Climate Risks Weighs On Ethanol Target
Achieving the goal of 20 per cent ethanol blended petrol by 2025-26 is at risk due to the impact of climate on crops. Which should take precedence – energy or food security?
The deadline for achieving E20 or 20 per cent ethanol blended petrol in the country has been advanced from 2030 to Ethanol Supply Year (ESY - from November 1, 2024-October 31, 2025) 2025. Sector watchers, however, say this exercise should have happened two years ago, as E10 or 10 per cent ethanol blended petrol, as part of the Ethanol Blended Petrol (EBP) programme, had become a reality in June 2022, a full five months ahead of the November 2022 deadline.
Now, this begs the question: are we on schedule to meet the E20 deadline by November 2025? Those who track the sector closely think otherwise. “In ESY 2024 (November 1 2023-October 31 2024), we were to achieve 15 per cent ethanol blended petrol. We may touch 14 per cent at best," says a senior analyst.
Therefore, in order to achieve E20, some tough questions need to be answered. For example, achieving the E20 petrol goal means better utilisation of both grain and sugarcane feedstock to increase its supply. What is the situation of grains? What is the outlook for sugarcane production? Ethanol is produced from two types of feedstock – sugarcane and food grains (mainly rice and maize). In the last two years, the overall production of both the feedstock have been hampered due to changing climatic conditions, uneven monsoon among other factors
Why EBP?
EBP reduces India's dependence on imported crude oil by substituting a portion of petrol with domestically produced ethanol, thereby enhancing energy security. The EBP programme supports farmers by creating a market for crops like sugarcane and corn, which are used to produce ethanol. This can help stabilise agricultural incomes and boost the rural economy. Ethanol is a cleaner-burning fuel than petrol, leading to reduced carbon emissions and contributing to India's climate goals. By reducing oil imports, EBP helps save foreign exchange, which is crucial for India's trade balance.
As per the government's estimates, the ethanol required for E20 is 1,016 crore litres. As per the roadmap, a successful E20 programme can save India about $4 billion (over Rs 32,000 crore) per annum.
The current ethanol production capacity is spread across ethanol- surplus states of Uttar Pradesh, Maharashtra and Karnataka. This capacity is sufficient to produce the ethanol required to meet the blending targets, says a government report. And in line with this roadmap, the oil marketing companies achieved 10 per cent ethanol blending during ESY 2021-22 and 12 per cent during ESY 2022-23.
Progress Check
Experts say sugarcane and rice were in surplus when the biofuels policy was announced. Since then, erratic temperatures and rains have affected these crops in 2022 and 2023. Therefore, the availability of feedstock for ethanol blending is also under threat. In October 2023, India's crop production estimates for pigeon pea, chickpea, wheat, sugarcane, and cotton were revised down due to erratic weather and pest attacks. Consequently, India restricted export of wheat, rice, and sugar, and imposed a minimum export price on basmati rice. Once the world's second-largest sugar exporter in 2021-22, India's exports have since been limited due to lower yields and rising domestic demand.
Navigating energy security goals alongside food security has become increasingly complex. Key Indian agricultural commodities are experiencing high inflation, reduced surpluses, and trade restrictions. Since January 2022, except for a few months, India's retail food inflation has consistently exceeded the RBI's comfortable threshold of 4 per cent.
Will India achieve a 14 per cent ethanol blending in current ESY?
A CRISIL Ratings analysis of 17 integrated sugar mills, accounting for about one-third of sugar-based ethanol supply, indicates as much. While grain utilisation for producing ethanol is not controlled, the government determines the quantum of sugarcane utilisation based on its estimation of demand-supply balance of sugar for the year ahead. Last year’s erratic rainfall is expected to have impacted sugarcane production this year, the report states. Consequently, ethanol production from the sugarcane route is expected to be restricted to ~250 crore litre (equivalent of 2.5 million tonne of sugar) this season, it adds.
Says Poonam Upadhyay, Director, CRISIL Ratings, “Ethanol blending could still improve to 14 per cent in ESY 2024 as extraction from grains has significantly risen due to 40 per cent capacity expansion. That will compensate for the reduced output from sugarcane." However, to achieve the 20 per cent blending target by ESY 2025, allocating sugarcane required to produce ~4 million tonnes of sugar can be considered for ethanol production, similar to the season 2023, she adds.
In the upcoming sugar season 2025, gross sugar production is expected to be ~33.5 million tonne, with consumption at ~29.5 million tonne. Additionally, sugar inventories are projected to be healthy by the end of this season. Hence, allowing sugarcane — equivalent to the quantity required to produce 4 million tonne of sugar—for ethanol supply (~390 crore litre) can be considered, while the larger remaining share will be sourced from grain-based route, the report states. According to Anil More, Associate Director, CRISIL Ratings, “Higher sugarcane usage for ethanol production will also help optimise sugar inventory, which is estimated to rise to about 4 months of consumption (~8 million tonne) by the end of this season. Besides, it can positively impact the cash flows of sugar mills and help them pay cane dues to farmers on time.” In the road ahead, the policy on quantum of sugarcane allowed next season and availability and prices of grain-based feedstock will bear watching.
Challenges Ahead
Is using water-intensive crops like sugarcane and rice for ethanol production truly sustainable? Sugar mills eye exports due to high global prices, while oil companies demand more ethanol for fuel blending. Meanwhile, industries compete for maize, and rice must balance food, export, and ethanol needs. The West Indian Sugar Mills Association (WISMA) and the Indian Sugar and Bio- Energy Manufactures Association (ISMA) have already demanded an increase in sugar's Minimum Selling Price from the Rs 31/kg set in February 2019. They cite ethanol production restrictions impacting distilleries' operation days, causing financial strain on sugar mills. They had also urged the government to announce the 2024-25 ethanol policy by August 15, which did not happen. Shouldn’t a comprehensive impact study guide EBP strategy? Is a hard relook needed amidst current challenges?
