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India's Ethanol Industry Poised for Investment

By Gordon Feller | November 13, 2007
Over the past few years, the prospects for fuel ethanol use have grown around the world. Once confined to a few specialized countries, production and consumption have now spread to all corners of the globe.

At the same time, India's economy has developed at a rapid pace and its demand for expensive crude oil has intensified. To attain sustainable growth, India is desperately looking for cheaper alternative sources of energy—especially green energy. The country holds a great potential for ethanol and the possibility for cross-boundary ventures.

India presently imports about 70 percent of its annual crude petroleum requirement of approximately 110 million tons. As prices have ranged from US$50 to $70 per barrel, the country's expenditure on foreign crude is about India Rupees (INR) 1.6 billion (US$41 million) per year.

In the next few decades, alternative fuels will compete for markets currently dominated by gasoline. Ethanol—an important renewable transportation fuel—is likely to be one of the foremost choices. The Indian government recognizes this and on the week of Oct. 22 ordered the mandatory blending of 5 percent ethanol with all gasoline sold in the country. This is the seed from which India's ethanol industry looks set to grow.

India already has a small ethanol industry. Its installed capacity of 300 MMly (79 MMgy) is producing at less than 50 percent capacity, but meeting the demand of the potable and chemical industry trials under government-sponsored projects.

The petroleum industry is committed to utilizing ethanol as a transportation fuel. Farmers are expected to benefit as well. India has a sizable portion of fertile, uncultivated land suitable for producing sugarcane, which is an excellent feedstock for ethanol production. India also has a pool of highly educated, low-cost labor.

The seeds for biofuel ventures were sown more than seven years ago when the India Ethanol Coalition was formed by Winrock International India with the full support by Shri Santosh Kumar Gangwar, minister of state for petroleum and natural gas. Since then, India's government has been exploring ways to boost the agriculture sector and reduce environmental pollution with ethanol-blended petroleum.

The coalition conducted research and development studies and launched three pilot projects in 2001—two in Maharashtra and one in Uttar Pradesh. The pilot projects continue to supply the market, blending 5 percent ethanol with petroleum, but only to the retail outlets in their supply areas.

Discussions were also held with concerned agencies, including the governments and industries of major sugar-producing states. As a result, they confirmed the available capacity to produce ethanol.

The Indian government has since set up an expert group headed by the executive director of the Centre for High Technology to examine various options for blending ethanol with petroleum, including the use of ethyl tertiary butyl ether in refineries. Considering the logistical and financial advantages, the group has recommended blending of ethanol with petroleum at supply locations (terminals/depots) of oil companies.

Since 2003, ethanol-blended petroleum has been available in nine states and four territories: Andhra Pradesh, Daman, Diu, Goa, Dadra, Nagar Haveli, Gujarat, Chandigarh, Haryana, Pondicherry, Karnataka, Maharashtra, Punjab, Tamilnadu and Uttar Pradesh.

In mid-October, United Progressive Alliance, the current ruling coalition of political parties in India's government, issued a 5 percent mandate for blending ethanol with petroleum with immediate effect. They are also willing to double it to 10 percent beginning October 2008. The decision directly benefits sugarcane-producing states like Uttar Pradesh, Maharashtra, Karnataka, Tamil Nadu, Andhra Pradesh, Gujarat and Bihar—all of which face excess sugarcane cultivation this crop year.

The policy is now clear, but a question of "comfort zone" for oil companies remains. Indian ethanol producers should concentrate on the technologies which bring down the cost of production. It is here that Brazil's input is important.

Earlier this year, Brazilian President Luiz Inácio Lula da Silva met with Prime Minister Manmohan Singh in New Delhi to discuss potential partnerships in biofuel production. Indian companies like Praj Industries, Alfa Laval and others would benefit from such cooperation, particularly as Praj has already built a name for itself in the Latin American market.

Indian Sugar Mills and the private stand-alone ethanol manufacturers should cut the cost of production by using good technologies which require fewer resources, such as steam, water and electricity. They should also concentrate on cogeneration through effluent generated by sugarcane juice and molasses. Petroleum suppliers should appreciate and support such activities.

Lower production costs would bring ethanol prices down from the current INR21.50 per liter (US$2.07 per gallon). Suppliers from Maharashtra are supplying ethanol at INR19.50 per liter (US$1.88 per gallon). This would also allow ethanol suppliers to focus on expanding capacity, creating a "win-win" for the industry.

