Ethanol-Blended Petrol: Progress, Challenges, and Untapped Potential

India, the world’s third-largest oil consumer, accounted for approximately 5.05% of global oil consumption in 2022, according to the U.S. Energy Information Administration (EIA). It is also the third-largest importer of crude oil, with around 88% of its demand met through imports in 2023-24[1]. To reduce this import dependence, the Government of India has laid down a strategy to increase domestic production, adoption of biofuels and renewables, energy efficiency norms, improvement in refinery process and demand substitution (MoPNG, 2018). The Ethanol Blended Petrol (EBP) programme has been considered as one major step in this direction, which aims at reducing oil imports and mitigating environmental impact. Under this programme, ethanol is blended with petrol which reduces the consumption of petrol and thus consumption and imports of crude oil. In addition to its contribution to India’s energy security, ethanol may also help address environmental issues. It is claimed to be a less polluting fuel as compared to conventional fuels like petrol, as 1 crore litre of EBP can save around 20,000 tons of CO₂ emissions (MoPNG, 2021). However, some important challenges remain, such as food security concerns, inflation etc., which will be uncovered in the following section.

Ethanol is blended with petrol which reduces the consumption of petrol and thus consumption and imports of crude oil. It has played a key role in reducing crude oil imports, saving foreign exchange, and generating domestic revenues.

The Ethanol Blending Petrol Programme–Progress, Achievements and Challenges

The ethanol blending with petrol in India has increased from a mere 1.5% in the Ethanol Supply Year (ESY)[2] 2013-14 to 13% in the ESY 2023-24 (Table 1), indicating a significant increase in ethanol blending capacity. As per PIB (2024), this growth has helped reap several benefits including a reduction in crude imports by 181 lakh metric tons between 2014 and August 2024, which saved approximately ₹1,06,072 crore in foreign exchange. Although the resultant reduction in crude oil imports due to EBP accounts for just 0.80% of India’s total crude oil imports during this period, the increased blending capacity in recent years holds the potential for a significant reduction in crude oil imports in the future. Farmers reportedly have also earned ₹87,558 crore because of increased demand for feedstocks like sugarcane and grains, while distilleries generated around ₹1,45,930 crore in revenues during this period, indicating its role in boosting domestic manufacturing and employment. EBP programme is believed to have also reduced CO₂ emissions by 544 lakh metric tons since 2014, demonstrating its environmental benefits (PIB, 2024). These benefits are expected to increase with the ambitious target of achieving 20% ethanol blending by ESY 2025-26.

Table 1: Ethanol Blending Rate and Foreign Exchange Savings in India

*India’s cumulative foreign exchange savings for the period ESY 2013-2014 to ESY 2021-2022.

Source: MoPNG (2023), PIB (2024)

EBP has raised challenges, such as its impact on food security and inflationary pressures on sugar and maize markets. Additionally, it may affect vehicle fuel efficiency, potentially imposing an additional burden on consumers.

But with increased blending also comes the challenges associated with higher ethanol production. The National Biofuel Policy 2018 facilitated the use of diverse feedstocks such as B-heavy molasses, sugarcane juice, and surplus or damaged grains for ethanol production (MoPNG, 2018). While these measures aim to boost ethanol production, they have raised concerns about their impact on food markets. To address the over-diversion of sugar usage for ethanol production, which is most significant when produced from sugarcane juice or syrup and least in C-heavy molasses, ethanol production from C-heavy molasses and maize has been incentivized (Mukherjee, 2023). This shift, however, has introduced challenges for the maize industry. The increased demand of maize for ethanol production along with the incentives has driven up its prices and reduced availability for other consumers (Saini, 2024). The All-India Poultry Breeders Association even reported domestic maize shortage of 5 million tonne in 2023 because of ethanol blending. In current year, India is set to become a net-importer of maize than being the net-exporter (Reuters, 2024). In addition, EBP may also impact vehicle fuel efficiency, as usage of E20 fuel in 4-wheelers (or 2-wheelers) which were designed for E0 and has been re-calibrated for E10 may drop the fuel efficiency by around 6-7% (3-4% in case of 2-wheelers). Flex Fuel Vehicles (FFVs) offers a solution to this issue, albeit at a cost. The engines of these vehicles are compatible to run on up to 84% ethanol blended petrol, but according to the Society of Indian Automobile Manufacturers (SIAM) FFVs are more expensive than the normal petrol vehicles, which may impose an additional burden on consumers (Sarwal et al., 2021).

