Biofuel Market Conditions

Motor Vehicle Petroleum Based Energy Market

India's petroleum-based energy demand by the transport sector is the fastest growing energy consuming sector and will continue to grow steadily in the coming years due to strong growth in the economy, rise in income levels, and an increase in the availability and choice of vehicles. Petroleum product consumption has gone up from 100 million tons in Indian fiscal year (IFY) 2001/02 (April/March) to 134 million tons in IFY 2008/09. Energy demand by the transport sector is expected to grow by 6-8 per cent per year during the 11th five-year plan (2007-2012). Diesel and gasoline (petrol) contribute 98 per cent of the energy consumed in the transport sector.

Over 80 per cent of passengers and about 60 per cent of freight are transported by road in India. With the growth in the economy and the rise in personal incomes there is increasing dependence on personal modes of transport such as cars and two wheelers. Industry sources report that that the total number of vehicles has increased more than fivefold, from 21.3 million (including 14.2 million two-wheelers) in 1991 to 109 million in 2008 [10] . The motor vehicle population grew by 10-12 per cent in the last few years, and is expected to continue to grow around eight-10 per cent in the next few years.

Can India Meet Policy Targets?

Ethanol Policy

Industry sources report that the EBP is not sustainable as the ethanol supply hinges on sugarcane and sugar production. Sugarcane and sugar production in India typically follows a six to eight year cycle, wherein three to four years of higher production are followed by two to three years of lower production (refer to Indian Sugar Annual Report IN9049 for more details). The Indian sugar industry crushes about 70-80 per cent of the sugarcane for sugar production, with the remaining cane used for local sweeteners (khandsari and gur), seed, feed and cane juice, chewing and waste. The by-product of the sugar industry, sugar molasses, is used for production of alcohol and ethanol.

Since sugarcane and sugar production is cyclical, availability of sugar molasses and sugarcane juice for ethanol production varies depending on the sugarcane cycle. Lower sugar molasses availability and consequent higher molasses prices affect the cost of production of ethanol, thereby causing disruptions in the supply of ethanol for the EBP programme at pre-negotiated fixed ethanol prices.

Unless the government initiates sugarcane production stabilizing measures or petroleum companies agree to link ethanol prices with raw material prices, the EBP will be successful only during excess sugar production seasons.

The proposed third phase of the EBP (10 per cent blend ratio) will require additional area to be brought under sugarcane and the sugar industry to install facilities for ethanol production directly from sugarcane juice. However, there is a very limited scope for an increase in area under a „water guzzling? crop like sugarcane as irrigation water availability is increasingly becoming a constraint in the Indian agriculture production system.

India has about 320 distilleries, with a production capacity of about 3.5 billion litres of rectified spirits (alcohol) per year, almost all of which is produced from sugar molasses , and not from sugar juice, food grains or other cellulose feed stocks. More than 115 distilleries modified their distillation facilities to produce ethanol with total ethanol production capacity of 1.5 billion litres per year. Current ethanol production capacity is enough to meet the estimated ethanol demand for the five per cent blending ratio with gasoline. However, for a 10 per cent EBP programme, current ethanol production capacity have to be expanded by increasing the number of molasses-based ethanol plants, and by setting up sugarcane juice-based ethanol production units.

Biodiesel Policy

Commercial production and marketing of biodiesel in India is negligible due to the lack of availability of Jatropha seed and other non-edible oil feedstock. Most existing biodiesel producers are using mixed feed stocks including non-edible oilseeds, non-edible oil waste, animal/fish fats/tallow as feed stocks. Although India’s biodiesel processing capacity is currently estimated at 200,000 metric tons per year, the majority of biodiesel units are not operational during most of the year. Industry sources expect the biodiesel blending programme to gather momentum in the next four to five years, with expected improved availability of Jatropha seeds as more areas are brought under plantation and as the plantations mature.

The existing Jatropha plantations are at the very initial stage of development. The total Jatropha plantation area in the country is currently estimated at around 450,000 hectares, of which about 60-70 per cent are new plantations (1-3 years old) and not yet into full production. The new Jatropha plantations are expected to come into maturity in the next 3-4 years.

There are growing concerns about the prospects of Jatropha plantations based on the Planning Commission estimates of the seed density/yield/oil needed to produce an economical yield. Although Jatropha plants can survive in wastelands/degraded lands, the fruiting and seed yield of the plant is highly dependent on availability of water (rain or irrigation) during critical stages. Consequently, there are insufficient Jatropha seeds to crush for biodiesel production units for sale to petroleum companies for blending purposes.

Government and industry sources have been overly optimistic about Jatropha plantation prospects with estimates for expected area being projected from 7.0 million hectares to 11.2 million hectares. India’s non-edible oilseed Jatropha based biodiesel production policy is facing following constraints –

• Lack of good quality planting material and management practices leading to poor seed yields (vary from 0.5 to 1 kg per plant per annum).
• Research on developing quality seeds and agronomic practices is still at a very nascent stage.
• Ownership issues with community or government-owned wastelands. While government records may identify wastelands and marginal lands, most of these government and community owned lands are under some kind of economic activity and/or temporary ownerships, and not available for Jatropha plantation.
• Lack of bank financing for Jatropha plantations, which is discouraging growers from undertaking plantation activities since the crop has a long gestation period (two to three years) compared to annual crops.
• Lack of marketing and pricing support for Jatropha or other non-edible oilseeds growers.
• Jatropha plants face severe insect, microbial and fungal pest problems.
• Monoculture practices which raise environmental concerns about the impact on soil health and the water table.

