Author: cprindia

The State Capacity Initiative at the Centre for Policy Research (CPR)’s talk series titled: ‘Know Your Regulator’ is held in collaboration with the National Council of Applied Economic Research (NCAER), the Forum of Indian Regulators (FOIR) and the Indian Institute of Corporate Affairs (IICA). In this talk series, we are talking to chairpersons and members of India’s regulatory agencies about regulation of Indian markets and the economy.

Our guest for the fourth event in the series was Mr P.K. Pujari, Chairperson, Central Electricity Regulatory Commission (CERC).

He was in conversation with Ms Arkaja Singh, Fellow, CPR, Dr Abha Yadav, Associate Professor, IICA and Director, FOIR Centre at IICA, and Dr Ashwini K Swain, Fellow, Initiative on Climate, Energy and Environment, Centre for Policy Research.

Dr Mekhala Krishnamurthy, Senior Fellow, CPR and Ms Amrita Pillai, Consultant, IEPF Chair Unit on Regulation, NCAER made welcome remarks.

The event was held on 20 December 2021, and a full video recording is available above.

Here is a summary of the conversation:

Background, role and purpose of CERC

CERC was setup with a purpose to distance the government of the day from getting into running the power sector. From 1991, power generation was opened to accommodate private participants and dealing with these private players on commercial issues was not within the government’s expertise. This led to the creation of a regulator. Subsequently, in 2003, the government distanced itself from tariff setting and other commercial aspects of the power sector. The mandate of the regulator is very clear: CERC is an independent regulatory body, but it must work within the framework of the Electricity Act.

CERC frames its own regulations, and the objective is to strike a balance between the suppliers and the consumers. In the process, CERC’s role is to ensure that the cost of electricity is recovered in an affordable manner and that competition and efficiency are brought into the system.

Dealing with the transition to renewables

The power sector all over the world is undergoing a tremendous change because of the introduction of renewables. The regulator needs to keep itself abreast with these developments and create a legal framework that enables and facilitates the changes that the sector is experiencing. In India, the government has announced setting up of large-scale renewables with a capacity of 480 GW. The biggest challenge that the CERC faces at this time is to integrate this into the Indian grid. Battery and hydrogen alternatives are also showing a promising potential.

This has regulatory, commercial and operational aspects. The regulator needs to keep itself abreast of these developments and develop a legal framework to facilitate these changes. The regulator also needs to be able to anticipate what changes are going to happen, and create the necessary background so that they can be assimilated into the system.

CERC might frame regulations facilitating integration of renewables into the system but how does it play out in practice? CERC needs to address technological operations that involve forecasting and scheduling issues as well. The grid operator must upgrade itself but how can CERC facilitate this transition? These functions are not visible to the public. The public only know the generation and distribution part of the sector, but operating the grid is not something people see. It takes a lot of effort to manage the grid. EVs are coming up and those challenges needs to be addressed too. CERC must be prepared to facilitate these developments; it must also prepare the grid to absorb the changes without disruption. When we discuss market turbulence, market monitoring and new emerging trends are where the issues begin. CERC must be very quick to develop capacity in those areas. Either we recruit people, or we have in-house capabilities, and CERC usually takes a call on how to upskill its employees. But the nature of the requirements keeps changing and this is another challenge.

CERC is mandated to promote competition and increase the efficiency. The body also advises government on the removal of institutional barriers to bridge the demand and supply gap, and therefore to foster and develop the interest of the consumers. Has the CERC been able to fulfil this mandate for its consumers?

As far as bulk power generation is concerned, there are two ways in which we determine the cost. The Electricity Act provides for either the cost-plus approach, which means that, for example, for an NTPC plant, you determine the capital cost and tariff. Or you can have a competitive bid through which price is discovered. This is more appropriate when there are private sector generators. But it is not as if only the second approach is competitive. In the first one too, it is the job of the regulator to determine efficiency parameters and mimic the market in fixing tariff. So it is not that the cost-plus approach is based on actual expenses. Over the years, the regulator has had to analyse and find the most efficient norms. In either of these ways, what the regulator does is to discover the tariff that is competitive.

