Ethanol pricing report signed with dissent notes

The final report on the price of ethanol set by a committee of the Planning Commission has been signed with dissent notes from the ministries of food and oil and natural gas.

“The report is qualified since most of our concerns were not being addressed and we will wait for the Cabinet to take a final call when it vets these final recommendations,” said an official member close to the development.

The price and formula are needed to procure ethanol by oil marketing companies to mix it with petrol up to five per cent of the total quantity under the government’s ethanol blending programme (EBP) to minimise air and environment pollution.

The final report submitted to the members last week has decided the price of ethanol to be Rs 26.76 a litre, followed by a quarterly revision of the price based on a formula. The formula on pricing of ethanol, which is the first part of the report, has linked the price of ethanol to motor spirit gasoline, adjusted with excise payments.

The second part, basically an analysis of sectoral demand and allocation, has capped the use of ethanol under EBP and as industrial chemical. In its draft report, the committee had capped the ethanol for EBP at 500 million litres annually, as against the current requirement of 1,200 million litres.

While the food ministry had dissented to both the price and caps suggested for ethanol under EBP, the petroleum and natural gas ministry objected to the caps suggested, with a dissent note.

EBP aims at making it mandatory for oil marketing companies to mix motor spirit gasoline with ethanol. Since ethanol is prepared as a by-product of sugar from sugarcane in India and is also used as an industrial chemical, the operational ministries represented in the Planning Commission committee are oil and natural gas, food and chemical and fertiliser.

The food ministry is of the view that the price is too low and the committee has failed to consider high prices of sugarcane while calculating the price. Besides, the committee did not have the mandate to do any sectoral analysis and suggest caps on the availability of ethanol for any use, said a source.

On the basis of the price of sugarcane, the price could have been in the range of Rs 28-29 a litre.

All along, the petroleum and natural gas ministry have been of the view that ensuring mandatory EBP will require continuous availability of ethanol and competitive pricing. Competitive pricing of ethanol will only result in a low price of ethanol-blended petrol compared to pure petrol. Explaining this, an official source said if the ethanol price became higher, blended petrol would cost more than pure MS- petrol and in that situation, the programme was not feasible.

Therefore, the cap on ethanol for EBP restricts its availability. Besides for the rest of the use, either the oil marketing company has to procure it from the open market or import. In both the cases, the company is exposed to the volatility of crude oil prices, which naturally skew to the higher side, thus rendering the programme non-feasible. Thus, the ministry has qualified the report with objections on cap.

The committee, in its draft report, had stated that even if just 500 million litres were earmarked for the ethanol programme, then 500-700 million litres would be left for the chemical industry after meeting the demand of the potable sector. Further the report was of the view that this quantity of 500-700 million litres was lower than the ‘normative’ requirement that approximates the usage in past two years but was close to the actual consumption in the immediately preceding two years.

The committee had also said in its draft report that it was ‘neither feasible nor appropriate to require that the alcohol-based chemical industry be effectively denied access to domestically produced alcohol’.

Ethanol blending at five per cent continued for about two years before coming to a halt in October 2009, due to low supply on account of a dip in sugarcane output and default in supplies by standalone ethanol manufacturers.

source: BS