While there may be sufficient scope for expanding area under Jatropha and other biofuel feed stocks, considerable research is still required to identify appropriate germplasm and seed varieties for agro-climatic conditions in different regions of the country. The government will also have to offer fiscal incentives to growers to encourage them to follow appropriate agronomic practices during the initial two to three years of plantation development.

Current Production Scenario

Ethanol Production

The ethanol supply for the EBP programme during MY 2008/09 has been severely impacted by the short supply of sugar molasses and continued strong demand for alcohol from other competing industries. Consequently, ethanol for blending with petrol in Indian sugar marketing year 2008/09 (October/September) is estimated at 100 million litres, against the target of 600 million litres. With market prices of alcohol ranging between Rs. 26 to Rs. 30 per litre since October 2008, most ethanol suppliers preferred diverting their supplies to the potable liquor and chemical industries instead of supplying ethanol at the current price of Rs. 21.50 per litre for the EBP programme.

Despite the forecast improvement in the sugarcane and sugar production in MY 2009/10, a sharp drawdown in carryover stocks and expected strong demand from the chemical and potable liquor industry will constrain alcohol supplies. Consequently, supply of ethanol for fuel is forecast lower at 50 million litres. However, ethanol supplies to the EBP programme may improve if petroleum companies agree to a major hike in the procurement price from the current negotiated price.

The progress of the second phase of the EBP has been slow as ethanol usage is subject to commercial viability. Besides irregular molasses availability, a plethora of high taxes and levies has adversely impacted ethanol blending in several states, particularly sugar/alcohol deficit states. Most states have a labyrinth of rules and regulations (inter-state movement, high excise duties, storage charges, etc.) to control alcohol for the potable liquor industry, and these regulations are equally applicable to ethanol for blending purposes. The GOI is actively engaged in working with state governments to resolve the underlying issues constraining adoption of the EBP programme in other states.

The current shortage in supplies of ethanol has been due to high prices of sugar molasses which makes it unviable to supply ethanol to petroleum companies at the negotiated prices . The sugar industry continues to pressure the government to ask the petroleum companies to raise the negotiated sales price, while the petroleum companies have opposed increases in ethanol prices, especially given that crude oil prices have eased since mid-2008.

In years of bumper sugarcane production, the sugar industry may prefer to produce ethanol directly from sugarcane juice to avoid the sugar market glut and declining prices. There is considerable scope for increasing sugarcane yields from the existing acreage, which can also offer additional sugarcane for production of ethanol directly from juice. There is limited scope to increase area under sugarcane as the crop is water intensive and India’s irrigation water supplies are increasingly limited.

Since the production of ethanol directly from sugarcane juice requires additional investments for technological modifications, most mills are closely assessing the market demand for ethanol and the efficacy of the government’s ethanol policy before making the necessary investments. Industry reports suggest that a petroleum marketing company has acquired two sugar mills for production of ethanol from sugarcane juice on an experimental basis, and with commercial production expected in MY 2009/10. There are currently no foreign players in the Indian sugar industry, as it is one of the most controlled agribusiness-sectors in the country (see policy section of Sugar Annual IN9049). However, the increased consumption of ethanol by oil companies, and the production of ethanol from sugarcane juice by local companies may attract foreign investment in the future.

Biodiesel Production

India's commercial production of biodiesel is very small and what is produced is mostly sold for experimental projects and to the unorganized rural sector. While the government discourages the use of edible vegetable oil for production of biodiesel, it is also not economically feasible to produce biodiesel from vegetable oils due to high edible oil prices in the domestic market [14]. The small quantities of Jatropha and other non-edible oilseeds procured by traders are mostly crushed for oil, which is used for lighting lamps and other non-edible uses.

Several entrepreneurs have established small plants (less than one ton per day) to extract biodiesel, but the product is mostly sold in the unorganized sector mainly for operating irrigation pumps and other agricultural uses. There are about 20 large capacity plants (one to fifty tons per day) that produce biodiesel from edible oil waste (unusable oil fractions), animal fat and non-edible oil. Automobile and transport companies mostly buy biodiesel for R&D trials on their vehicles. Indian Railways and other state-owned transport companies have set up experimental projects for biodiesel production. Reliable production information on Indian biodiesel is not available as commercial production is yet to take off in an organized manner, with estimates ranging anywhere between 100 to 200 million litres per year.

