Vegetable Oil Based Biofuels in India

This paper addresses two key questions: What is the economic potential of biofuel development in India? And what are the obstacles to this development? The paper traces the economics at each stage in the production chain – from harvesting to processing to transportation.

Amidst rising energy prices and on-going threats to the global environment, consumers, producers and governments across the world are searching for viable alternative sources of energy.  Biofuels represent one such alternative.  Biofuels are substitutes for fossil-based liquid fuels typically produced from agricultural crops.  The two main types of biofuels, ethanol (a substitute for gasoline) and biodiesel (a substitute for diesel) have gained widespread acceptance in developed country markets, particularly the US and European Union.

The paper provides an overview of the industry’s economics and details the requirements at each stage of the value chain for the industry to reach its potential. It also shows how the vegetable oil biofuels sector can provide substantial benefits to the rural poor in India while addressing the risks and threats of the biofuel industry development.

EXECUTIVE SUMMARY

Key Conclusions about the Investment Climate:

A review of the industry economics and value chain below demonstrates that biofuels in India can provide substantial benefits for the rural poor by:

1. Delivering lower cost energy: Biofuels can be 12-32% less expensive, offering substantial savings to consumers who use conventional diesel.  For example, farmers using diesel irrigation pumps could save as much as RS 1,500 for each acre of irrigated land
   
2. Generating earnings of RS 5,000-10,000 per acre in peak cash profits for smallholder growers and up to 325,000 person days of work for every 5,000 hectares of feedstock grown.
   
3. Improving the rural environment / air quality and thereby reducing the number of respiratory illnesses caused by harmful emissions.

Yet significant risks exist at both the industry and company level:

Industry level concerns:

1. A recent government mandate fixed the price of biodiesel below the industry’s current cost of production, stalling all sales of biodiesel.  There is no clarity on when the mandate may be relaxed or if it may applied to other types of biofuels such as straight vegetable oil.
   
2. Demand for vegetable oil feedstocks from export markets could limit the availability of feedstocks to producers serving the domestic fuel market.
   
3. Widespread development of the biofuels sector could diminish important resources for food-based agriculture, including land and water.

Company level concerns:

1. All of the firms in the sector are still in the start-up / development stage and many have yet to prove their capability to achieve the necessary crop yields and quality of end-products that will be essential to financial sustainability.
   
2. Most of the start-up companies interviewed for this report have not developed a compelling plan for how they will serve the base of the pyramid and most have not developed a complete distribution strategy for their end products.