10% ethanol blending in fuel to be mandated

10% ethanol blending in fuel to be mandated

In a significant move to deal with a massive oversupply of sugar that could also give a major boost to environment-friendly fuel, a group of ministers (GoM), headed by external affairs minister Pranab Mukherjee, has recommended that India adopt a mandatory blending of 10% ethanol with petrol to run motor vehicles.

While blending—at 5%—is currently optional for individual states, the GoM has recommended that 10% blending of ethanol be made mandatory by October 2008, with only exceptions being Jammu and Kashmir, the north-eastern states, Andaman and Nicobar Islands, and Lakshadweep.

The recommendation now goes to the cabinet committee on economic effairs (CCEA) for approval.

An official close to the development, who spoke on the condition of anonymity because of the far-reaching implications of the group’s decision, said the GoM has also agreed to recommend a uniform purchase price of Rs21.50 per litre, ex-factory, for the supply of ethanol, to be implemented all over the country for the next three years.

In a related move, the GoM has also suggested that the import duty on imported industrial ethanol be reduced from 7.5% to 5%, to prevent potential shortage of industrial alcohol from the ethanol decision, and asked the department of food and public distribution to also explore options for ethanol exports. The GoM was acting on the ethanol proposal of the department.

India is the world’s second largest producer of sugar, behind Brazil, and the largest grower of sugar cane. Ethanol is produced from the fermentation of sugars such as corn, sugar cane, grains and beet. In India, ethanol is mostly made from rectified spirit which, in turn, comes from molasses—a by-product in sugar manufacturing. Molasses comprise around 45-50% of total sugar production.

The GoM decision will come as a major relief to many sugar companies that have seen their revenues—and share prices—plummet in recent months because of the huge imbalance between India’s consumption of sugar—under 20 million tonnes (mt)—and the supply of nearly 29mt.

Environmentalists are also likely to cheer the move. India now imports 70% of its crude oil supply and the number of cars nationwide has more than doubled in the last decade.

With power and energy consumption rising steadily, analysts say one viable solution to India’s growing demand for energy—both environmentally sound and linked to the development of the rural economy—lies in sugar by-products, namely, molasses and sugar cane juice.

With total sugar production touching 29mt in 2006-07 (the season ends on 30 September), molasses production is expected at 14.8mt, which has the potential to produce 3,300 million litres of alcohol. At the proposed level of 10% blending, a full implementation of the government’s order would require around 1,130 million litres of ethanol. Today, more than one-third of alcohol produced in India is allocated to potable alcohol and then sold to breweries and makers of spirits.

Key industry executives said the supply of molasses will not be an issue at 10% blending.

“However, other glitches have to be addressed," said Ravi Gupta, president (sugar and alcohol business), Bajaj Hindusthan Ltd, and a vocal proponent of the use of more ethanol in fuel.

For instance, Gupta maintained that oil marketing companies need to be given clear guidelines and the Bureau of Indian Standards’ specifications would have to be changed because they currently allow only 5% blending in fuel for motor vehicles.

In September, these oil marketing companies were directed by the government to sell petrol blended with 5% ethanol in 20 states and four Union territories. While most states have initiated the blending programme, West Bengal and Orissa are yet to do so and Madhya Pradesh has just begun negotiations with oil marketing companies.

The biggest procrastinator, however, has been Tamil Nadu, a major sugar-cane producing state.

“Although there is a move to make 10% blending of ethanol mandatory, the Tamil Nadu government has not yet initiated the programme at 5%," noted a senior official at a sugar company based in South India.

Unlike the proposed policy, the current policy of blending is subject to commercial viability. That caveat means compliance is only mandatory in those states where ethanol is readily available and can be procured at a cost less than the price of petrol.

But the availability of ethanol is linked to state excise boards that control the supply of alcohol.

In a recent interview, Indian Sugar Mills Association president P. Rama Babu said the sugar industry wants the government to declare ethanol a “declared good", allowing it to be deemed as an item of national importance that can move freely across borders and can’t be controlled by states.

Meanwhile, the GoM’s latest decision is unlikely to go down well with several states as they are not keen to channel molasses to ethanol production. That’s because it would mean less production of potable alcohol in the state and loss of revenue for local governments. In most key sugar cane growing states, both alcohol and sugar industries are highly politicized because of their ability to raise significant money for local politicians.

But, if approved, the GoM decision could benefit sugar-cane producing regions in large states such as Uttar Pradesh, Tamil Nadu, Andhra Pradesh, Bihar and Maharashtra, all of which face a glut in sugar-cane production that isn’t likely to go away anytime soon because of low consumption.

V. Shunmugam, chief economist of the Multi Commodity Exchange of India Ltd (MCX), suggests that the proposed blending programme may also face technological hitches because of the lack of capacity.

“Fuel-grade ethanol needs to be 100% water-free and the distillation process is more rigorous than producing potable alcohol. How many companies today have the technology and capacity to produce such ethanol?" he asked.

(Leila Ann Parker contributed to this story.)