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India looks at innovative ways to fund ethanol blending programme

The aim was to ensure that around 10 per cent of the total petroleum consumed in the country is blended with ethanol by 2022
Back in 2018, the Union government had first announced an ambitious programme to encourage sugar mills to expand their ethanol production capacities which, along with the differential price regime for procurement by Oil Marketing Companies (OMCs), was aimed to usher in a new era of ethanol manufacture in the country.

The aim was to ensure that around 10 per cent of the total petroleum consumed in the country is blended with ethanol by 2022 and thereafter the target could be scaled up to 20 per cent blending by 2030.

The target was ambitious as till then, actual ethanol blending with petrol hardly crossed five per cent and in some years it was even less than three per cent.

The government first announced a differential and fairly attractive price for ethanol made from C-heavy and B-heavy molasses, sugar juice, direct sugar and from sources other than sugarcane, such as broken rice and maize as feedstock.

This was followed by an ambitious incentive of interest subvention costing about Rs 5,000 crore to the Central government.

As part of the scheme announced in June 2018, the Centre had approved soft loans for sugar mills to set up new distilleries or upgrade existing ones, expand capacity, and encourage them to divert sugarcane for ethanol making.

The government has extended interest subvention twice for projected loan disbursals of about Rs 22,000 crore.

However, despite all this, the expansion programme has been slow to take off and till date, of the 368 sugar mills that had applied for the interest subvention scheme (that included standalone distilleries), loans have been sanctioned to only 68 projects and final disbursal has been made to 30.

The result of this is that in the 2019-20 sugarcane season that ended in September, India blended around 5.11 per cent ethanol with petrol--a far cry from the 2022 target of 10 per cent blending.

A big reason for this was wasn’t sufficient ethanol wasn't available from sugarcane and other sources to successfully blend with petrol.

Reasons for the slow progress 

Of the 368 projects approved by the ministry of food, final loans were sanctioned only for 68 in almost two years, which is less than 19 per cent of the total approvals.

So what is causing this slow movement in expansion?

If top industry sources are to be believed, when the Central government first announced the incentive scheme in 2018, many sugar mills rushed to apply for expansion without carefully looking at all the pros and cons.

Later, around 116 of the 368 mills went to the banks for loans, while the rest did not even clear the first stage as several clearances such as environmental etc were taking time.

Usually, a single environmental clearance for an ethanol firm takes 18-20 months.

Of the 116 that reached the banks, applications of 68 were approved, while final disbursal of the loans was made to just 30 of them till September 2020.

Banks are insisting that the entire balance sheets of the sugar companies, which include their past losses made on account of sugar business be considered before loan approval for ethanol expansion, as they fear the businesses will not be able to repay the loans because of accumulated losses.

“In several cases that reached the final stage of approval, banks simply rejected the applications saying that the balance sheet of the company was not good enough for any further credit, which is why the scheme hasn’t taken off in the right spirit so far,” a senior industry official said.

The way forward

To break the logjam, the Central government, along with the sugar mills and the OMC, has now devised an innovative method of financing.

Under this, banks, the oil marketing companies and the sugar mills have decided to enter into a tripartite agreement and form an escrow account.

The payment that the OMCs make for the ethanol supplied by the sugar companies will be deposited in this escrow account, which will then be first accessed by the banks to settle their loan dues and interest amount therein.

Whatever remains after this encumbrance will then be passed on to the mills as their payment for supplying ethanol to the OMCs.

The banks will enter into such a tripartite agreement with each sugar mill that desires to access the soft loans subsidised by the Centre.

“Through this, the banks won’t have the fear of losing their money and the sugar mills too won’t be able to divert the money earned from selling ethanol to any other purpose. But, most importantly, the capacity expansion programme will kick off,” the industry official explained.

The second thing which is being considered to boost the blending programme is to extend the subsidised soft-loan scheme to grain-based distilleries.

As present, the soft-loan scheme, which costs the Centre Rs 5,000 crore, is available only for firms that make ethanol from sugarcane-based sources.

News agency PTI in a recent report said that the petroleum and food ministries are of the view that ethanol production cannot be dependent on one feedstock, that is, sugarcane, for achieving the target of 20 per cent ethanol blending with petrol by 2030.

There is a need to look at other agri-feedstock such as rice, maize, sorghum and barley for the purpose.

After several rounds of discussion, both the ministries now favour extending soft loans to grain-based distilleries as well, under the ongoing scheme.

India currently has 4.26 billion litres of ethanol production capacity annually while the actual ethanol produces is much lower at around 2 billion litres. When all the new production capacities come on-stream, India will start producing 5.5 billion litres.

However, to achieve a 20 per cent blending target by 2030, this capacity and estimated production is inadequate as India will need around 10 billion litres of ethanol per year to meet the 20 per cent blending target.

To bridge the gap, ethanol needs to be produced aggressively from non-sugarcane sources such as broken rice and maize as well.

At present, of the two billion litres of ethanol produced in the country, miniscule quantities come from non-sugarcane sources and the bulk comes from sugarcane.

Unless other sources are included as feedstock, it will be extremely difficult for the country to meet the 20 per cent blending target by 2030. 

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