Moneycontrol Pro Panorama | Sugar industry's enthusiasm for ethanol may dim a bit

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India wants to lower its dependence on imported fossil fuels so that it is less of a hostage to international price swings, dollar fluctuations and the resultant impact on its fiscal deficit. Discouraging consumption through high fuel prices is one way of doing it. But that has its limitations, for instance because of second-order effects on freight rates. A more positive approach is alternative fuels.

Vehicles that run on electricity are one such solution. Those that can run with a blend of ethanol and petrol or pure ethanol—equipped with a flex fuel engine—are another. While electric occupies all the attention, in India ethanol has had surprisingly more success. The government wants the industry to put the cart—in this case make electric cars by the million—while the industry wants the charging infrastructure, components and suitable incentives, in other words the horse, to be in place first.

But ethanol’s surprising rise came about as the government played the role of a facilitator--a whatever it takes approach. Industry got financial support for setting up projects, a liberal regime for environmental clearances, intervention for transporting ethanol across state borders and duty concessions. But most crucial was an assured market for ethanol at an assured price.

Sugar companies used to complain earlier that oil marketing companies would bargain hard during tenders to procure ethanol and even lift less than their commitments. Now, the government sets procurement targets, fixes ethanol prices and then ensures mills deliver—which they are happy to—and OMCs buy. It has even set commitments for blending ethanol with petrol, from 10 percent in the latest year to 20 percent by 2025. That’s a commitment to give comfort to the industry to invest. In return, the industry was expected to put up with higher sugarcane prices and also pay cane farmers on time. This arrangement has worked well. Between 2013-14 and 2021-22, ethanol procurement has increased from 38 crore litres to 452 crore litres.

But not everything is humming along fine in sugar-based ethanol land. The Indian Sugar Mills Association was not too pleased by the revised ethanol prices announced for 2022-23. It had pitched for an ethanol price of Rs 69.85 a litre for ethanol made from sugarcane juice but what it got was Rs 65.61 a litre, a price it says will make investors shy away from investing. Meanwhile, the industry is paying 5.2 percent more for sugarcane this year. It’s a situation of the feedstock turning more expensive than the finished products. As we recently noted, the government may also want sufficient sugar to be produced to keep its prices in check.

ISMA’s argument, outlined in a presentation to the government, is that expansion of existing ethanol capacity has reached a limit and now fresh investments in ethanol-manufacturing from sugar syrup are required but need a higher procurement price. But the government is not biting.

The thing now is that the industry is already dependent on the government, with a web of incentives and policy measures holding up performance. A few cuts from the government can hurt a lot. So they may have little choice but to make the investments in ethanol the government needs to meet its ethanol blending target. The returns may not be that great, however. But that’s the risk in an industry where the government plays an overarching role. Where sugar mills are seeking an ethanol price based on a 5-year payback period, the government may tell them to think longer term. They may have little choice but to.

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