Petrol Pricing in India and how Ethanol may shape them

In India, retail petrol prices are primarily influenced by two factors: international crude oil prices and the prevailing union (excise duty) and states’ levies (Value Added Tax) . The heavy dependence on imported crude oil implies that fluctuations in global crude oil prices will directly affect the petrol prices in India. Another major component of petrol price is the imposition of taxes, excise duty by the Union and Value Added Tax (VAT) by the respective State government. Trends in daily petrol prices in four metropolitan cities i.e. Delhi, Mumbai, Chennai, and Kolkata reveal that the latest major alteration to the petrol prices in India was on 14th March 2024 when petrol prices were reduced owing to lower international crude oil prices and also due to the union elections which began from April 19. Before that, other major price cuts were primarily driven by the Union lowering excise duty (May 2022 and November 2021) and VAT reductions (like Delhi’s VAT cut in December 2021). While the impact of changes in these two components on petrol prices has been evident, there has been no prominent impact of ethanol blending on petrol prices.

Ethanol blending with petrol in theory may lower the prices of petrol. This is because, ethanol in India presently costs significantly lower than petrol. One major reason behind this is the tax levied on ethanol compared to the tax on petrol. In the case of petrol, while taxes (excise duty and VAT) contribute to around 50% of the retail selling price, the only tax on ethanol is the GST equivalent to 5%. (Sarwal et al., 2021) also stated that since the excise on petrol is higher than GST on ethanol, it is keeping ethanol price lower than petrol’s. The cost at which the Oil Marketing Companies (OMCs) buy ethanol from the mills includes ex-mill ethanol price, GST and transportation charges (MoPNG, n.d.). Given that different feedstocks are used to produce ethanol which have varying prices, as per our computations the weighted average ex-mill price of ethanol is around Rs. 65.35/litre during ESY 2023-24 (Table 2). On top of it, the average GST depending on the feedstock used for ethanol production would be around Rs. 3.27/litre. Transportation charges on the ethanol supply during ESY 2023-24 range from as low as Rs. 0.273/litre for up to 75 km to Rs. 4.133/litre if the distance is 1100-1200 km. Assuming a higher transportation charge of Rs. 4.133/litre, the average cost of ethanol to OMCs would be around Rs. 72.75/litre (65.35+3.27+4.13), which is substantially lower than petrol.

Table 2: Average Cost of Ethanol to OMCs

Source: DoFPD (n.d.), Damodaran (2024)

In July 2024, India achieved a blending rate of 15.83% which could translate into a potential to reduce the petrol price by around Rs. 3.5 to Rs. 5.1/litre provided there are no other prominent unit costs for OMCs to blend the refined petroleum with ethanol.

In July 2024, India achieved a blending rate of 15.83% which could translate into a potential to reduce the petrol price by around Rs. 3.5 to Rs. 5.1/litre provided there are no other prominent unit costs for OMCs to blend the refined petroleum with ethanol (Table 3). Studies also indicate that EBP may help reduce the price of petrol, as a 10% ethanol blending with petrol can lower petrol prices by approximately Rs 3/litre (Mishra, 2021), while 20% blending could result in a Rs 8/litre reduction (CNBC TV18, 2021). However, retail petrol prices are yet to reflect these potential savings.

