SECTOR ANALYSIS

India: Bio fuel Energy Sector

Prepared by Trade Commission of Denmark, Bangalore Keywords: India, Bio fuel Energy Sector, Key drivers, Government Regulations & Initiatives, Opportunities for Danish companies, Challenges for danish companies, Conclusion & Recommendations (Dansk: Indien, Biobrndsel sektoren, key drivers, regerings initiativer & reguleringer, muligheder for danske virksomheder, udfordringer for danske virksomheder, konklusion & anbefallinger) Abstract: This report provides a short overview of the Indian Bio fuel Energy Sector. It describes the industry and its potential, with focus on opportunies for Danish companies. Growing population and rapid socio-economic development has spurred an increase in energy consumption across all major sectors of the Indian economy, especially in the transport sector which emphazise the need for alternative sources like bio fuel. This spurres opportunities for Danish bio fuel companies.

Date File No.

19-01-2011 MH/CM

Table of contents
1 2 3 4 5 6 Introduction ................................................................................................................ 3 Industry ........................................................................................................................ 3 Key drivers .................................................................................................................. 4 Opportunities for Danish companies...................................................................... 5 Challenges for Danish companies............................................................................ 6 Conclusion and recommendations .......................................................................... 7

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1 Introduction
Indias energy consumption is increasing at one of the fastest rates in the world due to population growth and economic development. The demand for energy has been increasing in India because of resource constraints on one hand and increased economic activities on the other hand. As the ever-increasing demand for energy continues to squeeze fossil fuel reserves, India is looking at fossil fuel-rich countries around the world. Consequently, India has emerged as a major importer of energy and this has seriously sensitised the Government of India to look at meeting the energy requirements by reducing the demand-supply gap and strategically developing energy security of the country. In light of this concern, renewable energy and hence the Bio fuel sector is getting increasingly lots of attention from the Government which creates opportunities for Danish suppliers in the Bio fuel Energy sector.

2 Industry
India is the fifth largest primary energy consumer and fourth largest petroleum consumer in the world. Growing population and rapid socio-economic development has spurred an increase in energy consumption across all major sectors of the Indian economy. Approximately 50% of the consumption of petroleum products comes from transport. This percentage is likely to be higher given double digit growth in the Indian economy, rise in domestic spending levels, and improving road infrastructures which have led to an increase in new vehicle registrations and ownership. Indias on-road vehicle population has increased from 49 million to more than 65 million vehicles over the last five years and is expected to grow annually by 8% to 10%. Diesel and gasoline-based oils meet more than 95% of the requirement for transportation fuel, and demand has been expected to grow by 6% to 8% per year during the 11th Plan (2007-2012). Indian bio fuel sector covers both bio-ethanol and bio-diesel. The former is in the growing stage (with India as the fourth largest producer of ethanol in the world) and the latter is still in its nascent stage. The demand for ethanol in India is far from being met. The existing production is 184 million litres with a demand of 500 million litres which illustrates a shortfall of approximately 60%. Bio-ethanol (in million litres per annum) Demand 500
Source: Ethanol India: www.ethanolindia.net

Supply 184

Shortfall 316

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Presently, the government is unable to implement compulsory blending of 5 percent ethanol in petrol (gasoline) due to the short supply of sugar molasses in the last couple of years because of overall low sugarcane crop production in India. Consequently, India imported about 280 million liters of ethanol in 2009 to meet the demand for industrial and potable liquor production, of which none of the imported ethanol was for fuel purposes. In order to produce sufficient bio-diesel to blend at 20 percent with petro-diesel, a target of 11.2 to 13.4 million hectares are set to be planted with Jatropha by 2012, according to the Planning Commisison. An estimated 55.3 million hectares are considered wasteland in India, which could be brought into productive use by raising bio-diesel crops1. The price to buy bio-diesel for blending is set by the government and is currently USD 48 cents (Rs.21.50) per litre. However, bio-diesel production costs are much above the government advised purchase price. Although the bio-diesel sector is lobbying the government to allow duty concessions on imports of vegetable oils and their derivatives for captive consumption for bio fuel production, there are no positive indications for approval of such proposals. However, a few local and foreign collaborative projects for production of bio-diesel for exports are being set up as export oriented units which could boost the countrys bio-diesel production. Though, no reliable data of biodiesel production is available at this stage2.

