Ethanol was rarely discussed 7-8 years ago in India. But now environment-friendly fuels, like ethanol, are on the top priority list of the government. By blending domestically produced ethanol with conventional fossil fuels for consumption, the government can reduce reliance on oil imports.
Earlier, the demand for ethanol was from potable liquor and chemicals companies. Today, thanks to the government’s push, there is a big demand from oil marketing companies (OMCs).
Consequently, in the past few years, sugar/sugarcane started getting diverted for ethanol production. Apart from sugarcane, modern technology-based ethanol plants are being set up across the country to convert agricultural waste/surplus to ethanol.
READ : Government's ethanol U-turn a big disappointment for sugar mills and investors, here's why
What is the new directive on ethanol?
The government has directed all sugar mills and distilleries to halt the use of sugarcane juice/sugar syrup for ethanol production in ethanol supply year (ESY) 2023-24 with immediate effect. November 2023 to October 2024 is the current ESY. However, the supply of ethanol from existing offers received by OMCs from B-Heavy molasses, C-Heavy molasses and grains will continue.
Why was the change required?
Deficient rains and the potential effect on sugar production led to the curb on the use of cane juice to ensure sufficient availability for domestic consumption. The move also aimed at curtailing sugar price inflation (up more than 8 percent in the last six months) in an election year.
What was the original ethanol policy?
Ethanol Blended Petrol (EBP) programme, launched in January 2003, received a major stimulus under the leadership of the present government in 2018. The government and OMCs have been aggressively promoting the EBP programme to achieve 20 percent ethanol-blending in petrol by 2025.
Plans remain on track as ethanol-blending has jumped to 12 percent from just 5 percent in 2019-20.
Why is the government so focused on ethanol-blending?
Rising energy demand and high reliance on import pose significant energy security challenges for India. It also leads to massive foreign currency outflows.
Moreover, ethanol is cheaper than petrol and less-polluting. Therefore, the move will not only reduce the country’s oil import bill, but also decrease CO2 emissions.
Also, since OMCs make timely payment for ethanol supplies, it enables sugar companies to make timely payment to farmers, thereby reducing cane arrears.
Can ethanol be manufactured from other sources?
A vast majority of ethanol in the US is produced from corn, while Brazil primarily uses sugarcane. Technically, any starch-rich crop can be used for fuel ethanol production, including potato, corn, wheat, rice, sorghum, barley, rye, cassava, and triticale. However, the efficacy of the output would depend on several factors like procurement costs, government policies, crop yields etc.
How did sugar companies manufacture ethanol prior to the change in policy?
Under the National Policy on Biofuels 2018, the government allowed the conversion of B-Heavy molasses (by-product of sugar), sugarcane juice and damaged food grains (DFG) to produce ethanol in ESY 2018-19, which marked the beginning of differentiated ethanol pricing, based on raw material/feedstock. The move enabled reliable supply of feedstocks and price stability for farmers.
Moreover, in November 2020, maize was introduced for ethanol production. Currently, there are about 120 grain-based distilleries in the country, which can use maize as feedstock for making ethanol.
Last year, India produced about 4.94 billion litres of ethanol, of which about 75 percent came from sugarcane-based sources, 15 percent from rice released by FCI, 4 percent from maize and the remaining 5 percent from damaged food grains. Within cane-based sources, 63 percent came from B-heavy molasses and 35 percent from juice.
How will sugar companies manufacture ethanol, after the directive?
Excluding sugarcane juice/syrup, ethanol can be produced from first-generation feedstock - sucrose (molasses - B-Heavy and C-Heavy) and starch alternatives (corn/wheat/rice).
The successful implementation of the EBP programme needs 50 percent of ethanol to be produced through grain-based distilleries.
What is the government’s stance on other feedstock?
Given that India has a surplus of sugar, corn, and wheat, the government is encouraging ethanol production not only from molasses (sugarcane by product), but also from other foodgrains to achieve the blending targets.
Do Indian sugar companies have dual feed stock capabilities?
Historically, most of the players have been using either molasses or grains to produce ethanol. However, the scenario is fast changing as the likes of Radico Khaitan, EID Parry, Dhampur Bio Organics and Triveni Engineering have set up dual feed (molasses or grain) plants in recent months.
What are the benefits of using maize as a feedstock for ethanol production?
Maize-based ethanol is more economical and water-efficient in comparison to sugarcane.
How will the policy impact sugar prices?
Curbing ethanol from sugarcane juice will add an estimated sugar inventory of 15-17 lakh tonnes to the domestic market. The recent change in demand-supply dynamics is likely to exert a downward pressure on sugar prices (currently Rs. 39 per kg) by 4-5 percent, at least in the immediate term.
However, prices will largely depend on sugar production in the current crushing season, which has already started from November 2023.
In what ways will this policy impact the earnings of sugar companies?
Since 2014, the production capacity of ethanol distilleries has jumped more than 2.8 times to 620 crores litres. The ban will have a detrimental impact on incremental capital expenditure by industry participants within the biofuel ecosystem. However, the impact on financials will vary, company by company.
For instance, Balrampur Chini uses around 10 percent of cane juice in ethanol making. Balrampur’s earnings are anticipated to decline by 10-12 percent on account of these developments. Besides, there could be additional pressure on bottom line through lower sales realisations, weak capacity utilisation and interest expenses.
Should long-term investors in sugar have reasons to worry?
According to industry experts, the ban is temporary, and is aimed at curbing sugar prices in the near term. However, long-term viability of the EBP remains intact.
That said, given the high regulatory risk and keeping in mind that the 2024 elections could trigger populist measures, investors should remain on the sidelines as far as sugar stocks are concerned.
Is 20% ethanol-blending target realistic for India?
Brazil is a leader in ethanol-blended gasoline. Brazil's current standards require a 27 percent blend of ethanol in gasoline. The Brazilian government intends to increase ethanol-blending in gasoline to 30 percent from 27 percent currently. In contrast, India’s share of ethanol blending stands around just 12 percent at present.
What are the key risks to India’s ethanol policy?
At present, India is largely dependent on sugarcane for its ethanol production. Sugarcane, a water-guzzling crop, requires about 1,500-2,000 liters of water for 1 kg of production. Therefore, a situation of crop shortage due to a weak monsoon and erratic rainfall poses a big threat to meet targeted objectives.
How does ethanol policy impact our vehicle performance?
Pure ethanol has lower calorific value than petrol. Therefore, the vehicle mileage is inversely correlated with percentage of ethanol blend.
Also, usage of ethanol-mixed petrol can lead to corrosion and rust in the fuel tank as it has high polarity and moisture affinity.
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