Caught Between Politics And Economics, Ethanol Producers Get A Headache

Ethanol is a key component of India's green fuel plan. With the 2023-24 supply year for ethanol production beginning in November, the government's move can impact India's green fuel plan as well as the commitment it has made at the climate summit.But with Lok Sabha elections a few months away, the government appears guided by the need to ensure sugar supplies are adequate and prices don't get out of control.

In India, ethanol is largely produced with sugar syrup and with grain. The decision to ban use of sugarcane juice and sugar syrup for ethanol production has left ethanol producers who use sugarcane juice a worried lot. They have made several representations to the government but the government is not likely to go in for a U-turn for obvious reasons: keep vigil on sugar stock.

"The government will now rely upon maize to boost ethanol production in the country in order to achieve blending goals. In order to increase the maize output, the government is working on some schemes,"Food Secretary Sanjeev Chopra said during a recent media interaction.

Sources said that a plan in this regard has been approved. The National Agriculture Cooperative Marketing Federation (NAFED) and the National Cooperative Consumers Federation will buy 2 lakh tonnes of maize from farmers and supply it to companies for ethanol production.

But grain-based ethanol producers aren't happy since grains, largely rice and maize, are not cheap in the market.

Grain-Based Ethanol Producers Suffer More

The ordeal of grain-based ethanol producers began when the Food Corporation of India stopped the supply of rice for ethanol production. It did so because FCI rice was being distributed under the PM Garib Kalyan Yojana and the scheme's extension for another 5 years from January 1, 2024 meant the FCI couldn't afford to continue supply to ethanol plants.

More than 100 distilleries across the country, which depend on rice from FCI for conversion into starch and then process it into ethanol, are having a hard time. The alternative, maize, is not cheap either; the price of maize has almost doubled in the past two years and is now hovering around Rs 2,300 per quintal in the open market. Ethanol producers expect maize prices to reach up to Rs 2700-2800 per quintal in the near future.

Domestic maize availability is already under strain because about 35 lakh metric tonnes of maize are exported. As a result, it drives up the price per kilo.

"The FCI decision of completely stopping surplus rice sale has created tough times for grain-based ethanol producers. We have no option but to buy rice or maize from the open market at a much higher price. At current market rates of Rs 27,000 per ton for rice and Rs 23,500 per ton for maize, buying grains and using them for ethanol production at current ethanol prices is completely unviable," said Abinash Verma, Promoter, Eastern India Biofuels.

Even dual-feed distilleries, which use sugarcane during sugar season and grains during off-season, may also be impacted. Though the FCI did not give any reason for banning rice sale, it is understood that the rising prices of cereals and concerns over rice production in 2023-2024 crop year along with erratic rains may have led to this decision.

Ethanol Producers Want OMCs To Pay More

In turn, OMCs now pay ethanol producers Rs 66 per litre for ethanol from maize and Rs 64 per litre for ethanol made from rice.With the prices of raw materials going up, ethanol producers claim their business will remain viable only if OMCs increase the price of ethanol they pay.

"We are in a situation now where adequate availability of raw materials at reasonable prices has become a big concern. The only way to solve the current problem is to increase the price of ethanol from broken rice, fixed by OMCs, to at least Rs 72 per litre, otherwise grain based distilleries will find it difficult to continue their operations. Achieving enough clean fuel would become difficult.” Verma said.

The Grain Ethanol Manufacturers Association has appealed to the government to partially restore the supply of rice for ethanol producers and requested the price of maize being sold via NAFED and other agencies to be reduced.

No One Is Winning

The government and the oil marketing companies are not happy either. The latest development runs counterto the government's ongoing effort to minimise reliance on imported crude by encouraging ethanol production.

The National Policy on Biofuels 2018 allowed the production of ethanol from a variety of feed-stocks like agricultural residues (rice straw, cotton stalk, corn cobs, saw dust, bagasse etc). The other raw materials were maize, cassava, rotten potatoes, broken rice, sugarcane, sugar beet and sweet sorghum. But grain-based ethanol is largely with rice and maize.

The government and the OMCs have been fixing remunerative prices of ethanol produced from different feed-stocks for supply to OMCs. To boost ethanol production, the government amended the Industries (Development & Regulation) Act, 1951 in May 2016 to ensure free movement of ethanol in the country.

It also cut the Goods & Service Tax (GST) on ethanol meant for the Ethanol Blended with Petrol (EBP) Programme from 18 per cent to 5 per cent in July 2018.

"Under the EBP Programme, public sector OMCs have saved approximately 509 crore litres of petrol on account of ethanol blending during the ESY (ethanol supply year) 2022-23, resulting in savings of more than Rs 24,300 crore foreign exchange and expeditious payment of about Rs 19,300 crore to farmers,’’ Minister of State, Petroleum,RameswarTeli said in a statement in Rajya Sabha. Ethanol supply year runs from November through October.

Although, the government officially maintain that the target of increasing ethanol blend in petrol to 15 per cent in 2023-24 would be met, not many share the optimism. Ethanol producers don't see it crossing 12 per cent, said Rahul Choksi, a Mumbai-based commodity analyst.

Sugarcane-based ethanol companies are concerned that their cash situation would be weak because of the ban on making ethanol by using sugar juice.

"The sector is facing multiple problems. Sugar-based producers have different problems, grain-based have different ones. Whatever may be the case, the government has to resolve them differently. But the fact remains, this will hurt the government's clean fuel plan badly,” said Choksi.

As per an industry estimate more than Rs 10,000 crore has been invested in ethanol production capacities over the past four years. Their future viability depends on the government's ability and success in resolving the conflicting priorities and ensuring the investments made don't turn into bad assets. One immediate recourse could be to persuade oil marketing companies pay more for the ethanol they buy.