Resolving India’s ethanol conundrum

The benefits of blending ethanol with petrol for fuelling vehicles are obvious and many. It is environment-friendly. It also helps reduce India’s dependence on oil imports. Our country is the third largest consumer of crude oil after China and US and imports as much as 82 per cent of its needs. Lower imports reduces the current account deficit which in turn eases the pressure on the rupee, leading to lower inflation and interest rates and, thereby, fuelling economic growth.

This is true particularly when oil prices spike. India’s fuel bill in 2018-19 is expected to rise by 42 per cent to $125 billion from $88 billion in 2017-18, even though the volume increase is just 4 per cent. Under the circumstances ethanol blending presents itself as a compelling option. Government data suggest that in 2015-16, even at a 3.5 per cent blending rate, the savings were to the tune of $353 million. Imagine the savings a 10 per cent or a 20 per cent blending rate will deliver.

Also, blending ethanol with petrol will help the country manage its surplus farm output and increase farmers’ realisation. In other words, it will ensure that oil companies, instead of enriching some sheikh in the Middle-East, pay our farmers for the feedstock that goes into making ethanol.

Despite these advantages, the ethanol blending policy, first announced by the Vajpayee government in 2002 (5 per cent blending rate), has failed to deliver. A decade-and-a-half later, in 2016-17, the average blending rate was just 2.07 per cent. This was lower than the 3.5 per cent achieved the year before.

Lack of a consistent policy and, more importantly, the will to implement the programme effectively has, over the years, cost the country dearly. Policy flip-flops like how ethanol should be priced — fixed by the government or identified through tendering — created so much of hassle for the oil marketing companies (OMCs) that they lost interest. All the more so when global crude oil prices fell.

For their part, sugar mills, which produce most of the ethanol in the country by distilling molasses, found the price offered by the potable alcohol industry more attractive. State governments added their bit of dampeners too.

They either banned inter-State movement of ethanol or dis-incentivised it by levying taxes. In the end a situation evolved where there was neither significant demand nor supply.

Positive steps

The Modi government, since 2016, has been putting in place policies (including the 2018 National Policy on Biofuels) to correct the situation. It has offered better price for ethanol, ensured oil companies blend, addressed supply issues and removed restrictions that State governments imposed. In 2018-19 (December-November period) it is expected that the blending rate should touch 5 per cent for the first time. It remains to be seen if this trend will continue now that oil prices have begun to decline or if the government changes post 2019 elections.

For India’s ethanol blending programme to deliver, three critical factors — policy consistency, stability in price and flexibility — are essential. It must be made clear that ethanol blending with petrol will continue irrespective of where the oil prices are, and that the blending rate will only increase going forward. Such unequivocal statement will prepare the stakeholders to make necessary investment. India’s ethanol capacity is estimated at 300 crore litres.

Of this, 130 crore litres is consumed by the potable alcohol sector and 60 crore litres by chemical industries leaving about 110 crore litres for blending with petrol. To achieve the government’s target of 10 per cent blending by 2022, the ethanol required is 300 crore litres.

Sugar mills will have to make substantial investment for this. Thanks to the government’s subsidised loan scheme as many as 114 mills are expanding their capacities, which should in the next 24 months add 90 crore litres of ethanol capacity.

Capacity for another 100 crore litres needs to be created. If the government sticks to its plan of increasing the blending rate to 20 per cent by 2030, automotive players will have to study if engines need to be modified. These investments will not materialise without policy consistency.

Ethanol has competing users and for OMCs to get their share for blending they should pay a remunerative price. The government has ensured this for 2017-18 and 2018-19. It is anybody’s guess what the price will be next year as crude prices soften.

For ensuring price stability, ethanol pricing should be de-linked from crude prices. Even if crude falls, ethanol price for blending should remain remunerative considering the overall benefits it offers. Also, the government should handhold the programme till it stabilises. Brazil did just that. Its ethanol programme started in the 1970s and for over 25 years the government fixed the price and shielded it from market fluctuations. Brazil’s average blending rate of 40-45 per cent would not have been possible without it.

Flexibility matters

Flexibility is another important virtue. In India, ethanol is produced after distilling molasses, a by-product of sugar. As against the domestic consumption of 260 lakh tonnes, sugar output in 2017-18 was 322 lakh tonnes.

It is estimated that the 2018-19 season will be another bumper year. This glut could have been avoided if mills were allowed to produce ethanol directly from cane juice or by converting molasses earlier in the process instead of producing sugar. This would put an end to the sugar cycle (non-climate triggered) and the debilitating cane arrears.

Fortunately, the new bio-fuel policy allows this. It also permits damaged/broken foodgrains apart from agri-waste to be converted into ethanol.

This helps as sugar-cane-based ethanol, even when the crop is not affected by drought, can at best feed a 7 per cent blending rate. Increasing sugar-cane acreage (from the present 3 per cent of net sown area to 7 per cent to meet ethanol demand for blending) raises serious ecological issues. By 2040 it is estimated that India will become the largest consumer of crude oil. Importing bulk of that requirement will leave us vulnerable economically and strategically.

Ethanol blending is a good way to avoid that situation. It should become a national policy that is supported by all political parties irrespective of who is in power.

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