase from 5.7 million hectares (mha) to 6.2 mha, Ballani said.

Weather is the biggest threat to New Delhi’s ethanol plans. For instance, sugarcane crush during the sugar season 2023-24 for Triveni was 11 per cent lower at 8.26 mt from a year earlier due to heavy rains and waterlogging in certain regions and the associated proliferation of red rot in planted seed cane, which reduced the yields considerably, the company said. Inclement weather and lower yields forced the government to divert more of the crop to sugar in an election season while placing restrictions on ethanol production for blending.

“Sugarcane production in India has seen shocks in the past two years, given erratic monsoons and local weather patterns," said Paras Pal, senior analyst, India Ratings & Research (Ind-Ra).

“Ind-Ra expects the government to prioritise sugar production against ethanol production for the ethanol blending programme in a situation of limited availability of sugarcane,” he added.