Electricity is a concurrent subject and the state regulators set the distribution tariff that is paid by the consumer. State regulators determine the tariff of distribution of power within the state. They take the price set by the central regulator (both through costless and competitive bid), add the transmission charges (determined by the central regulator) and once the cost is fixed, they fix the tariff for the utilities and this final cost is passed to the consumers. So, the benefit of efficiency that finally reaches the consumer is through both the central and state regulatory levels. The CERC is a central regulator and does not directly deal with consumer tariff. But CERC’s generation cost becomes a bigger input in consumer tariff, and the regulator is fully responsible for discovering tariff that is competitive. The approach that CERC takes is to fix the tariff within competitive and tight normative parameters, discover tariff through competitive bidding and make sure that the transmission system is planned in an efficient manner so that there are no strained assets, and lastly, ensure that the efficiency is passed on to the consumer. The bidding guidelines, based on which the competitive bidding takes place, are framed as per the Electricity Act. Over the years, solar prices have been reducing sharply after competitive bidding, and regulators have to see the benefits of these falling tariffs are also passed down to the consumer. This is the broad framework under which CERC makes sure that the efficiency, economies of scale and competitiveness of those tariff gets passed on to the consumer.

CERC’s legislative, executive and adjudicatory powers

CERC has powers that are quite similar to legislative powers; the regulator frames regulations and places it in the Parliament. The regulations made by CERC are adjudicated based on the Electricity Act and the regulator also adjudicates on its own regulations and in that, it functions like a civil court. The CERC also does operations functions. It is a whole system operator and thinks about how systems function and does transmission planning, which is almost like an executive function. The CERC as an organisation has all the three elements of legislative, judiciary and executive functions. The need of the organisation is not specialization in one part; for electricity is the sector where there is techno-commercial economics. Every technology has its own commercial use. Finance, technology, and legal components are important in decision making. So, there is a need to ensure that CERC has enough expertise in these areas. This is a challenge since it is difficult to get competent people in all the three areas. Being in the electricity sector, people with technical backgrounds understand finance and law easily. CERC also has in-house people who acquire capacity and contribute to the government’s decision making. The regulator has autonomy to the extent that it does not report to the ministries but there are general financial guidelines under which the body requires governmental approvals. The CERC does not depend on the government budget and there is financial independence since we have charges and fees. The Act also defines the nature of our independence. If the Act is followed in true spirit, there is enough independence. The government can give directions to the central regulator, but the regulator is not bound by their advice. They also cannot issue guidelines specific to commercial or tariff issues. There is also a provision where CERC can advise the government on competition and market regulation; these are not binding on the state governments. We are independent but we are guided by the national policies; the jurisprudence is very clear on what is meant by guided and what is mandated.

The Kerala High Court described the domain of regulation as “unfathomable ocean of technical gobbledegook”. One of the key features of a regulatory authority is to be able to respond to complex technical demands in a rapid timeframe. The that is not all, CERC also has considerable legislative, executive and adjudicatory power. In what ways is the exercise of power by a regulator distinct from what you would do in the ministry, and can you explicate what the term regulate means in the context of CERC?

The role of the ministry is to make broad policy framework; the Electricity Act provides tariff policy, national electricity policy etc. The ministry gives policy guidance for the sector and the regulator is guided by that policy framework. The regulator works on the nitty gritty functions of the Act. For example, if we say that there is 450 GW of renewables, that is a policy statement. To do that, the ministry may take a document and ask us to setup a solar generation project, but the regulator needs to think about how this gets integrated within the larger framework, commercial issues involved in the contract, etc. CERC’s regulations comes into the detailing of all these activities. Its regulations promote implementation of policy.

The judgement you refer to of the Kerala High court is about a simple order relating to transmission. There is a transmission network in the country, but you can’t identify the exact line that goes to a specific consumer. How do we account the cost for this and how do we regulate? We found out that X amount of money needs to be recovered from the consumer. It flows from the policy that money needs to be recovered but how do we apportion the cost? Should it be based on usage? Should it be based on distance from the generating system? This is what CERC determines. We frame regulations to figure out the percentage cost for reliability and security; we also determine the x% that is a national component, the x% that is a regional component and how we estimate components becomes complex. The nitty gritty of translating policy and making it workable is CERC’s job. A lot of detailing takes place and CERC’s underlying policy is to do it in an equitable, affordable, fair, and efficient manner.