Indian ethanol technology is on par with Brazil. They need to take only the methodology—specifically, petroleum suppliers should understand the economics of blending—and frame a system which suits the petroleum pricing mechanism and bridges the ethanol pricing mechanism. Furthermore, they should add their own margin on ethanol as they do currently with petroleum refining and marketing, a step that likely would be much cheaper.

The current period of ethanol development in India can be called a "turn-around period" with a positive outlook for ethanol manufacturers. Some prospects and challenges of using ethanol in India include energy security, trade balance and risk reduction; environmental benefits such as reducing carbon dioxide, hydrocarbons and volatile organic compounds; and economic benefits including in-country capacity utilization, scope for industry expansion and additional market outlet.

At a 5 percent blend, the market potential for ethanol use in India is 500 MMly (132 MMgy). With existing production of approximately 184 MMly (49 MMgy), this would see demand of 70 MMly (18 MMgy) in the state of Maharashtra and 246 MMly (65 MMgy) from the rest of the country.

As with other countries, ethanol will rely on government initiatives to support and promote the implementation of projects. The central government has decided to amend the Sugar Development Fund Act of 1982, enabling financial assistance for production of ethanol and cogeneration of power from bagasse. It is also examining various other options to provide concessions/exemptions to sugar and oil industries.

At a state level, the Maharashtra government offers waivers from the 1 percent turnover tax on anhydrous ethanol, INR500 per kiloliter (US$0.048 per gallon) permit fee, 4 percent sales tax, 10 percent surcharge on sales tax, INR1,500 per kiloliter (US$0.14 per gallon) import fee, INR300 per kiloliter (US$0.029 per gallon) service charges and 3 percent Octroi, which is a local tax collected on various articles brought into a district for consumption.

Finally, there are cost differences associated with different feedstocks. The production of ethanol from sugarcane juice is an integrated production process. It starts with crushing the cane to extract the juice and processing it into molasses. The molasses is then fermented into ethanol. The process involves a high set-up cost for the crushing plant and associated machinery.

Below is a comparison of costs for different feedstocks. All figures are in INR for a plant with capacity of 30,000 liters (7,900 gallons) per day.

Ethanol from rectified spirit (special denatured spirit):
› Feedstock—INR38 million (US$974,000)
› Land—INR1.5 million (US$38,000)
› Civil and structural work—INR4.5 million (US$114,000)
› Plant and machinery—INR26 million (US$670,000)
› Preliminary and pre-operative expenses—INR1 million (US$25,000)
› Margin money of working capital—INR5 million (US$127,000)

Ethanol from molasses:
› Feedstock—INR79 million
› Land—INR2 million (US$51,000)
› Building and civil structure—INR12.5 million (US$317,000)
› Plant and machinery—INR55 million (US$1.4 million)
› Preliminary and pre-operative expenses—INR3.5 million (US$89,000)
› Margin money of working capital—INR6 million (US$152,000)

Ethanol from sugarcane juice:
› Feedstock—INR152.5 million
› Land—INR4.5 million (US$114,000)
› Building and civil structure—INR25 million (US$630,000)
› Plant and machinery—INR100 million (US$2.5 million)
› Preliminary and pre-operative expenses—INR8 million ($US200,000)
› Contingencies—INR5 million (US$127,000)
› Margin money of working capital—INR10 million ($250,000)

The 21st century presents many critical challenges, and one of the most important is energy. In any closed system, the total amount of energy is a constant. Earth is a closed system. It has no external power sources, and most energy sources we use come from the Earth itself. Some of these sources, like oil and gas, are running out. This widens the scope for alternate energy, and fuel ethanol is one of the most prominent sources.

The Indian economy is growing at a pace of 8 percent and foresees future growth at 9 percent or more in the coming years. Continued growth will fuel more demand. High crude oil prices will have an impact. To lighten the impact, India needs to develop its ethanol sector.

Undoubtedly, India has a lot of potential for ethanol production and is looking like a win-win situation for investors. The economy is looking for development in ethanol and there currently is abundant opportunity for mutual growth.

Gordon Feller is an alternative energy specialist, who works with governments, companies and international agencies. Reach him at gordon.feller@gmail.com.

The claims and statements made in this article belong exclusively to the author(s) and do not necessarily reflect the views of
Ethanol Producer Magazine or its advertisers. All questions pertaining to this article should be directed to the author(s).
 

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