Earlier this year, India approved a sweeping update to its National Policy on Biofuels, which lays out an ambitious plan to substantially increase domestic biofuel production. Unlike the Renewable Fuel Standard in the U.S. or the EU’s Renewable Energy Directive, India’s biofuel policy update discourages food-based fuels, focusing instead on rapidly increasing production of second-generation biofuels made from wastes, residues, and inedible energy crops. The policy doubles down on India’s existing 20% blending mandate for ethanol established in 2008, and adds a supplemental, 5% target for biodiesel to meet by 2030. To overcome the barriers that prevented the original 2008 targets from being met, the new policy expands the scope of feedstocks eligible for biofuel production and provides stronger incentives for fuel producers. If the new policy is successfully implemented, then India could quickly become a global leader in cellulosic biofuels, eclipsing struggling second-generation biofuel industries in the West.
Concerns over food insecurity in India have traditionally made first-generation biofuels produced from food crops a political non-starter. This stance puts the country in a unique position, where it can potentially leapfrog first-generation biofuels, ensuring that that its biofuels come from sustainable wastes, residues, and energy crops with minimal indirect land-use change (ILUC) impacts and low greenhouse gas (GHG) emissions. India’s original 2008 Biofuel Policy supported the conversion of molasses (a by-product of sugar production) and inedible vegetable oils into first-generation ethanol and biodiesel. While the 2008 policy established aggressive targets, the actual implementation fell short: in 2018, India only achieved 3.2% ethanol penetration, far from the 20% target.
Several aspects of the proposed policy suggest that India has learned from the failures of advanced biofuel projects in the U.S. and EU, as well as the problems with its initial biofuel strategy. Notably, India will be pursuing several strategies to mitigate economic risk and policy uncertainty for biofuel producers, which together often hold back the success of pioneer advanced biofuel projects. On the supply side, advanced biofuel producers would be eligible for a variety of upfront incentives, such as grants, to offset the cost of new technology. The pot of money to support this incentive, or “viability gap funding”, would be equivalent to over $700 million over the first six years of the program and could provide up to 40% of a project’s costs. Furthermore, state-owned oil companies would be directly encouraged to set up their own advanced biorefineries, potentially producing approximately 700 million liters per year. On the demand side, to support the nascent industry, those state-owned oil companies will enter into offtake agreements with advanced biofuel suppliers for at least 15 years, ensuring a stable market for their products.
While the proposed policy has several encouraging design elements, there are still some reasons to question its likely long-term success. One of the reasons that India failed to meet the targets for its 2008 biofuel policy was the limited availability of molasses. While the new policy greatly expands the list of approved feedstocks, the development of supply chains to produce and collect these materials may present a new bottleneck for advanced biorefineries. Even agricultural residues, potentially the most widely available advanced biofuel feedstock, face logistical challenges in collection. Furthermore, the pot of money available for direct funding is likely too small relative to the cost of an advanced biorefinery. While India’s government estimates that a new, 35 million liter commercial-scale cellulosic conversion facility would cost around $120 million to construct, the limited data available on near-term projects suggests that the actual costs could be more than two or three times that amount. Furthermore, total available funding may only support a handful of projects in the entire country—far short of the total capacity needed to meet the target volumes for the policy. Lastly, pioneer facilities may take several years to ramp up production and develop supply chains even after construction is complete. Developing an entirely cellulosic biofuel industry from the ground-up may take longer than a decade.
A potential risk from the expansion of eligible feedstocks within India’s new biofuel scheme is the inclusion of surplus grains if they’re either inedible food waste or if the Ministry of Agriculture and Farmers’ Welfare determines that there’s an oversupply of food grains during a given production year. Ostensibly, this change is intended to create flexibility to use food crops when the risk of impacting food markets is low. However, in the biofuels world it’s never so simple. Surplus grains usually aren’t thrown away entirely—they can be used as livestock feed. Diverting those grains would create demand for grain production elsewhere in the world, reviving competition between food and fuel. Even assuming that the Ministry can accurately estimate the quantities of surplus grain in the economy—a tall order—this exception could create a loophole for the inclusion of food crops that may crowd out demand for other feedstocks with better environmental attributes.
To generate meaningful investments and demand for cellulosic biofuels, India must minimize the ILUC and food security risks posed by the surplus grains provision of its policy—otherwise, it may head down the same track as other countries and lock in an overreliance on food crops. If the surplus grain provision is tightened and the financing and supply challenges of new cellulosic biofuels projects can be worked out, the GHG benefits of India’s new policy may be substantial. It appears that the Indian government has developed a biofuel policy that prioritizes the best-performing categories of feedstocks and seeks to provide political and economic stability for advanced biofuel producers.