How is CERC’s adjudicatory powers different from what the judiciary does?

CERC’s adjudicatory powers are derived from the Electricity Act. The Supreme Court recently pronounced that composite schemes fall under the domain of the CERC. A private or government generating station supplying to more than one state comes under the CERC. Transmission is a monopoly, and it comes under the CERC as well. Intra-state generation and intra-state transmission is investigated by the CERC. Any contractual issues are adjudicated by CERC, and the regulator has its own procedure, it has the powers of the civil court and follows the process of the civil courts. We adjudicate disputes and we also investigate tariff setting issues in the same manner we resolve disputes. Adjudication comes in when there are issues of power supply agreement or when there is a force majeure issue, we adjudicate for the provision in the contract based on the law prevailing and whether the parties can claim for compensation or additional costs for recovery etc. We follow the basic principles of adjudication; we issue orders, and our orders are self-speaking. In the earlier days, all entities were government entities and there were very few disputes.  Today, there are many private entities, and these issues are very important since huge amounts of commercial stakes are involved. Our intention is to adjudicate these issues in a fair and quick manner. We also investigate how many of our orders are appealed and how many of our orders the courts have set aside etc. Usually, our orders are very good. Parties do look up to us since we provide a quicker way of resolving issues, and both the distribution utilities and generating utilities accept our judgements.

How does CERC integrate the market at a national level and how does it help consumers in tariff and supply reliability?

One can have a power plant purely as a merchant power plant. One can go anywhere else in the market for power exchange. This is delicensing. Transmission is a natural monopoly; we will not have competition in this space. Earlier all the transmission lines were built by power grids belonging a common entity but now these lines are bidded out and then private players who build these lines, operate, and maintain them for 35 years. We license them so that they can run and manage those lines. In the last 2-3 years, close to 50% of transmission assets have been bidded out. In the distribution part, utility will not have competition, but the point is who manages the distribution. The issue is about bringing in efficiency in the delivery of these services.

One issue we thought about was the carriage and content separation. In distribution, we take the lines part and make it a separate company. For example, the Central Transmission Utility is the monopoly in transmission, and we allow entities to supply in that line. The lines remain as monopolies. Recently there was a talk about delicensing distribution utilities but again switching over form one supplier to another is difficult because of the way in which the Act stands and hence, there is limited competition on this side.

There are other developments which need to be looked at: traditionally we have long term Power Purchase Agreements (25 years) but now because of the dynamics within the power sector there are not many takers for long term PPAs. In the long term, if you look at the distribution utilities, even the good utilities in the states of Gujarat, Maharashtra and Tamil Nadu can lock in 40-50% in long term PPAs, 30% in medium term PPAs (3-5 years) and for the rest 10-20% they can look to the short-term market. The whole load curve is changing and if you lock into long term PPAs you don’t have that flexibility. This is happening now. The demand for the market will grow and because of necessity, we will go to the market and buy.

CERC’s job is to facilitate market operations. We have different types of products; our term end market was limited to 11 days but now we are going for products with longer periods, and we will have contracts of 3 or 6 months. Everyone is looking at flexibility and managing their portfolios in an efficient manner, rather than locking into a contract for the long term and paying unnecessarily. Second, the scheduling that takes place on a PPA basis sometimes doesn’t optimise the power sector. For example, if I don’t schedule cheaper power the gain to the system is minimised. Market based economic dispatch (MBED) says that instead of every individual player scheduling power based on their contract, we can pull everything together and put it in the market to schedule it. The schedule is done from cheaper to higher cost and cheaper power is dispatched 100% so that there is efficiency gain in the system.  This is the basic concept behind MBED.

The challenge is implementation. Not technology implementation, but that the Discoms are the larger buyers and have to agree to go out of the PPAs and go to the market. There is a financial issue, because once you go to the market you have to pay upfront, so they have to have the resources. A lot of effort is being made by the ministry and by us so that we proceed in that direction. It is a slow process, we have floated a paper, a lot of comments have come, we have been discussing with stakeholders. My understanding is that it will happen. Security Constrained Economic Dispatch has been happening for the last 1.5 years, that is a precursor to MBED.

