Unlike the traditional method of producing ethanol from sugar-based crops, 3G or third-generation ethanol is produced by algae from wastewater, sewage or salt water. Ethanol, a biofuel, is primarily produced from feedstock, such as cereals, sugarcane juice and molasses in India known as 1G ethanol while 2G ethanol utilises surplus biomass and agricultural waste as raw material.

The advantage of using 3G ethanol is that it does not source from food crops, thus solving the issue of food security. Oil marketing companies (OMCs) such as Indian Oil are working on setting up 3G ethanol plants.