In its latest Annual General Meeting, Mr. Mukesh Ambani, Chairman of Reliance Industries announced an ambitious plan for setting up new energy business. The plan includes building four Giga factories to produce photovoltaic modules, advanced energy storage batteries, electrolyzers for the production of green hydrogen; and fuel cells for converting hydrogen into motive and stationary power.
The announcement has added more energy to the already popular
trade in alternative and new energy. Even though the media narrative has been
more focused on the renewable energy and electric mobility, from stock market
perspective, the most popular trade has perhaps been in the sugar manufacturers
who have set up decent ethanol manufacturing capacities in past one decade or
so.
The Government of India had announced an ambitious ethanol
blending program (EBP) in 2018, through a National Policy on Biofuels-2018
(NPB-2018). The program included interest rate subvention for setting up
molasses and grain-based distilleries (DFPD). The Bureau of India Standards
(BIS) prescribed standards for E5 (95% Petrol and 5% Ethanol), E10 and E20
blends of ethanol and petrol. Initially the target was set to achieve E20 stage
by 2030 in line with the Sustainable Development Goals (SDGs). However
recently, the E20 target date has now been advanced to April 2023.
NBP-2018 in perspective
To put the NBP-2018 in perspective—
·
At the end of FY21, the ethanol production
capacity in India was 426 crore liters from molasses-based distilleries, and
258 cr liters from grain based distilleries.
·
To Achieve E20 target by 2025, India would need
a total of 1500cr liters capacity to cater to the blending demand and other
demands, e.g., liquor, sanitizer etc.
·
It is estimated that the molasses based capacity
shall get increased to 760cr liters (from present 426cr liters) and grain based
distillery capacity shall get enhanced from the present 258cr liters to 740cr
liters by 2025.
Obviously, the larger focus would be on grain based distilleries
rather than sugar based distilleries. To produce the required ethanol to E20
target, total 6 million MT of sugar and 16.5million MT of grains would need to
be sacrificed.
·
Technically E20 target could be achieved without
any significant modification in the vehicle design. However, when using E20,
there is an estimated loss of 6-7% fuel efficiency for 4 wheelers which are
originally designed for E0 and calibrated for E10, 3-4% for 2 wheelers designed
for E0 and calibrated for E10 and 1-2% for 4 wheelers designed for E10 and
calibrated for E20. However, as per SIAM, the efficiency loss could be further
reduced through some modifications in engines (hardware and tuning). SIAM has
assured that E20 material compliant and E10 engine tuned vehicles may be rolled
out all across the country from April 2023.
·
The present transportation fuel consumption mix
in India is 65% Diesel, 28% Petrol and 7% Jet Fuel. NBP-2018 addresses only
the petrol blending.
·
The dispensing pump infrastructure would need to
be developed to enable dispensing of E0, E10, E20 and E20+ separately.
Presently, only a handful of fuel stations are equipped to dispense the variety
of blends. Besides, the entire supply chain and logistics of OMCs needs to be
augmented to store, handle and dispense different blends.
Objectives of NBP-2018
From various discussion papers and policy documents, it is not
clear what is the primary objective of the EBP. A plain reading of NPB-2018
would suggest that the current account deficit is the primary driver of EBP.
As per “The Roadmap for Ethanol Blending in India 2020-2025”,
published by NITU Aayog, “India imports 85% of its oil requirement. The Indian
economy is expected to grow steadily despite temporary setbacks due to the
COVID pandemic. This would result in a further increase of vehicular population
which in turn will increase the demand for transportation fuels. Domestic biofuels
provide a strategic opportunity to the country, as they reduce the nation’s
dependence on imported fossil fuels.” The positive impact on environment is
mentioned as an incidental benefit.
However, at places energy security and commitment to emission
reduction under SGDs are also mentioned as primary objectives of EBP.
It is pertinent to note the following in this context:
·
EBP, in its present form addresses only 28% of
India’s fuel mix, i.e., petrol used as transportation fuel. It does not address
the more polluting diesel which forms 2/3rd of India’s
transportation fuel mix.
·
To achieve E20 target, about 50% of the ethanol
requirements would be met through sugar based ethanol. Sugarcane is highly
water intensive crop. In that sense, it would not be environment friendly to
increase the acreage of sugarcane crop.
