India Elections: Policy Incentives in Spotlight to Drive Biofuels Transition

May 21, 2024

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by Sampad Nandy, Samyak Pandey, and Aditya Kondalamahanty (S&P Global) Focused policy needed to boost biodiesel production; Compressed biogas competes for feedstocks with other biofuels; SAF demand limited from cost-sensitive domestic airlines -- India has been actively exploring various forms of biofuels to accelerate its transition toward renewable energy and achieve its carbon neutrality commitments.

While the government has been formulating policies aimed at positioning itself as a key player in Asia's biofuels sector, limited feedstock availability and a shortage of aggressive government incentives have posed as fundamental bottlenecks, preventing the industry from operating at full throttle, industry sources said.

Feedstock availability for ethanol

India, as the world's third-largest fuel ethanol producer, aims to achieve a 20% ethanol blending rate in gasoline by 2025. Market participants have been concerned about a scarcity of first-generation feedstocks, primarily sourced from sugarcane and corn, that could delay that timeline.

Market participants expect the new government to address challenges in utilizing second-generation feedstocks such as agricultural and biomass waste to ensure a stronger ethanol production supply chain.

Some recent initiatives include the launch of a second-generation ethanol plant by state-owned refiner Indian Oil Corporation at its Panipat refinery. This plant is expected to produce 30 million liters/year of ethanol from 200,000 mt agricultural residue waste.

As of March 31, India achieved 11.96% ethanol blending in the first five months of the 2023-24 supply year (November-December), according to government data.

"It is evident that India may not be able to maintain a steady supply of first-generation of feedstocks, but it may look at ways to use its farm wastage as an alternative source," an ethanol supplier based in Singapore said.

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The government restricted sugarcane juice usage for ethanol production in late 2023 to control rising sugar prices.

"The target is still a bit away, and with the scarcity of feedstocks, like limits on sugarcane juices, [it] may hinder India's path to E20," an ethanol manufacturer based in the Indian city of Kanpur said.

While the government plans to supply corn to ethanol makers through procurement from farmers, market participants have been doubtful about India's ability to secure reliable supplies for ethanol production solely from corn.

"Corn production in India will not be able to replace sugarcane as a dependable feedstock for ethanol," a distiller based in Maharashtra said.

Considering these challenges, stakeholders have emphasized on the need for a diversified approach to ethanol production, leveraging first and second-generation feedstocks to ensure a sustainable future for India's energy sector.

Focused biodiesel policy

India aims to achieve 5% biodiesel blending with diesel by 2030. Market participants have been optimistic about achieving this target, but feedstock availability has been tight.

The country has enough room to boost its biofuel conversion capability, with 200 million mt of its annual agricultural residue out of about 500 million mt unused and often burned, according to government estimates.

In 2023, India produced 200 million liters of biodiesel, representing about 33% of its production capacity of 600 million liters, according to the US Department of Agriculture data.

"Not enough research and development has been done in this field because there was no economic viability so far," said Ashvin Patil, managing director of Biofuels Junction, an aggregator in the biofuels value chain.

India could also utilize other biodegradable waste like animal fat, tallow or used cooking oil to enhance its biodiesel production.

In 2023, India produced about 35% of its entire biodiesel production from UCO and just 3% from animal fat and tallow, USDA data showed.

Most market participants expect the usage of UCO to be expanded further under the new government to enhance overall biodiesel production.

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CBG competes for feedstocks

In the interim financial year 2024-25 (April-March) budget, the government proposed phased mandatory blending of compressed biogas in compressed natural gas for the transportation sector and piped natural gas for domestic use. It also plans to provide financial assistance to support the collection of biomasses.

The blending will start voluntarily, gradually rising to a 5% target over the next few years.

The CBG blending requirement is voluntary in FY 2024-25 and will become mandatory from FY 2025-26 onward, starting at 2.5% and reaching 5% by FY 2028-29.

"The phased implementation strategy, starting with voluntary blending and gradually increasing to 5% by FY 2028-29, provides the industry with the necessary time and flexibility to adapt while moving steadily toward net-zero emissions. We believe it will propel the demand for [agriculture]-waste biomass in the country," said Patil.

However, rising demand for agriculture waste to produce CBG could potential eat into the share of feedstocks for some other biofuels, like biodiesel and ethanol, market participants said.

Limited SAF demand

At the end of 2023, India's National Biofuels Coordination Committee set a target to blend 1% of sustainable aviation fuel with jet fuel in 2027 and 2% in 2028.

Market participants have been awaiting clear policy directives and financial incentives to stimulate investment and innovation in the SAF sector.

According to government estimates, if India uses 1% SAF for commercial flights by 2025, it will require about 140 million liters/year of SAF. If the blending target rises to 5%, the country will need require about 700 million liters/year of SAF.

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SAF offtake in India faces multiple challenges including high production cost, limited raw materials availability and the need for investment in refining and distribution infrastructure.

Market participants said SAF demand in India from its highly cost-sensitive domestic airlines could remain limited for now because of its higher cost compared with conventional aviation fuel.

Longer term, and with government support, India could potentially look at becoming a key SAF supplier globally.

Aemetis, a California-based renewable fuel producer, has said that it is eyeing an initial public offering in India later in 2024 to build an SAF production plant there.

"The India plant can be expanded to supply SAF for airlines in India as well as international markets," Eric McAfee, president, Aemetis in an earning call said.

India offers less expensive waste feedstock, which can be used to produce biofuels, the company said. READ MORE

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