Most Jatropha plantations are far from biodiesel producing units, and lack of efficient marketing channels result in high inefficiencies leading to high production costs. Industry sources estimate current biodiesel finished production costs at anywhere between Rs. 32 to 40 (67 cents to 83 cents) per litre, much above the government advised purchase price of Rs. 26.5 (55 cents) per litre. Consequently, there has been no commercial sale of biodiesel at the GOI’s biodiesel purchase centers. Some of the state transport agencies and Railways procure biodiesel for experimental trials of their vehicles.

Many Indian corporations, including petroleum marketing companies, are venturing into biodiesel production by having a memorandum of understanding with state governments to establish Jatropha plantations on government wasteland or contract farming with small and medium farmers. Several state governments have announced policies to encourage Jatropha cultivation, setting up biodiesel plants and supply chains in their respective states.

Although the nascent biodiesel industry has been lobbying the government to allow duty concessions on imports of vegetable oils (palm, soybean, etc.) and their derivatives to captive consumption for biofuel production at their units, there are no positive indications for approval of such proposals. Some local and foreign collaborative projects for production of biodiesel for exports are being set up near the ports as export-oriented-units [15] that could boost the country's biodiesel production capacity to 1.0 to 2.0 million tons per annum in the next few years.

There is no commercial production of biofuels from other biomass, except for some experimental trials by research organisations.

Biofuel Import Regime

Although there are no quantitative or SPS restrictions on imports of biofuels, high duties on tariff lines associated with biofuels (see below) make imports economically unviable. The GOI does not provide any financial assistance for exports of biofuels, both ethanol and biodiesel.

Given that the GOI's focus is on developing domestic biofuel production capabilities; there are no duty concessions for imports of biofuels or imports of feedstock (maize, oilseed, and vegetable oils such as palm oil etc) for the production of biofuels for the domestic market. Although some oil companies are pushing for imports of bio-ethanol at a concessional duty for blending with petrol/diesel, it is highly unlikely to receive government approval. However, current trade regulations allows duty free imports of biofuel feed stocks for re-export by certified export oriented units.

India’s existing import duty on tariff lines associated with bio-fuels (Percent ad valorem on CIF value)

Biofuel Trade

India does not import ethanol or other biofuels for fuel purposes. During years of low sugar production, and consequent molasses and alcohol shortages, India imports alcohol, mainly for industrial use and potable liquor production.

Market sources report that one of the recently commissioned biodiesel export oriented units exported a few consignments of biodiesel to the E.U. and the United States. However, relatively high international prices of vegetable oils and low biodiesel export prices due to softer crude oil prices have limited significant export opportunities.

IMPACT OF BIOFUEL FEEDSTOCK ON FOOD/FEED/TRADE

India does not produce any ethanol from cereal grains (maize, etc.), and thus, there has been no impact of the ethanol programme on the domestic market for food, feed and trade of cereal grains and byproducts. Similarly, as the biodiesel programme is based on the use of non-edible vegetable oil, biodiesel production should not have an impact on feed, food, and trade of oilseeds, vegetable oils and other edible products.

As the production of ethanol for fuel is basically from sugar molasses, it has not had a significant impact on the production, prices and trade of sugar for food and industrial use. Despite a decline in production of sugarcane/sugar, and consequently sugar molasses, higher prices of alcohol vis-avis fixed ethanol prices have limited fuel ethanol production. If ethanol prices are allowed to be linked to sugar molasses prices, it may impact the availability of sugar molasses for use in cattle feed, and the use of alcohol for industrial and potable liquor. When Stage III of the EBP programme is implemented, it may also impact availability of sugarcane juice and sugar molasses for alternative uses.

BIO-ENERGY USE IN OTHER AREAS

Biomass-based fuels support over 80 per cent of home energy use (mostly for cooking and heating) in India, and consist of agricultural by products (crop residues, cow dung, etc.) and gathered fuel wood. Biomass is also used as industrial fuel by small and cottage industries in the organised sector. Total biomass energy in the household sector and unorganized sector accounts for almost one-third of India’s total primary energy consumption needs (540 to 550 million tons oil equivalent in 2006/07).

India launched a National Project on Biogas Development in 1981-82 with the objective of utilizing cattle manure and human waste for fuel for rural households along with manure for agricultural fields [17] . Currently, there are about 4.1 million family type biogas plants, against an estimated target of 12 million biogas plants in the country. However, evaluation studies show that less than half of the installed plants are operational.

Biomass resources like crop residues, agro-industrial waste, fuel wood, etc., are also used for generation of electricity through biomass gasification. Some industries (sugar, paper pulp, rice mills, etc) are using the industrial waste for cogeneration of electricity and heat energy to meet their total/partial requirement, and/or sale of excess power to distribution grids. Industrial co-generation did not receive a great deal of attention in the past as cheap electricity and fuel were abundantly available. With the increasing electricity costs and unreliable supplies of electricity from the public distribution grids, several industries are increasingly developing co-generation. Currently, most of the cogeneration activity is sugarcane bagasse based. However, there is significant potential in breweries, distilleries, rice mills, textile mills, fertilizer plans, etc. for undertaking cogeneration.

Courtesy: USDA Foreign Agricultural Service – GAIN Report

Indiabiznews, August 19, 2009