India needs robust policies for ethanol to sustain distillery investments

“Noted that the commissioning of a new multi-feed distillery at Rani Nangal, Uttar Pradesh (UP), is expected by March 31, 2024. Furthermore, considering the present government policy and challenges in the availability of permitted grains at viable procurement costs for distillery operations, it has been decided to keep the implementation of the new proposed distillery expansion project at Sabitgarh, UP, in abeyance."

This is an excerpt from an investor brief issued by Triveni Engineering & Industries (TEIL), one of the biggest sugar and ethanol producers in the country, after posting October-December results. The company suspended work on a Rs 230 crore investment in a new distillery, reflecting the nature of state policies last year.

“We have to look at the payback for any new project, and the payback is dependent on two things: the input price primarily, the input price of the raw materials, and the sale price of the ethanol that we manufacture,” said Tarun Sawhney, vice-chairman and managing director, TEIL, one of the country’s biggest sugar and ethanol producers.

The delay is primarily due to concerns over returns.

The need to promote biofuels, which are clean and green and help farmers, is admirable, but India needs to come up with a longer-term policy on raw materials used to produce ethanol, Sawhney said.

Additionally, the government must allow the corporate sector to manage feedstock like maize, which, in turn, will boost the productivity of agricultural inputs used to make biofuels.

Also, the government needs to look at an environment where the margin structures remain as they were a couple of years ago. Unfortunately, because of input cost increases, there has been a steady erosion in margins within the ethanol business. It used to be around double digits.

“The cessation of a substantial portion of ethanol production is expected to result in reduced earnings before interest, tax, depreciation, and amortisation (Ebitda) margins in the distillery segment of integrated sugar mills,” said Pushan Sharma, director, CRISIL, in a note in December.

“Consequently, overall Ebitda margins of integrated sugar mills are projected to decline by about 100 basis points in sugar season 2023-24,” he added.

Indian Oil Corporation has set up 100 per cent ethanol dispensing outlets at 400 petrol pumps in Maharashtra, Karnataka, UP, and Tamil Nadu, Oil Minister Hardeep Singh Puri said at the India Energy Week in Goa. He said that the country did 12 per cent blending last year and will do 20 per cent by 2025. There were 80 retail outlets offering 20 per cent blended ethanol last February. That number has increased to 9,000, Puri said.

Limitations over feedstock are creating roadblocks for proposed ethanol distilleries in the country, industry officials said.

In the past six to seven months, rice has become much dearer in the country, and the availability of Food Corporation of India (FCI) rice for the blending programme doesn’t exist any longer, Sawhney said.

Last July, FCI stopped supplying rice for ethanol production amid supply concerns, Mumbai-based rating agency CRISIL said in a report.

New Delhi promoted maize as an alternative to make ethanol. Oil-marketing companies (OMCs) announced an incentive of Rs 5.79 per litre for maize-based ethanol with effect from January 5, 2024, to raise rates to Rs 71.86, the highest for any feedstock used to make the biofuel.

But the increase in maize procurement prices has effectively nullified the incentive, Sawhney said.

“My point is that the entire increase has been absorbed by the cost of procuring maize today in the market, and as a result, the effective profitability of a factory running on maize is now absent. Now, you see when rice was banned, we were procuring maize at around Rs 19 per kilogram. The price of maize, now, in UP, is closer to Rs 25 per kilogram. All price increases have gone, and therefore there is very little viability in maize,” he said.

The disappearance of rice and maize impacted two of the critical feedstock, but distilleries were established to process a variety of different inputs and are still viable on heavy molasses. But there’s a limitation there now because of questions New Delhi has about the total sugarcane crop in the country.

As recently as in December, the government suddenly banned the production of ethanol from sugarcane juice, and in a few days modified the rule again to restrict the sugar sacrificed through the B-heavy molasses and sugarcane juice/syrup route for ethanol to 1.7 million tonne (mt) versus 3.8 mt in the previous season, and directed sugar units to operate on C-heavy process.

India experienced scanty rainfall in key sugarcane-producing states such as Maharashtra and Karnataka leading to lower yields.

“Against the backdrop of price volatility in staples and the upcoming national elections, the government has taken measures to control domestic sugar prices,” CRISIL said.

Moreover, there’s no market now for ethanol produced from cane juice and B-heavy molasses. OMCs floated a second tender for the supply of 2.67 billion litres of ethanol in the ethanol supply year (ESY) 2023-24, this newspaper reported.

Bids were invited for ethanol produced from C-heavy molasses, maize, and damaged foodgrain. These bids contradict efforts to adopt ethanol blended petrol because of the total ethanol produced in the country, ethanol from cane juice accounted for 25-30 per cent while that from B-heavy molasses accounted for over 60-65 per cent. Ethanol from C-heavy molasses and grains is a minor portion.

The government’s ambitious target of attaining 20 per cent ethanol-blended petrol by ESY 2024-25 and 30 per cent by ESY 2029-30 is likely to face setbacks, CRISIL said.

The new regulation is expected to keep the blending rate below 10 per cent in ESY 2023-24, with ethanol production projected to fall 20 per cent.

LIKELY SETBACKS

·         Limitations over feedstock are creating roadblocks for proposed ethanol distilleries in the country

·         The government’s ambitious target of attaining 20% ethanol-blended petrol by ESY 2024-25 and 30% by ESY 2029-30 is likely to face setbacks: CRISIL

·         The new regulation is expected to keep the blending rate below 10% in ESY 2023-24, with ethanol production projected to fall 20%