1. Ethanol-petrol blending plan under threat; Cabinet set to cut price

Ethanol-petrol blending plan under threat; Cabinet set to cut price

Almost 13 years after the government first mooted the blending of ethanol with petrol at a 5:95 ratio and endorsed it at various stages, the country finally realised it in 2015-16, reports Banikinkar Pattanayak in New Delhi.

By: | New Delhi | Published: October 10, 2016 6:27 AM
The Cabinet will soon take up a proposal to cut the price of ethanol at which prod-ucers, mainly sugar mills, supply to oil-marketing companies (OMCs) for blending with petrol from the current levels of `48.50-49.50 per litre, sources told FE. (Reuters) The Cabinet will soon take up a proposal to cut the price of ethanol at which prod-ucers, mainly sugar mills, supply to oil-marketing companies (OMCs) for blending with petrol from the current levels of `48.50-49.50 per litre, sources told FE. (Reuters)

Almost 13 years after the government first mooted the blending of ethanol with petrol at a 5:95 ratio and endorsed it at various stages, the country finally realised it in 2015-16, reports Banikinkar Pattanayak in New Delhi. But that achievement is under threat now despite push for the blending programme by both the Prime Minister’s Office and the food ministry.

The Cabinet will soon take up a proposal to cut the price of ethanol at which prod-ucers, mainly sugar mills, supply to oil-marketing companies (OMCs) for blending with petrol from the current levels of `48.50-49.50 per litre, sources told FE.

Oil-marketing companies have delayed floating the expression of interests to invite producers to commit supplies of ethanol — a cane by-product for 2016-17 (the supply period is from December 2016 to November 2017) for the blending programme. Any delay in floating the EoI will, thus, add to the storage costs of sugar mills if they choose to supply ethanol to OMCs, as sugarcane crushing is a seasonal activity that usually runs from November through April.

The blending programme has witnessed fierce resistance from the chemical and potable alcohol industries, which fear a shortage of raw materials (alcohol, another cane by-product) for them. Already, our ethanol blending level is much lower than that of 25-30% in Brazil, 15% in the US and a whopping 85% being planned by Thailand, according to senior executives of the sugar industry.

Last year, the OMCs had floated the EoIs in August and delivery could start from only late December after the completion of all formalities.

graph-ethanol

Coming on the back of the government’s recent decision to withdraw incentive (roughly R5 per litre) by restoring a 12.5% excise duty on ethanol meant for blending with petrol, the proposal to lower ethanol prices and the delay in floating EoI could discourage mills from pledging supplies and mar the government’s blending programme, senior sugar industry executives said. As such there is no worthwhile incentive to supply ethanol, especially to far-away states and ethanol producers are already struggling to supply due to states’ unwillingness to abolish levies on the inter-state movement of the bio-fuel and also effect administrative reforms, including digitising the excise permit processes, they said.

When contacted, Indian Sugar Mills Association director-general Abinash Verma said: “The decision to withdraw the excise duty benefit has reduced incentives for producers to supply ethanol to OMCs. This could adversely affect offers by mills.”

In December 2014, the government had fixed ethanol prices for OMCs (to be delivered at their depots) at R48.50-R49.50 per litre, depending on the distance to depots. The price factors in costs of transportation to the depots by producers, various levies and taxes, and the costs of obtaining all permits from relevant authorities.

Sources said the rationale behind the proposal to cut in ethanol price is the increase (over 30%) in sugar prices over the past one year, which has improved cash flows of mills and reduced their reliance on revenue sources other than sugar. However, for the sugar industry, which finally saw its fortune revive with a recovery in sugar prices in 2015-16 after three straight years of losses, the move comes as a shocker. Mills argue that the government’s restoration of the excise duty on ethanol already offsets part of the rise in their income from sugar sales. Sugar prices long stayed below the costs, falling to six-year lows last year, before recovering. However, losses occurred in earlier years are yet to be recovered.

Earlier this year, the sugar industry had sought the restructuring of loans, which jumped to R40,300 crore as of March 2015 from roughly R11,000 crore in March 2008. Factoring in the loans taken by sugar co-operatives, the total debt burden of the industry stands at a staggering R55,000. The annual turnover of the industry, which has been incurring losses since 2012-13, is around R85,000 crore.

The delay in floating the EoI This is because it takes around 75-90 days between the floating of EoI and the start of actual delivery, thanks to several formalities, such as approval by OMCs, grant of letter of intent, agreement between buyers and sellers and excise permits.

The government had first proposed the 5% blending of ethanol with petrol in 2003 and made it mandatory in 2007. In December 2013, the Sharad Pawar panel mooted doubling the blending limit to 10%, which was re-iterated by the Cabinet committee on economic affairs in April 2015. In August last year, Prime Minister Narendra Modi directed ministries concerned to look for ways to make the proposed blending programme a reality soon.

Still, as many as nine states, including Gujarat, Maharashtra, Uttar Pradesh and Delhi, still impose levies up to Rs 3 per litre on intra-state movement of ethanol. The centre has also stipulated that mills have to sell ethanol at R49.50 per litre at the depot of OMCs locating beyond 300 km. This is a loss-making proposition for mills that have to supply at depots in far-away places, say over 500 kms. Moreover, states like UP stubbornly refuse to digitise its excise permit processes and cause huge delay in granting the no-objection certificates for the supply of ethanol outside the state even for a short period.

These reasons explain why the country could achieve only 1.4% ethanol blending with petrol in 2014-15, lower than the 2013-14 level of 2%, even after a decade of pledges at the centre’s level to implement the blending programme.

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