Govt's ethanol push to help sugar mills, oil companies

BL Research Bureau

Year after year, despite drought conditions in many parts of the country, we produce more and more of sugarcane – a water-guzzling crop, and there is a huge amount of excess sugar in supply in the market today.

In fact, we are entering the Sugar season 2019-20 (October- September) with a record opening stock of 142 lakh tonnes of sugar — that can actually serve half the country’s annual demand.

While scrapping FRP to dissuade farmers from growing cane is not in consideration by states, given the vote bank of cane growers, all focus is now in pushing mills to divert cane into making of ethanol — a biofuel that derived from sugarcane that when blended with petrol, limits carbon discharge.

This will reduce excess sugar supplies in the market, and boost sugar price, helping mills. It will also reduce oil imports, and save dollars for the country. That way, the Centre thinks it can kill two birds with one stone.

A great idea. But, is it doable?

While the Centre keeps rising its ethanol-blended petrol (EBP) target every year (from 5 per cent to 10 per cent and now 20 per cent by 2030), given that it is not mandatory for oil companies, will they oblige? As oil prices have fallen sharply, will it still be worthwhile? Also, do sugar mills have enough capacity to produce sufficient ethanol to reach the 20 per cent blending target?

To reach the Centre’s ambitious target of 20 per cent in blending by 2030, a back of the envelope calculation with India’s current fuel consumption shows that there is the requirement of around 700-800 crore litres of ethanol in a year. But India’s current ethanol production capacity is only around 355 crore litres.

Increasing capacity

The lack of capacity in ethanol production is not likely to pose a hurdle in reaching the blending target. With the Centre’s soft loan (interest subvention) provision for sugar mills to build capacity in ethanol in June last year, many companies have come forward to expand or add new capacities. So far, a total number of 245 projects have been approved by the Government under the scheme for financial assistance says ISMA.

Around 300 crore litres of capacity is expected to be added if all the approved projects come on stream in the next 2-3 years, taking the total ethanol production capacity to 600-700 crore litres annually.

This will help take EBP to the desired target.

In 2018-19 ethanol supply year, i.e., December – November, about 163 crore litres of ethanol have been lifted by oil companies (till September 10) from sugar mills. This brings the blending rate for the year to 5.6 per cent. In the next two-and-half months, the total lifting may reach about 200 crore litres, say market observers.

Why oil companies are interested

Though there is no written mandate, oil companies have begun to show interest in blending petrol with ethanol in last few years, due to the government’s constant push and the high price of oil, that has made blending ethanol with petrol an attractive deal.

Note that the cost of ethanol is lower to petrol for oil companies, but when selling it at the retail pump, oil companies sell ethanol-blended petrol at the same price as petrol and make a profit.

While last year the price of petrol at the retail pump (in Delhi) was about ₹81, the cost of ethanol worked out to about ₹62, the difference per litre was ₹19 for the oil companies.

Now, with a lower price for petrol, due to falling in crude prices globally, and the higher cost of ethanol (after price increase by the government), the profit has come down to ₹5/litre but is still attractive.

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