Spotlight on India’s Biofuel Market: It’s all about the sugar

India’s is the world’s fifth largest biofuels market. After a period of lackluster growth in the late 2000s and early 2010s and failure to achieve mandated targets, political interest in biofuels has significantly increased, driven by a confluence of agricultural, social and environmental drivers. In this article, we characterize the market, the key biofuel policies and regulations, and attempt to draw a conclusion on the likely way forward and the implications for the U.S. market.

Market Overview

India’s biofuel market consists of two large sectors (bioethanol and biogas) with a small fledging biodiesel sector. Overall demand stands at around 3.3 billion gallons (gasoline equivalent) per year (bgy) of which 1.7 bgy is used for transport and is overwhelmingly comprised of bioethanol. Note that, as shown in the figure below, biogas is primarily used for heat and power in India as opposed to transport.

Figure1: Indian Biofuel Demand 2015 – 2024 forecast

Bioethanol’s dominance of the liquid biofuel space in India should come as no surprise as India is the world’s second largest sugarcane producer after Brazil. However, India’s sugarcane mills are typically significantly smaller than their Brazilian counterparts and, in contrast to Brazil’s large-scale industrial farming practices, India’s mills are supplied with cane from small scale farmers with each farmer manually farming no more than a couple of acres. There are some 40 million cane farmers overall in India, and even a modest-sized sugarcane mill may be reliant on many tens of thousands of farmers for feedstock.

Price regulation is another key difference between India and Brazil. In India, the government regulates the prices for both the sugarcane that farmers sell to the mills, and the sugar and ethanol that the mills produce and sell.¹ A mismatch in pricing has sometimes led to depressed or negative margins for the mills with consequent implications for production.

Lastly, because of improvements in varieties and agronomic practices India sugarcane yields have improved to be on par with best-in-class yields in Brazil. As such, India’s sugarcane and sugar production has increased markedly, leading to increased sugar exports. Given India’s sugar subsidy program, this increase in sugar exports has led to World Trade Organization (WTO) disputes.² Therefore, as discussed below, a large part of India’s ethanol program is driven by a desire to find another home for the surplus sugar and molasses production.

Out of the 700+ sugarcane mills in India, some 270 produce ethanol with a total annual nameplate capacity of 3.8 billion gallons. The main feedstocks are sugarcane, and molasses (a byproduct of sugar production) with smaller volumes of waste grains, rice and corn being used.

In contrast to sugarcane, India’s oilseed sector is significantly smaller with India being an importer of vegetable oil. The ambition in the 2000s to boost India’s biodiesel feedstock capability with Jatropha, a non-food crop that could be grown on marginal land, failed to materialize. Hence, India’s biodiesel sector is small, consisting of some 12 plants totaling 220 million gallons per year (mgy) capacity, that use a combination of used cooking oil (UCO) and imported palm oil. Utilization rates are low at <30%.

Lastly, India has a large biogas sector comprised of over six million digesters, both at a household and commercial level, producing over five billion cubic meters per year of biomethane (~1.6 bgy of gasoline equivalent). The feedstock base is primarily manure, agricultural residues, and other wastes. The vast majority of the biogas produced goes into the heat and power sectors, with only 1-2% being used in transport.

Biofuel Policy & Legislation Overview

India’s biofuel policy is set within its wider commitments under the Paris Climate Agreement. In 2022 at COP27, India announced its intention to achieve net zero by 2070 and to supply 50% of its energy consumption from renewables, green hydrogen and biofuels by 2030, cutting its carbon emissions by 1 billion metric tons. Let’s dive deeper into the underpinning policies and regulations for each biofuel sector in turn:

Ethanol

After earlier failed attempts to introduce ethanol mandates, India’s 2018 National Policy on Biofuels was a significant step to promote biofuels and to increase ethanol production.  Driving the policy was a combination of a large domestic sugar surplus due to WTO restrictions on subsided sugar exports, combined with India’s decarbonization ambitions.  The flagship element of this is an E20 mandate for the 2025-26 sugarcane season, having previously hit E10 in 2022, and with the most recent data from August 2024 revealing that E15 has now been achieved. However, the recent boost in ethanol blending has been achieved in large part by the diversion of ethanol from industrial applications, with a corresponding 50% increase in imports to fulfill the industrial shortfall. To further increase ethanol production, the plan sets out four key action areas:  

1. Increasing domestic production from first generation (1G), second generation (2G), and third generation (3G) biofuels: This includes financial assistance for sugarcane mills to install or increase ethanol production capacity, as well as funding to support 2G (cellulosic) ethanol projects.
2. Feedstock diversification: Sugarcane mills are now permitted to produce ethanol directly from sugarcane, where previously only production from molasses was allowed. In addition, production from broken rice, damaged food grains, and corn are encouraged.
3. Regulated supply chains with effective tender pricing: This enables mills to secure long-term pricing agreements with the public sector oil marketing companies (OMC), improving their financial stability. In addition, the government has increased ethanol’s procurement price over the last three years.
4. Expansion into other sectors, encouraging the use of ethanol in stationary and mobile power applications and in other machinery to help increase demand.

The Indian government has also recently started actively promoting the domestic manufacturing of Flex Fuel Vehicles (FFVs)³ and E20-compatible vehicles.

Additionally, in 2023 India and Brazil entered into international collaboration in the form of the Center of Excellence on Ethanol, with a focus on encouraging FFVs, sustainable aviation fuel (SAF), and 2G ethanol.

