Ethanol factories set to whir back to life

After remaining shut for two years, ethanol factories in the country are readying to whir again. With crude prices spiking again to $80 per barrel levels and the government cracking down on the 5% blending requirement, oil companies have been negotiating with sugar producers for supply of ethanol.

“We think it will take one more meeting, but the broad contours were worked out last week with the oil ministry and the (oil) companies,” said G S C Rao, president of the Sugar Technologists’ Association of India, an umbrella body representing the interests of ethanol and sugar manufacturers.

Ethanol factories costing about Rs 2,500 crore were set up after the ethanol blending programme was announced in 2002. However, these units had been lying idle for almost two years as the Central government started easing up on ethanol blending requirements in 2005.

The original programme foresaw blending 5% ethanol in petrol sold across the country. Ethanol content was proposed to be gradually raised to 10% by October last year.
However, soon after taking power in 2004, the Central government relaxed the policy of enforcing even the 5% blending. As a result, oil companies stopped procuring ethanol for blending in 2006-07.

According to Rao and members of the ethanol industry, oil companies were unwilling to buy ethanol at Rs 26-28 per litre, a price which they claim barely covers their cost of production.

“The problem with the current tender system has been that you can bid both the price and the quantity. As a result, very small scale suppliers put in bids at Rs 17 and Rs 20 (per litre) quoting very low quantities. The oil companies then expect big suppliers to supply at that price as well,” he said.

It is estimated that India will require around 1.2 billion litres of ethanol, primarily made from sugar cane, every year to cater to the 10% blending requirement. The current installed capacity is around 1.6 billion litres, according to the association.

Abhay Chaudhari, executive vice-president, Praj Industries, the biggest equipment supplier to ethanol plants in India, said the policy uncertainty has crippled the industry’s growth. “We get around 50% of our orders from India and the rest from abroad. 90-95% of the orders from abroad are for ethanol plants. However, nearly all the plants we have put up in India are dual-use — they can make potable spirit (alcohol) or ethanol according to the demand,” he said.

The industry, having once burnt its hands, is keeping all options open. “There has been almost no demand for ethanol production equipment from India for the last two years,” he added.

However, he expects ethanol to be back in vogue owing to rising crude prices. “We believe the cost of producing ethanol and petrol becomes comparable when crude reaches the $50-mark. At this point, it makes sense to blend as much ethanol as possible from a commercial perspective,” he said.

However, it may not be as simple as that, as one petroleum industry official pointed out. “It is alright to say ‘use ethanol instead of petrol’. But there is no such substitute for diesel. So if we have to refine crude for getting diesel, what do we do with the petrol?,” he asked. The official requested to remain anonymous as he is not authorised to speak to the media.