This is very important because 80% of the tariff we pay as consumers is the bulk power cost, and this will bring down that cost. However, the challenges are also political. The way electricity has developed, we treat states as islands of electricity grid, and there is a state-level sense of energy security. But moving to integrated market is a necessity for the future.

The Draft National Electricity Policy discusses the need to shift to light touch regulations. There is a transition happening in the sector. Supply and demand were predictable but now with renewables and various behind the meter interventions, demand is going to be variable. We are also moving away from a control to a market-based economy. Given all these changes, what does light regulation mean? Will there be a reduced role for regulators, or a more substantive role?

In the value chain of electricity, generation is the first point. The main cost is the generation cost. If you go through the process of competitive bidding, it is much easier. You go through a guideline, bid document, follow a process, and discover tariff. You ensure that the process is fair and transparent. The difficulty comes in the cost-plus tariff setting, since you must discover the tariff based on ‘n’ number of factors which is time consuming. Initially, we thought that we will do away with the cost-plus efforts and move into competitive bidding, but we realised that we cannot do away with one option. Today, instead of a deterministic approach, we are thinking to build normative parameters and then determine some benchmarks to set the tariff. For example, there are ‘n’ number of NTPC plants with various sizes and types and if we can determine O&M expenses based on size and capacity as a formula, it will be easier to add weightage. Can we also have an average normative number for capital cost? Everything is much more predictable in these situations when the norms are fixed. But we cannot make a norm for 10 years and go to sleep, this needs to be updated. For this, the regulator needs to be much more sensitive to what is happening in the market.

Another point is that today we have multi-year tariffs. We notify norms applicable to whichever power plants come in and are operating during a 5-year period. There is some regulatory certainty. We notify it before the tariff period kicks in, so everyone knows about it and this makes everything simpler. We cannot do away with regulations, but we can make them more normative, predictable, and this will certainly reduce the burden on the regulators and uncertainty for the other entities. This is our effort, but we have a long way to go because fixing up normative numbers is a difficult task.

What is CERC’s role in making sure there is universal access to electricity? How does CERC do advocacy and engage with the public?

The Act itself provides for various advocacy roles for the state regulators, and state regulators deal with the retail consumers and their awareness campaigns. The PSU generators like NTPC also do their own awareness campaigns as part of their CSR activities.

Our role in awareness generation is limited because we are not dealing with retail consumers. However, at our level, public engagement in regulation-making is something that we promote and encourage. For any regulations we make, we do engage with the expert bodies. Secondly, we take out a staff paper and ask for public comments. Thereafter, we consider those public comments. Then we make a draft regulation, and we ask for comments on the draft regulations and do a public hearing, and then we finalise it. The whole process is transparent, and we value the comments we receive.

In cases where larger public interest is involved, we allow certain non-governmental bodies to participate in the hearing. They bring the other side of the picture, or the counter point. We have recognised some NGOs and they are expert bodies. We also have interactions with various associations and societies who are active in the field of power sector.

But if you look at the level of engagement in regulation-making it is quite surprising and effective. We recently made a special provision for waste-to-energy plants – there are only 5-6 plants in the country, but we want to encourage them, so we made a special provision. We received comments from people who had read very clearly and made comments.

Access all events as part of the Know Your Regulator series:

• Why you should ‘Know your Regulator’?
• ‘Know Your Regulator’ Event 2: Ms Rita Teaotia, Chairperson of the Food Safety and Standards Authority of India (FSSAI)
• ‘Know Your Regulator’: Mr Navreet Singh Kang, Chairperson of the Real Estate Regulatory Authority (RERA), Punjab

All in all, then, there would be some 4.5 million families – farmers and workers – dependent on sugarcane in UP. Inclusive of their members (4-5 per family), it would add up to 20 million persons. That works out to over 8% of UP’s total estimated 240 million population – in other words, one in every 12 persons in the state!