However, these positive developments for ethanol are tempered by the following caveats:

1. The ethanol mandate only applies to the state-owned OMCs, not to the private sector players (such as Reliance Industries, Nayara Energy, and Shell) that make up 10% of the market. These private players only purchase and blend bioethanol if it is priced below gasoline.
2. Irrespective of the above, despite bullish statements from the Indian government that it is now looking beyond E20, there remain doubts that the E20 mandate will be achieved in 2025/2026 or possibly even in the medium–term. The additional ~1 bgy of ethanol required, would necessitate further diversion of ethanol away from industrial uses, backfilled by additional imports (India effectively prohibits the import of ethanol for fuel use), coupled with continued diversion of sugarcane away from sugar production, and/or a significant expansion in sugarcane cultivation (10-15%), which would typically come at the expense of wheat and rice cropping. 

Biodiesel

India has attempted to introduce a B5 mandate at least four times over the last two decades without success, as well as attempting to stimulate non-food domestic feedstocks such as Jatropha. The current target is for B5 by 2030; with the current blending rate at paltry 0.16%, no incentives, and lacking a strong domestic supply base, however, the prospects of achieving this mandate appear remote.

Sustainable Aviation Fuel (SAF)

India has set targets of SAF use in domestic flights of 1% in 2025 and 5% by 2030. However, while the 2018 National Biofuel Policy called for tax incentives to enable SAF production, these are yet to transpire.While there are several SAF pilot projects being developed, and test commercial flights using imported SAF have occurred, there are as yet no commercial SAF production facilities in India. However, the Indian Oil Corporation (IOC), and Bharat Petroleum Corporation (BPCL) have both announced early-stage plans to build SAF plants using agricultural and municipal solid wastes. Praj, a leading biofuels process technology developer, has likewise indicated its intention to enter the Indian SAF market. At a recent Indian bioenergy conference, 4 senior participants highlighted the role that ethanol has to play in SAF production as a precursor via the Alcohol to Jet route.  A SAF sector may yet emerge in India by the end of this decade, but only if the anticipated regulatory support materializes.  

Biogas

India has a large and vibrant biogas sector, but only a small proportion is currently used as a transport fuel. Biogas for use in transport is called Compressed Bio Gas (CBG) in India, and it does benefit from India’s Compressed Natural Gas (CNG) sector, namely:

• India has one of the largest Compressed Natural Gas (CNG) vehicle fleets in the world, ranging from three wheelers, taxis, cars, buses, and commercial vehicles. Such vehicles are promoted both at a federal and state level to reduce air pollution, dependence on fossil fuel imports, and costs, with original equipment manufacturers (OEMs) incentivized to produce CNG variants of their vehicles.
• CNG benefits from preferential tax treatment vs gasoline and diesel that lowers pump prices by 30-50% vs gasoline and 20-30% vs diesel.
• The government is expanding the City Gas Distribution (CGD) network across the country. This includes a requirement for Fuel Suppliers to install CNG refueling stations at their sites if they are located in a CGD sector. Likewise, some states also require the installation of CNG refueling stations in areas with poor air quality (e.g. Delhi, Maharashtra, and Gujarat).

In addition to this “enabling” support, CBG receives the following specific support:

• The 2018 SATAT Initiative (Sustainable Alternative Towards Affordable Transportation) sets a target of 5,000 domestic CBG plants with an annual production capacity of 15 million metric tonnes (4.9 bgy gasoline equivalent) by 2025, which is around 40% of current CNG consumption.
• OMCs are mandated to purchase CBG from registered producers at a fixed price of 46-52 Indian Rupees ($0.50 – $0.60 USD) per kilogram.
• CBG receives additional preferential fuel tax treatments over CNG,⁴ that in turn has preferential treatments vs gasoline and diesel.
• There are capital subsidies and financial assistance for new CBG production plants.

Bottom line: While the volumes of CBG into transport remain small, the prospects for growth look good. Even so, meeting the 2025 target appears to be overly ambitious.

Conclusions and U.S. implications

India has significant biofuel (liquid and gaseous) potential both currently and into the future using advanced biofuel technologies.⁵ This is reinforced by strong political interest and ambition in the biofuel space driven by the policies concerning de-carbonization, energy security, and agricultural and rural community support.

To date, material progress has been made in those areas that are already price competitive with the fossil equivalent and can therefore compete without significant price subsidies or support (e.g., sugarcane ethanol and biogas). In contrast, biodiesel has struggled. As a still-developing country, India needs to balance ambition of supporting new growth areas, such as biofuels, with financial budgetary constraints and a desire not to pass on high costs to its large number of low-income groups.

Therefore, while India has strong ambitions on SAF and advanced biofuels, it remains to be seen whether sufficient incentives will be made available. India also has a track record of making progress towards mandated targets but not fully achieving them.

In terms of implications for the U.S. market, currently India’s impact on global biofuel markets is relatively minor, given it effectively excludes imports (i.e., bioethanol for fuel use⁶), and its small level of ethanol exports are primarily to African markets. Also, unlike China, India is not a UCO or other HEFA (hydrotreated esters and fatty acids) feedstock exporter.

In terms of import opportunities, given India and the U.S.’s adversarial relationship in the WTO, it would seem safe to assume more of the same – limited options. On the export side, both for feedstocks and products opportunities would appear to depend on India’s willingness and capacity to strongly incentivize growth in segments beyond sugarcane ethanol and biogas.