At state level, it’s liquor vs ethanol

At state level, it’s liquor vs ethanol

Meerut, Uttar Pradesh: Amid lush sugar cane fields, shiny industrial equipment and drums of molasses, Bajaj Hindusthan manager Mukesh Bhatnagar believes his distillery can revolutionize energy usage in India. The Union government has agreed as much, calling for 10% of ethanol—derived from molasses—to be mixed with petrol. The problem now lies in convincing states, which reap even more money from another sugar byproduct: the potable alcohol used in liquor.

“More than 90% of the cost of a Rs400 bottle of liquor is excise duty," said Bhatnagar, the senior deputy general manager for the distillery.

This puts the future of ethanol production in India at an ironic crossroads between consumption and conservation. Ethanol advocates say the Centre needs to bring the states on board, as they oversee the movement and distribution of alcohol and earn lucrative duties along the way.

Seeing they have much to gain, sugar producers have long backed a nationally mandated policy on ethanol, or ethyl alcohol, a renewable fuel source that, when blended with petrol, enables cars to run more efficiently. Ethanol is produced from the fermentation of sugars such as corn, sugar cane, grains and beet. Molasses—a byproduct in sugar manufacturing—is the primary source in India.

Ethanol production from corn and wheat in the US and Europe, respectively, has caused widespread debate about the impact on world grain prices and the food supply. In India, says Ravi Gupta, president of the sugar and alcohol division of Bajaj Hindusthan Ltd, that is not a concern as it is not an either-or situation. “Fuel ethanol makes eminent sense, because here ethanol is made from a byproduct of the sugar industry," Gupta said.

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 byproducts, namely molasses and sugar cane juice.

But molasses also produces the alcohol that goes into potable liquor, while regulatory structures make it more profitable to allocate alcohol to the potable alcohol industry over the industrial power and fuel sectors. Today, more than one-third of alcohol produced in India is allocated to potable alcohol and then sold to breweries and makers of spirits.

States prefer to maximize revenues rather than allocate alcohol for fuel ethanol, with Tamil Nadu the most resistant to the 10% blending policy, said Arvind Mahajan, executive director of advisory services for KPMG Pvt. Ltd, which authored a recent report on India’s sugar sector.

Calls to the Tamil Nadu state excise board went unanswered; at the Central level, the joint secretary for biofuels and the petroleum secretary could not be reached for comments by phone.

In 2006, the government issued a mandate for 5% ethanol blended petrol, with support from both the sugar industry and public sector oil companies. But to date, only 15 states and four union territories have successfully implemented the policy, which was subject to commercial viability.

The 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 directly linked to state excise boards that control the supply of alcohol. In an interview in New Delhi, Indian Sugar Mills’ Association president P. Rama Babu said the sugar industry wants the government to declare ethanol a “declared good," which means it has been deemed an item of national importance, can move freely across state borders and can’t be controlled by states.

"There has to be a national programme. It has to be made mandatory," says Rajshree Pathy, chairperson and managing director of Combiatore-based Rajshree Sugars and Chemicals Ltd.

The sugar industry is India’s second largest agriculture-based industry, according to KPMG, supporting some 50 million farmers. But Pathy, president of the Indian Sugar Mills’ Association in 2005, says little is being done to support the industry and policies on its behalf.

Heightened demand for ethanol will obviously benefit sugar producers, as the primary suppliers of ethanol. However, as one of the largest industries promoting rural development, investment in the ethanol industry would also lead to further benefits and more profits for farmers, according to analysts.

Increased demand for energy from developing economies combined with rising concerns about energy security are forcing governments to shift away from dependence on crude oil imports. As a result, the global ethanol market is growing at a rate of 6-7% per year, according to Frost & Sullivan Pvt. Ltd, which authored a report on biofuels earlier this month.

Brazil and the US are the largest consumers and producers of ethanol. Together, they account for more than 68% of total world ethanol production, according to KPMG. Brazil produces ethanol from sugar cane, while the US relies on corn. Global ethanol exports have reached 6.5 billion litres, the report said, and are expected to increase to at least 50 billion litres by 2020.

As economies worldwide invest in biofuels, observers say now is the time for the world’s second largest sugar producer to establish a framework that brings agreement among the sugar, oil and auto sectors, and the Union and state governments.

"States are creating barriers on movement of ethanol from one state to another," says Mahajan. “Each state is virtually a separate country."

Ethanol is currently priced at Rs21.50 per litre in India. State levies on ethanol range from 80 paise to Rs6 per litre. Oil marketing companies, according to Frost & Sullivan, absorb the cost.

India’s ethanol production capacity stands at approximately 1.5 billion litres, the report says. Based on India’s current demand for petrol, it estimates that if the mandate for 5% ethanol blending—known in industry jargon as E5—was implemented countrywide, total domestic demand for fuel ethanol would be 631 million litres.

As demand for petrol increases and India potentially moves to higher ethanol blending, the country may need to look at producing directly from sugar cane juice, instead of molasses.

Vehicles can run on E5 or E10 without any engine modification. Beyond that, 15-20% blending would require the automotive sector to manufacture fuel flexible engines. In Brazil, cars are manufactured to run on pure ethanol, ethanol-blended petrol or only gasoline.

The Indian government is said to be in policy discussions with various stakeholders and intends to move to 10% ethanol blended petrol sometime next year.

As petrol consumption rises and debates persist over whether India should move to higher blends, other challenges will arise. There is a need to create physical infrastructure for storage, but who makes the investment: the sugar or petrol sectors? Can they share responsibility?

But first, the Frost & Sullivan report suggests, the states must be sold on ethanol: “For the mandate to be successfully implemented across the country, it is imperative that there is no significant variation in taxes and duties within different states," the report says. “Biofuels must be treated like a national program in order to ensure successful implementation."