On ethanol-blended fuel, sugar and grains, the tail is wagging the dog

India's ethanol blended petrol (EBP) programme was initially designed to help the sugar industry, which struggled with stagnant sugar consumption demand while production rose. Ethanol generated an extra revenue stream for mills to make timely payments to cane farmers. However, the programme has since shifted gears as grain-based ethanol feedstock became the mainstay.

From "C-heavy" molasses, mills began producing ethanol from "B-heavy" molasses and directly from whole sugarcane juice syrup in the 2018-19 supply year. This shift allowed mills to utilize more sucrose for fermentation into ethanol. The Narendra Modi government further incentivized this change by paying more for ethanol made from B-heavy molasses and direct cane juice/syrup compared to the normal C-heavy route.

Consequently, ethanol supplies to oil marketing companies (OMCs) surged from 38 crore to 190 crore litres between 2013-14 and 2018-19, and the all-India average ethanol blending in petrol rose from 1.6 per cent to 4.9 per cent.

The turning point came with the introduction of cereal grains as ethanol feedstock. Initially, sugar mills used multi-feedstock distilleries to process grains during the non-crushing period. Later, dedicated grain-based ethanol distilleries emerged across the country, using surplus maize, rice, and other grains. In 2023-24, grain-based feedstock contributed to 59.7 per cent of ethanol supply, making it the primary driver of the EBP programme.

The government's allocation of ethanol for the current supply year (ending October 2026) is 1,048.3 crore litres, with 72.5 per cent coming from grains and the remaining 27.5 per cent from sugarcane-based feedstock. Due to high sugar prices and projected low stock levels, there's a likelihood that no ethanol production from direct cane juice or B-heavy molasses will be allowed in the 2026-27 supply year. This means the EBP programme will be almost exclusively fueled by grains.

The push for higher ethanol blends (E22, E25, E27, and E30) is driven by distillers, who have set up an aggregate ethanol production capacity of nearly 2,000 crore litres. However, the availability of feedstock, particularly sugarcane and maize, poses challenges. The government has allocated FCI rice to ethanol distilleries, but its high cost and water requirement make it a questionable choice for sustaining the ambitious targets.

The original purpose of the EBP programme was to help sugarcane growers and provide an additional demand source for maize farmers. However, the current trajectory suggests that the tail is not merely wagging the dog, but it has taken full control.