Multi-pronged approach to India’s bioethanol conundrum
India’s energy security is facing challenges from rising demand in consumption as domestic crude oil production declines. This has led to a push for bioethanol, catalysed by the 2018 National Policy on Biofuel.1
The initiative reduced tax on ethanol, allowed more types of feedstock besides sugarcane (such as rice and maize) to be used, and provision of interest subvention for funding of distillery projects supplying ethanol for biofuels.
These helped India to achieve its target of 10 per cent ethanol blend (i.e. a fuel mixture of 10 per cent ethanol and 90 per cent gasoline) in 2022.2
However, challenges persist in this area, and we believe a multi-pronged approach could be adopted to ensure the sustainable development of the bioethanol industry.
Winds of (climate) change
It has not been all smooth sailing in India’s bioethanol journey as climate change has severely affected crop production in the past two years. Policies prioritising domestic food consumption over bioethanol means that surplus rice, for instance, was not permitted to be used for ethanol production from July 2023 to August 2024.3
“Challenges in India’s current bioethanol production highlight the importance of transiting towards sustainable feedstock that does not compete with use for food consumption,” said Bastavee Barooah, Head of Food and Agribusiness, Institutional Banking Group, DBS Bank.
While alternatives like maize could help with this shift, it may not be sufficient to achieve the 2025 target of 20 per cent blend target on a sustainable basis should there be feedstock shortages. As such, we believe that 2G feedstock (crop waste) would be required to supplement first-generation (1G food-based feedstock that uses edibles) to ensure long-term stability and sustainable growth of the industry. Measures can be seen from a near- and longer-term approach.
In the near term, we believe efforts could be made to improve productivity and the supply of feedstock. These efforts could include investments in irrigation systems and farming equipment to reduce weather dependencies. With improved crop yields, farmers would consequently benefit from higher income, which aligns with the government’s agenda to ensure a sustainable livelihood for the farmers.
One specific example is investment into drip irrigation systems, which could reduce water usage by up to 60 per cent for sugarcane crops4 (one of the most water-intensive crops) relative to traditional irrigation methods. Consequently, it would mitigate water shortages and maintain healthier sugarcane production yields during heat waves. As of end-March 2024, Uttar Pradesh, the largest sugarcane production state in India (accounting for 45% of India’s total production5), has less than 1 per cent of its sown land irrigated using drip irrigation systems.6 This indicates significant potential for productivity improvement through irrigation investments.
What’s on the horizon
With volatility inherent in crop production due to the unpredictable climate, we believe the transition to 2G feedstock (crop waste) should continue in the medium to longer term. Given the non-competing use of 2G feedstock with food, being able to utilise them will drive significant bioethanol production volume growth and improve the stability of bioethanol supply.
Cost remains a key obstacle in the transition to 2G bioethanol. Such a plant could cost 10 times more than a 1G plant7, contributing to an overall 50 per cent higher production cost. While 2G distilleries remain costly, we see early signs of such projects being economically viable in Brazil.
In India, with the government’s support in the form of financial grants and long-term offtake agreements, 2G distilleries have gained traction with Indian Oil Corporation Ltd commencing operations of India’s first 2G bioethanol plant in 20228. Government support has been geared towards incentivising oil marketing companies to operate such distilleries. However, integrated sugar companies could also play a role given their proximity to sugar waste crops like bagasse.
One of the key near-term challenges that we observe is the current extensive use of bagasse (2G feedstock) to power sugar mills, which limits its availability for bioethanol processing. A potential early transition step for sugar producers could be moving from the use of bagasse to capturing solar to meet their energy needs, freeing up bagasse to produce 2G bioethanol instead.
Significant strides
Partnerships between the public and private sectors, in areas such as finance, could boost sustainable production.
For instance, the government could allow the export of 2G bioethanol in a phased manner. With domestic production in markets like Europe unable to meet local demand, allowing exports from India could provide 2G bioethanol producers an opportunity to realise as high as a 70 per cent premium to domestic prices. This would help projects to be economically feasible without government funding.
Overall, we believe traditional 1G food-based biofuel will likely continue to play a role in the energy mix and remains crucial while the industry gradually pivots towards sustainable feedstock.
“The financial industry is taking significant strides in this transition journey,” said Bastavee, noting how in 2022, Shree Renuka Sugars Ltd obtained a INR1.75 billion (S$31 million) transition finance facility from DBS.
“This was believed to be the first such facility provided by a foreign bank to India's biofuel manufacturing industry, highlighting the potential for financial institutions to support the sector's sustainable development.”
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