3 Key drivers
As bio fuels are derived from renewable biomass resources it is eligible for various fiscal incentives and concessions available to the New and Renewable Energy Sector from the Central and State governments. Financial incentives, including subsidies and grants, for new and second generation feed stocks are provided. The Government of India (GOI) also offers subsidized loans (2% below market rate) and the Sugarcane Development Fund for up to a maximum of 40% of the project cost to sugar mills for setting up an ethanol production unit. Recently, the Indian government approved the National Bio fuel Policy that predominantly aims at promoting private investments in the bio fuel sector for achieving set targets. The policy aims at mainstreaming bio fuels in the energy vision of India. It sets a target of achieving at least 20% blending of bio fuels, both bio diesel and bio ethanol, by 2017. Prior to the announcement of the policy, 5% blending of bio ethanol with gasoline was mandatory, but this is now increased to 10% with
Global Agriculture Information Network Report: India Bio-Fuels Annual 2008, June 2008 India Bio-Fuels Annual 2008
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effective date of October 2008. The policy recommends 5% blending targets for bio diesel that will be made mandatory in due course3. By blending petrol with 10% bio fuel, 80 million litres of petrol could be saved annually in India4.
The GOI is promoting and encouraging production and use of:

1. Ethanol derived from sugar molasses/ juice for blending with gasoline 2. Bio-diesel derived from non-edible oils and oil waste for blending with diesel Bio-ethanol already enjoys concessional excise duty of 16% and bio-diesel is exempted from excise duty. Although the central government has exempted biodiesel from the central excise tax, most state governments do not provide any excise or sales tax exemptions. Ethanol production in India has a market advantage as its production of ethanol is from molasses. Molasses (or bagasse) is the waste of product after extraction and refining of sugar from sugar cane which potentially leave sugar prices unaffected and furthermore does not intervene with food security issues. Bio fuel technologies and projects will be allowed 100% foreign equity through automatic approval routes to attract FDIs, provided Bio fuel is for domestic use only, and not for export. Plantations of non-edible oil bearing plants would not be open for FDI participation. Other key drivers promoting the Bio energy technologies are: Accelerated depreciation under the Income Tax Act Preferential tariffs and Renewable Purchase Standards (RPS) wherein a certain percentage of states electricity demand has to be met from renewables Financial assistance from IREDA of up to 70% of the project cost with 10 years repayment 10 year tax holiday Concessional customs and excise duty exemption for machinery and components for initial setting up of projects 100% FDI is allowed in the power sector

4 Opportunities for Danish companies

Bio-diesel production from non-edible oilseeds is still a nascent industry in the research and development stage in India which leaves opportunities for Danish companies in areas of R&D of the biodiesel crops in general. According to the Planning Commission other areas that need emphasis are:
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National Bio fuel Policy, 25th December 2009 Institute for Defence Studies & Analyses (IDSA): Ethanol and Indias Energy Security
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Develop technology for production of ethanol from sweet sorghum and sugar beet. Develop technology for production of ethanol from ligno-cellulosic materials such as rice straw and other agricultural and forestry residues Engine design optimization for petrol with more than 10% blend of ethanol Physico-chemical properties of potential non-edible oils to be aligned with those of diesel for application in transport, stationary and portable applications Development of efficient chemical/catalyst conversion processes Development of bio-catalyst and heterogeneous catalyst for production of bio-diesel Production of bio-diesel from all possible feed-stocks Response of different available additives and their dosages on the bio-diesel Optimizing engine design for different feed-stock based bio-diesels/and verifying blends thereof for transport, portable and stationary applications

5 Challenges for Danish companies

The emerging industry is facing a lack of feedstock supplies and needs initiatives in crop cultivation technologies and competitive sourcing of appropriate feedstock all of which can alter the bio fuel economics. As such the greatest challenge to the widespread deployment and use of bio fuels is developing dedicated energy crops that are cost-effective, easy to sustain and can produce greater yields. The GOI does not want to target bio fuel feedstock crops to compete with food crops for scarce agricultural land. Therefore currently the challenge is to make it far more sustainable so that the food security does not become an issue. The production costs of bio-diesel are above the government advised purchase price. Consequently, there has been no commercial sale of bio-diesel at GOIs biodiesel purchase centres. The purchase price of bio-diesel fixed by the GOI is so low that no one can supply bio-diesel at that price, which is a barrier for Danish companies at this stage. Other problems regarding Indias non-edible oilseed Jatropha based bio-diesel production are5: Lack of good quality planting material and management practices Lack of bank financing for Jatropha plantations, which is discouraging gowers since the crop has a long gestation period compared to annual crops Ownership issues with community or government-owned wastelands

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Further barriers for Danish bio fuel companies are the high taxes and levies, which is making ethanol blending commercially unviable in several states, particularly sugar/alcohol deficit states. Most states have a labyrinth of rules and regulations (high excise duties, storage charges, etc.) to control alcohol for the potable liquor industry, and these regulations are equally applicable to ethanol for blending purposes6.

6 Conclusion and recommendations

Indias bio fuel sector is in its nascent stage and evolving. The governments policy is focused on promoting the use of non-food sources (also known as second generation bio fuels) for production of bio fuels: sugar molasses for production of ethanol for blending with gasoline, and non-edible oilseeds (i.e. Jatropha seeds) for production of bio-diesel for blending with petro-diesel. While the governments current policy target of five percent blending of ethanol with petrol has been partially achieved, five percent blending of bio-diesel with petro-diesel has not started as production of bio-diesel is not significant due to lack of sufficient i.e. Jatropha seeds. Although the bio fuel sector is still to set off in India many opportunities exists for Danish companies. The Indian Government has taken several steps to promote the sector and Danish companies with experience and know-how within the bio fuel sector are strongly needed; especially within R&D major efforts are required.

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