Table 3: Estimated Reduction in Petrol Prices for Around 15% Ethanol Blending

Note: 1. The Fuel Price of Ethanol is the average cost of Ethanol to OMCs, assuming no significant additional unit costs are incurred for blending petrol with ethanol.

2. Petrol Price in four cities is the Retail Selling Price of Petrol as of October 1, 2024, sourced from PPAC.
3. Estimated Cost of EBP is the combined contribution of ethanol and petrol to the price build-up of EBP.
4. Price Cut Potential is calculated by subtracting the Estimated Cost of EBP from prevailing Petrol Prices.

Source: Authors’ computations

The evidences show that ethanol-blending program has played a key role in reducing crude oil imports, saving foreign exchange and generating domestic revenues. EBP has also emerged as a sustainable alternative to conventional fossil fuels. These benefits are expected to increase in the near future as India is set to achieve the target of a 20% blending rate in ESY 2025-2026. However, this will be coupled with the challenges like impact on food security, inflationary pressures on sugar and maize markets, etc., which must be addressed as well. The aforementioned computations show that while EBP has led to a cost-effective transition, its potential to reduce petrol prices remains untapped. With ethanol-blended petrol becoming more prevalent across India as 20% of PSU OMC outlets are already offering E20 petrol, the petrol prices in the country should reflect the impact of ethanol blending. This becomes even more important as consumers might be facing an implicit cost because of a drop in vehicular fuel efficiency. By addressing this pricing gap, and mitigating the challenges associated with increased ethanol blending, EBP can become a win-win for the economy, environment and consumers.

References

CNBC TV18. (2021, September 10). Here’s how ethanol-blended petrol could be answer to spiralling fuel prices. CNBC TV18. https://www.cnbctv18.com/energy/heres-how-ethanol-blended-petrol-could-be-the-answer-to-spiralling-fuel-prices-10688181.htm

Damodaran, H. (2024, July 29). Ethanol used in petrol now more from maize, damaged foodgrains than sugar. Indian Express. https://indianexpress.com/article/india/ethanol-used-in-petrol-now-more-from-maize-damaged-foodgrains-than-sugar-9481641/

Department of Food and Public Distribution. (n.d.). Sugar Policy. Ministry of Consumer Affairs, Food and Public Distribution. Retrieved December 13, 2024, from https://dfpd.gov.in/Home/ContentManagement?Url=sugar_policy.html&ManuId=3&language=1

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Mishra, T. (2021, December 6). 10% ethanol blending with petrol can lower fuel price by ₹3/litre: Experts. The Hindu Businessline. https://www.thehindubusinessline.com/economy/10-ethanol-blending-with-petrol-can-lower-fuel-price-by-3litre-experts/article25208320.ece

MoPNG. (2021). Ethanol Growth Story- Fulfilling Aatmanirbhar Bharat Dream. https://mopng.gov.in/files/uploads/Ethanol_Booklet_english.pdf

MoPNG. (2023). Ethanol Growth Story- The Journey from Farm to Fuel (As on November 2023). https://mopng.gov.in/files/uploads/BPCL_Ethanol_Booklet_2023.pdf

Mukherjee, S. (2023, December 30). OMCs hike procurement price of ethanol produced from C-heavy molasses. Business Standard. https://www.business-standard.com/industry/agriculture/omcs-hike-procurement-price-of-ethanol-produced-from-c-heavy-molasses-123122900472_1.html

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Reuters. (2024, September 4). Ethanol push turns India into corn importer, shaking up global mkt. Business Standard. https://www.business-standard.com/economy/news/ethanol-push-turns-india-into-corn-importer-shaking-up-global-mkt-124090400327_1.html

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Sarwal, R., Kumar, S., Mehta, A., Varadan, A., Singh, S. K., Ramakumar, S. S. V., & Mathai, R. (2021). Roadmap for Ethanol Blending in India 2020-25. https://www.niti.gov.in/sites/default/files/2021-06/EthanolBlendingInIndia_compressed.pdf