Grain-based Dedicated Ethanol Plants (DEPs) are facing an existential crisis

By Dr. C.K Jain

Government of India (GoI) has formulated the National Biofuel Policy (2022) with an ambitious target of E20 i.e. 20% Ethanol Blended Petrol (EBP) programme, and undertook the following interventions to boost this sector:

• Authorized setting up of Dedicated Ethanol Plants (DEPs) to produce ethanol and supply all quantity produced to Oil companies only for petrol blending.
• Enabled expedited Environmental Clearance (EC) for DEPs implementing ZLD (Zero Liquid Discharge) under B-2 category without a public hearing.
• Directed Oil Marketing Companies (OMCs) to enter into Long Term procurement contracts with dedicated ethanol plants.
• Permitted supply of surplus rice by FCI to ethanol producers.
• Permitted usage of Damaged Food Grains (DFG) including broken rice and maize along with molasses for ethanol production and has put in place a differentiated pricing structure for procurement, based on various feedstocks.

Collectively, the above interventions related to the biofuel policy and EBP programme, helped India achieve the following notable successes:

• Increased blending from 5% in 2019-20 to ~ 15% in 2023-24 and is well on target to achieve 20% blending well ahead of 2026.
• Nearly 300 new DEPs setup in the past 4 years under the EBP programme with a collective investment outlay of Rs 25,000 crores.
• In 2024-25 grain-based DEPs are set to supply 600 crore liters ethanol for the petrol blending programme, which is nearly 60 % of the total requirement.
• Enabled India to reduce oil imports by 17.3 million metric tons of crude (since 2014) and lower carbon emissions by 51.9 million metric tons over the past decade.
• Saved USD $ 11.80 billion in forex due to reduced crude oil imports.
• Indian farmers received USD $ 10.44 billion due to purchase of various kinds of feedstock used in production of ethanol.

However, due to an acute shortage of grains (both broken rice and maize), over the past 12 months this sector is facing an existential crisis, which could threaten the viability of grain-based DEPs and imperil GoI’s ambitious biofuel targets.

In June 2023, GoI suspended supply of excess rice from FCI to ethanol producers. This has created an immediate runup in the price of alternate feedstocks such as broken rice and maize, as there is a significant demand or these grains from multiple sectors including Poultry, Live Stock, Fisheries, potable alcohol, and Starch industries.

Due to the continuous and sustained demand from various consuming industries and in the absence of enhanced production, procurement price of grains shot up by 40-50% in the past 12 months.

As the procurement price of ethanol by OMCs is under an administered pricing mechanism, ethanol producers don’t have the luxury of adjusting the ethanol supply price whenever the raw material price of grain changes.

In November 2023, prior to the commencement of the Ethanol Supply Year (ESY), GoI tried to encourage adoption of maize as primary feedstock for this industry and offered an incentive of Rs 5.79 per liter for ethanol produced with maize as feedstock. Recognizing that distribution of maize is highly fragmented, GoI also tried to centralize procurement and supply of maize to ethanol producers through NCCF and NAFED at a price linked to MSP. However, as the prevailing market price of maize across the country was consistently higher than MSP, these agencies were not able to procure any meaningful quantity of maize.

Recognizing this policy setback with maize, GoI has recently reinstated supply of surplus rice (upto 2.3 million MTs) to ethanol producers through FCI. However as opposed to the earlier policy, where rice is supplied to ethanol producers by FCI at a fixed price (which is in turn linked to the procurement price of ethanol by the OMCs), the current policy is based on an auction (with a floor price) under the Open Market Supply Scheme (OMSS).

This scheme is highly impractical and will be a non-starter for the ethanol industry, as there is no clarity on the final supply price of rice and if there is a linkage to the procurement price of ethanol by the OMCs.

A sensible alternative would be to revert to the earlier supply scheme by FCI with a fixed supply price of rice linked to the procurement cost fixed by the OMCs.

Many of our member units are struggling to make ends meet and will be forced to shut down if the GoI fails to immediately step in and resolve this crisis. Failure to take decisive action by GoI will jeopardize nearly Rs 25,000 crs invested in this sector and the banking sector will have a fresh crisis with NPAs as the ethanol producers will not be able to meet their debt service obligations.

The author is President of Grain Ethanol Manufacturers Association (GEMA), and also founder-chairman of Gulshan Polyols Ltd.

This article has been republished from The ChiniMandi.com