It’s not difficult to understand why sugarcane is so ubiquitous in UP. Virtually the whole of northern UP is a Ganna Pradesh. That encompasses the districts of the state’s North-West (Saharanpur, Shamli, Muzaffarnagar, Bijnor, Baghpat, Meerut, Ghaziabad, Hapur, Amroha, Moradabad, Bulandshahr, Sambhal and Badaun), North-Central (Rampur, Bareilly, Pilibhit, Shahjahanpur, Lakhimpur Kheri, Hardoi, Sitapur and Barabanki) and North-East (Bahraich, Balrampur, Gonda, Ayodhya, Ambedkar Nagar, Basti, Gorakhpur, Maharajganj, Kushinagar and Deoria) regions. Ganna Pradesh is essentially the northern half of UP, above Mathura-Aligarh, Lucknow, Amethi-Sultanpur and Azamgarh.

What is so unique about Ganna Pradesh making it suitable for sugarcane cultivation? Sugarcane, we know, requires more water than most other crops, the primary reason being its long duration of 11-12 months. Cane in UP is grown in the Upper Doabs – the lands between its great south-flowing rivers. Thus, the North-West ganna belt covers the riverine plains between the Yamuna, Ganga and Ramganga; the North-Central Doab is between the Ramganga, Gomti and Sharda-Ghaghara; and the North-East between Sharda-Ghaghara, Rapti and Gandak extending to Bihar.  The lands between these confluent rivers have extremely fertile alluvial soils, not to mention water, ideal for ganna. Unlike with Maharashtra, Karnataka or Tamil Nadu, water has not been a limiting factor in Ganna Pradesh, while also reinforced by a network of canals built from British colonial times. These include the Eastern Yamuna and Upper Ganga canals irrigating the North-West districts, the Sharda Canal in North-Central and the recently-inaugurated Saryu Canal project interlinking five rivers (Ghaghara, Saryu, Rapti, Banganga and Rohini) of North-East UP.

Ganna Pradesh’s potential, however, wasn’t really exploited till around 2004, when the then Mulayam Singh Yadav government in UP came out with a Sugar Industry Promotion Policy. Under it, a host of incentives were offered for establishing new or expanding existing mills: 10% capital subsidy on investment; exemptions from stamp duty and registration charges on land purchase, entry tax on sugar, purchase tax on sugarcane and trade tax-cum-administrative charges on molasses; and reimbursement of costs of transport of sugar up to 600-km distance, transport of cane from out-centres to factory gate and cooperative society commission on purchase of cane. The incentives were made available for a period of 5 years if companies invested a minimum of Rs 350 crore and 10 years for those investing more than Rs 500 crore.

Although most of the above sops never got delivered (https://indiankanoon.org/doc/107057029/), the policy induced large-scale investments in both greenfield and brownfield milling capacities. Till 2003-04, the total crushing capacity of UP’s mills was below 400,000 tonnes of cane per day (tcd). Today, the state has 120 mills with aggregate capacity of 787,275 tcd (see table below).

Region-wise capacity of sugar mills (tcd)

*Includes one 5,000 tcd mill in Ghaziabad; **Includes one 1,250 mill in Aligarh;

***Includes one 3,500 tcd mill in Kasganj; @Includes one 1,250 tcd mill in Farrukhabad;  @@Includes one 1,250 tcd mill in Sultanpur; @@@Includes one 3,500 tcd mill in Azamgarh and one 2,500 tcd mill in Mau.

Wonder variety

The second major breakthrough took place with the commercial cultivation of Co-0238, the blockbuster variety developed by Dr Bakshi Ram, former director of the Indian Council of Agricultural Research’s Sugarcane Breeding Institute at Coimbatore. Till 2012-13, this variety, officially released in 2009, was being grown only in select farmers’ fields under evaluation trials by the Indian Sugar Mills Association. In the 2013-14 sugar year (October-September), Co-0238 was cultivated on a full scale in 72,628 hectares across UP. From virtually nothing, its share in UP’s total sugarcane area rose to 3.09% in 2013-14, 8.30% in 2014-15, 19.64% in 2015-16, 35.49% in 2016-17 and 52.55% in 2017-18, and further to 69.02% in 2018-19, 82.21% in 2019-20 and 86.7% in 2020-21.

Co-0238 had two game-changing characteristics.

