Moving towards a free market structure, the Cabinet today approved a new mechanism for revising price of sugarcane-extracted ethanol used for blending in petrol, resulting in drop in rates by Rs 3 to Rs 39 per litre.
The price of ethanol will be determined on the basis of prevalent price of sugar in the open market as also demand- supply situation, Oil Minister Dharmendra Pradhan said.
"Any pricing mechanism should be market driven and we are moving towards that in case of ethanol as well," he said.
The NDA-government had in December 2014 fixed a price of Rs 48.50-49.50 per litre for procurement of ethanol for blending with petrol.
"The rate paid to sugar mills was never Rs 48.50. It was Rs 42. That price (Rs 48.50) was after including excise duty, VAT and other levies and transportation cost," he said.
Oil companies have to necessarily blend up to 10 per cent of ethanol in petrol.
The Cabinet Committee on Economic Affairs, chaired by Prime Minister Narendra Modi, today "approved the mechanism for revision of ethanol price for supply to public sector Oil Marketing Companies (OMCs) to carry out the Ethanol Blended Petrol (EBP) Programme," an official statement said.
For ethanol supply period from December 1, 2016 to November 30, 2017, the administered price of ethanol for the EBP programme will be Rs 39 per litre, it said.
Additionally, charges will be paid to the ethanol suppliers as per actuals in case of excise duty and VAT/GST and transportation charges as decided by OMCs.
"If the need arises to increase/reduce the retail selling price of petrol by public sector OMCs, then such increase/ reduction would proportionately factor in the requirement of maintaining the fixed cost of purchase of ethanol during the ethanol supply year," it said.
The prices of ethanol will be reviewed and suitably revised by the government at any time during the ethanol supply period -- December 1, 2016 to November 30, 2017 depending upon the prevailing economic situation and other relevant factors.
"The revision in ethanol prices will facilitate the continued policy of the government in providing price stability and remunerative prices for ethanol suppliers," it said.
In a bid to cut import dependence, the government had in 2003 started doping petrol with 5 per cent ethanol. The quantity was to be raised to 10 per cent.
But since 2006, OMCs were not able to receive offers for the required quantity of ethanol against the tenders floated by them due to various constraints like state specific issues, supplier related issues including pricing issues of ethanol.
In order to augment the supply of ethanol, a need was felt to put in place a new mechanism for pricing of ethanol.
Accordingly, the government on December 10, 2014 decided
that the delivered price of ethanol at OMC depots would be fixed in the range of Rs 48.50 per litre to 49.50 per litre including central/state government taxes and transportation charges.
This rate compared with about Rs 29 a litre that OMCs paid for ethanol previously.
The decision to raise price in December 2014 helped in significantly improving the supply of ethanol.
Ethanol supplies increased to 67.4 crore litres in 2014- 15 and the projected supplies for ethanol supply year 2015-16 are around 120 crore litres.
"The objective to fix the delivered price of ethanol has been achieved to a large extent. In view of firming of sugar prices, falling crude prices and consequent under-recoveries of OMCs on this account, a need to re-examine the pricing of ethanol under EBP Programme has been felt," the statement said.
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Welcoming the decision, Indian Sugar Mills Association (ISMA) Director General Abinash Verma said, "By ensuring that GST will be borne by OMCs, the uncertainty of GST rate has also been taken away."
However, he added that government should find ways to compensate or give back the benefit of excise duty waiver announced in June 2015, but withdrawn prematurely in August 2016, to ethanol suppliers to ensure enough ethanol is contracted and supplied for the blending programme, especially when the ethanol price has also been reduced.
"The double whammy has to be avoided. Incentives are essential over a longer period for a successful bio-fuel programme in the country," Verma said in a statement.