A winding drive to ethanol-blended fuel

In her Budget speech, Finance Minister Nirmala Sitharaman said, “Blending of fuel is a priority of this government. To encourage the efforts for blending of fuel, un-blended fuel shall attract an additional differential excise duty of ₹2 a litre from the October 1, 2022.” The date of implementation gives enough time to the industry to meet the target of 10 per cent for the current ethanol supply year (ESY) December 2021-November 2022.

On the face of it, this is a straight statement, but this has led to many questions like: Who will shoulder the burden — consumer or oil marketing companies? Is there enough ethanol supply for blending — 90 per cent of the contract for supply has been done by PSU refiner-cum-retailers, leaving little for private sector refiners? And, what happens to the certification of less than 9 per cent blending available with oil marketing companies both in public and private sector?

As regards whether the consumer has to bear the burden of this additional excise duty, if one goes by what Revenue Secretary Tarun Bajaj told media at the post Budget press conference of the Finance Ministry, the move is to push the petroleum companies to do ethanol blending and since the tax will be very minimal, it is not about collections.

However, it may not be this simple. A component of auto fuel retail price build-up is excise duty. Therefore, the concern whether this additional duty would be over and above the existing excise duty. Who would take the burden — consumers or the oil marketing companies (OMCs)?

Besides, there will be three different price points — branded or premium fuel, blended fuel price and unblended fuel. The government could easily ask the oil retailers to absorb this additional excise duty component and then reimburse them subsequently, as it had done during the controlled fuel pricing regime.

Another set of questions that has come forth is: Who is selling un-blended fuel? According to information available, the three public sector OMCs — Indian Oil Corporation Ltd, Hindustan Petroleum Corporation Ltd and Bharat Petroleum Corporation Ltd — are selling 10 per cent ethanol blended fuel in most parts of the country. This move from the government will put added pressure on the OMCs both in the public and private sectors.

New tariff items

While the Budget proposal has raised these questions, there is another development that has happened. The government recently said that blending lower than 9 per cent will not be considered in the category of blended fuel. Besides, Finance Bill, 2022 has proposed Clause 98 which seeks to amend the Fourth Schedule to the Central Excise Act to insert two new tariff items in Chapter 27 relating to E12 and E15 fuel blends, as new BIS specification has been issued for Ethanol Blended Petrol (EBP) with percentage of ethanol up to 12 (E12) and 15 (E15). This amendment will take effect from the date on which the Finance Bill receives the assent of the President.

This has put OMCs in a fix. What happens to the certification that they have on blending five per cent? Also, till now the OMCs were enjoying excise duty tax exemptions for blending. The industry is not sure whether this exemption will be available for these specifications too. Blending is treated as manufacture and thus attracts duty.

But, a happy lot with this proposal are the sugar millers. “We are future ready and do not see any supply side issue,” Abinash Verma, Director-General at Indian Sugar Mills Association, said, adding that for the 10 per cent target the requirement was for 430 crore litres, of which, 385 crore litres has already been finalised till January 2022.

The oil marketing companies have issued Letters of Intent (LOIs) for 385.49 crore litres of ethanol across all sources including sugarcane juice, B Heavy and C Heavy Molasses, damaged foodgrains and surplus rice among others. Of the total LOIs issued, the total contracted quantity stood at 362.02 crore litre, while the ethanol quantity received by oil marketing companies stood at 58.62 crore litre.

As regarding the remaining 45 crore litres, it will also be met, he said, adding “we have a two-pronged approach. First, Maharashtra and Karnataka will be giving additional outputs and, second, 70 more distilleries are coming up — new as well as existing ones which have gone for expansion. Therefore, there will be no issue.”

Echoing similar thoughts, Ravi Gupta, Director, Shree Renuka Sugars, said: “There will be no supply challenge as all states don’t do 11 per cent blending and even if they do we don’t see any challenge. Besides, the government is working overtime to push the millers to produce more ethanol. This move by the government is definitely good for the sector, giving a clear message from the government to the industry about seriousness of the programme.”

Where to do the blending

Yet another question that is now been asked is: Will the blending programme not work better if it is done at the refinery instead of installation stations or outlets? While both the oil companies and sugar millers agree that refinery is always a better place for blending, they also say that there is a need for a multi-pronged approach. “The model can have both refineries as well as at the installation stations or outlets. Places which are further from refinery can be supplied from installation stations,” Gupta said.

The government’s roadmap proposes a gradual rollout of ethanol-blended fuel to achieve E10 fuel supply by April 2022 and a phased rollout of E20 from April 2023 to April 2025. Currently, 8.5 per cent of ethanol is blended with petrol in India.

The Economic Survey has said that the government, which is targeting a 20 per cent blending by 2025, was expecting investment up to $5.5 billion in ethanol sector over the next three years. The government has lowered the Goods and Services Tax rate to 5 per cent from 18 per cent on ethanol meant for blending under the EBP Programme.

While the proposal in the Budget is definitely a step in the right direction to intensify pressure on the stakeholders, it would have been easier to implement if the aforesaid issues were clarified from the word go.