The first was its being an early-maturing variety. “Early-maturity” referred not to the crop’s duration per se, but to sucrose accumulation. UP farmers mostly plant sugarcane during February-April and it is ready for crushing in 11-12 months. From this harvested plant-cane, there is also a 9-11 month “ratoon” crop that sprouts automatically from its stubbles. The ratoon cane is what the mills first crush from November. Harvesting of the plant-cane happens after mid-January. The advantage with early-maturing varieties is that sucrose accumulation reaches 13-13.5% in the ratoon cane by November itself and by mid-January for the plant crop. This isn’t so with “general” varieties, where the same peak sucrose levels are obtained only after mid-December in the ratoon and from March for the plant-cane. Early-maturing varieties basically enable mills to achieve higher sugar recoveries right from November through the crushing season till April-end.

The table below shows how the average sugar recovery from cane crushed by mills in UP has gone up – from just over 9% to 11.5% over the last 10 years. This is largely courtesy of Co-0238. UP has, since 2016-17, even overtaken Maharashtra as India’s top sugar producer. Moreover, the average recovery rate recorded by its mills is today above that of Maharashtra (not all of the sucrose in cane is extracted/crystallized as sugar; the unrecovered part goes into the molasses used by distilleries).

The Big-Two: UP versus Maharashtra

*Sugar recovery is lower at 11.46% in 2018-19, 11.30% in 2019-20 and 10.76% after accounting for diversion to B-heavy molasses. Maharashtra’s recovery rates shown factor in such diversion.

But it’s not only mills that have benefitted from Co-0238. That links up with its second significant transformative impact. Prior to Co-0238, all cane varieties grown in northern India were “medium-thin”, with the average diameter of their sticks at 2-2.25 cm each. Co-0238 was “medium-thick”. Its individual cane sticks had a diameter of 2.5-2.75 cm. While increased thickness conferred greater yields, it could potentially also result in lower sugar recovery. The breeding challenge lay in breaking this negative correlation: The need was for a medium-thick variety giving higher yields to growers and simultaneously accumulating more sucrose for mills to recover early in the crushing season and through the winter.

That’s where Dr Bakshi Ram’s variety made all the difference. Water may not have been a limiting factor for cane in UP, but the winters were always so. Sugarcane has traditionally been viewed as a tropical crop requiring sunshine as much as water for both yields and sugar recovery. That limiting factor was circumvented through Co-0238 – proof of it being average cane yields in UP rising from below 60 tonnes to 80 tonnes-plus per hectare over the past 10 years. The extra 20 tonnes yield, thanks to Co-0238, would have considerably offset the effects of only marginal hikes in cane price – from Rs 315 to Rs 350 per quintal since 2016-17 – and steep jump in diesel, electricity, fertilizer and crop protection chemical costs. For mills, the extra 2 kg or so of sugar produced from every quintal of cane has been an unequivocal blessing. On the 110 mt of cane crushed annually by them, the additional revenue from 2.2 mt of extra sugar at Rs 30/kg average realization comes to Rs 6,600 crore!

One must mention here one other reason for cane yields going up in UP. It has to with farmers adopting trench planting – preparing raised beds on fields and sowing the cane seeds (‘setts’) on the furrows at 4-5 feet row-to-row distance. This technology – as opposed to conventional flat-bed planting at narrow 2-3 feet spacing – has led to better tillering and the canes coming out longer and thicker, besides making it easier to give water, fertilizers and crop protection chemicals through the furrows. Co-0238, in combination with the spread of trench planting and wide-row spacing, has brought about a revolution in the ganna fields of UP. Many farmers are also taking advantage of the wider space available between rows to plant short-cycle crops on the raised beds. These crops mature within four months, while the cane planted on the furrows continues to grow even after they get harvested (https://bit.ly/3mTTr3m).

Average cane yield in UP (tonnes per hectare)

Biofuel bonanza

A more recent boost to UP’s sugar industry has come from the Narendra Modi government’s National Policy on Biofuels unveiled in May 2018 – and, more significantly, the institution of a differential pricing regime in ethanol used for blending with petrol. Since 2018-19, mills are being paid higher rates for the ethanol that they produce from ‘B-heavy’ molasses and cane juice, than through the conventional ‘C’ molasses route.