Secondly, sugarcane is not an all India crop. Most of the sugar
cane is produced in three states, viz., UP, Maharashtra and Kanataka. Tamil
Nadu, Andhra Pradesh, and Gujarat, and some other states are minor contributors
to sugarcane crop. Naturally, most of the ethanol producing capacity is located
in UP, Maharashtra and Karnataka. Transporting this ethanol to various
locations for blending and storing it there, could be a significant energy consuming
effort in itself. Storage is even more critical since sugar is a seasonal
industry. Most of the molasses is produced between November and March, while
the consumption would take place 365days in a year.
The role of grain based distilleries therefore could be more
important than the sugar based distilleries over a longer period. This brings
me to the other area of reforms which is work in progress.
As per the 01 May 2021 press release
of the Press Information Bureau (PIB), “With the vision to boost agricultural
economy, to reduce dependence on imported fossil fuel, to save foreign exchange
on account of crude oil import bill & to reduce the air pollution,
Government has fixed target of 10% blending of fuel grade ethanol with petrol
by 2022 & 20% blending by 2025.”
It further reads, “To increase production of fuel grade ethanol
and to achieve blending targets, the Govt of India has allowed use of maize and
rice with FCI for production of ethanol. Government has declared that rice
available with FCI would continue to be made available to distilleries in
coming years. The extra consumption of surplus food grains would ultimately
benefit the farmers as they will get better price for their produce and assured
buyers; and thus will also increase the income of crores of farmers across the
country.”
While EBP addresses a part of the current account problem, the
implementation of three laws to reform the farm sector in 2020, could
potentially address the fiscal deficit problem by improving the condition of
the agri economy. Reforming the Food Corporation of India (FCI) by restricting
its role to maintaining a strategic food reserve and substituting the public
distribution system (PDS) of providing subsidized ration to poor with direct
cash transfer (DBT) may result in significant savings for the government.
However, this shall mean redundancy of the system of minimum support price
(MSP) for wheat and rice. A strong demand vertical for wheat and rice in the
form of grain based distilleries could be a good facilitator in this reform
process.
Ethanol could impact the fiscal balance adversely at least in
initial years. As of now Petrol is not covered under GST regime, whereas
ethanol attracts GST. The GST on ethanol works out to between Rs 2.28–
3.13/litre, while the central excise duty on petrol is approximately Rs
33/litre. As per various estimates, E20 EBP might result in direct revenue loss
of Rs100bn to the central government. Besides, poor fuel efficiency of blended
fuel may need further subsidies to motivate the adoption of E20 fuel.
Sugar to ethanol – impact on sugar companies
The general view so far is that the EBP shall enhance the
profitability of the sugar companies materially and also reduce the volatility
in their earnings. In this context it is pertinent to note that-
·
The government took care of volatility in sugar
prices, and hence earnings of the sugar producers, by prescribing a minimum
selling price (MSP) for sugar in 2018. The MSP so prescribed affords a minimum
profit to the producers, even in the seasons when the sugar production far
exceeds the demand.
·
Besides, ethanol pricing under EBP, has made the
production of ethanol more remunerative for the sugar mills.
However, the forecasts made by various analysts might not be fully factoring in the following trends in their calculations:
At present pricing, ethanol produced directly from cane juice
yields an EBIDTA of ~10%, which is half of the EBIDTA yield if ethanol is
produced from molasses. It is therefore less likely that mills will be shifting
majorly away from producing sugar at all.
As the sugarcane crop becomes more profitable, we may see
further rise in acreage and productivity of sugarcane; in which case the
problem of plenty may persist. Besides, in the year of drought when production
of sugarcane is low, ethanol might have to take a backseat, impacting the
projected profitability of sugarcane companies materially.
The biggest challenge would however come from material fall in
global prices of fossil fuels due to popularization of alternatives like
electric vehicles, worsening of demographics, and structural shift in travel
habits and needs.
Electric vehicle
Sugarcane being a highly water intensive, and therefore energy
intensive, crop in India, the more sustainable solution to current account and
carbon emission would be electric mobility. The purpose is not served
meaningfully if the electric vehicles are run on the power generated by thermal
plants using the imported coal.
The salvation therefore lies in materially increasing the electricity generation through non-fossil sources; and developing technology for storage of such electricity using non-polluting sources. Hydrogen cells and other technologies mentioned in RIL vision for future will therefore be critical to achieve multiple objectives of sustainability, energy security, trade balance and fiscal improvement.
Now a question would arise, “Should we be buying the stock of
Reliance Industries?” Well this is a question that does not fall in my domain.
The readers may look elsewhere to find an answer to this.
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