Mills typically crush cane with 13.5-14% TFS or total fermentable sugars content (TFS includes sucrose and reducing sugars, namely glucose and fructose). From every tonne of cane, they recover around 115 kg (11.5%) sugar. The un-crystallized, non-recoverable TFS (2-2.5%) goes into ‘C’ molasses that yield about 10.67 litres of ethanol on fermentation. Alternatively, they can extract, say, 10% sugar and divert the 1.5% extra TFS into an earlier ‘B-heavy’ stage molasses yielding some 19.42 litres of ethanol. A third option is to not make any sugar and ferment the entire 13.5-14% TFS to produce roughly 76 litres of ethanol.

By fixing higher prices for ethanol derived from fermentation of whole sugarcane juice/syrup and the intermediate ‘B-heavy’ stage molasses than from ‘C’ molasses (see table below), mills have an added incentive now to put up new distillery capacities. Producing more ethanol from the first two routes has also reduced their dependence on revenues from sugar. In 2019-20 and 2020-21, mills grossed Rs 7,823 crore and Rs 13,598 crore, respectively, from ethanol sales to oil marketing companies (OMCs). Further, it enabled them to divert an estimated 0.8 mt and 2 mt equivalent of sugar in these two years.

Ex-mill price of ethanol in Rs per litre

Note: Ethanol supply year is from December to November.

The adoption of differential pricing has led to the supply of ethanol by mills to OMCs increasing, from a mere 38 crore litres in 2013-14 and 66.5 crore litres in 2016-17 to 255 crore litres in 2020-21. Much of this has come from ‘B’ heavy molasses, with the share of direct cane juice/syrup, too, set to surpass that of ‘C’ molasses in 2021-12 (see table below). In the current year, ethanol supply by mills is expected to cross 350 crore litres, while diverting up to 3.5 mt of sugar towards ethanol produced from ‘B-heavy’ molasses and cane juice. The ethanol-blending target of 10% also looks achievable in 2021-22, as against the all-India average of 8.1% in 2020-21, 5% in 2018-19, 2.07% in 2016-17 and 1.53% in 2013-14. The Modi government is aiming at diversion of 6 mt sugar annually by 2025, as part of its ambitious 20% blending plan. That should further bring down the industry’s reliance on sugar sales and improve the capacity of mills to make timely payments to cane growers.

Supply of ethanol under blending programme (in crore litres)

*Broken/damaged rice and maize; **Contracted so far.

The National Policy on Biofuels has stimulated huge investments in ethanol production capacities by UP’s sugar mills, reminiscent of the boom in the early 2000s. That one, we saw, involved the creation of milling (as against distillery) capacities following the then state government’s Sugar Industry Promotion Policy. Between 2016-17 and 2020-21, ethanol production in UP has more than doubled from 42.70 crore litres to 99.31 crore litres. The total number of ethanol distilleries and their annual installed capacity, too, has gone up from 38 and 87.05 crore litres to 55 and 166.17 crore litres, respectively. UP has become India’s leading ethanol producer, while also achieving the highest blending-in-petrol ratio among all states.  That, at close to 10% (see table below), is already the level targeted for all-India in 2021-22!

Ethanol blending % achieved*

*For 2020-21 (Dec-Nov) till 14.11.2021.

Many leading sugar industry groups of UP have undertaken major investments in ethanol distillery capacities in the last 2-3 years and proposed further expansions within the next one year.

Balrampur Chini Mills, in January 2020, commissioned a 160 kilo-litres per day (KLPD) distillery at Gularia (Lakhimpur Kheri), taking its total capacity to 520 KLPD. Subsequently, it announced the expansion of both its Balrampur and Gularia distilleries (by 170 KLPD and 40 KLPD, respectively), plus a greenfield 320 KLPD distillery at Maizapur (Gonda) to produce ethanol directly from cane juice/syrup during the crushing season (November-April) and from grains (broken/damaged rice and maize) in the off-season. All these projects, more than doubling its capacity to 1,050 KLPD, are slated for completion by November 2022. DCM Shriram Ltd, likewise, commissioned a 200 KLPD distillery at Ajbapur (Lakhimpur) in December 2019, adding to its existing 150 KLPD facility at Hariawan (Hardoi). Next on the anvil is a 120 KLPD distillery at Ajbapur that can use grain as feedstock, taking the unit’s total capacity to 320 KLPD. Triveni Engineering & Industries, too, doubled its ethanol capacity to 320 KLPD through a new 160-KLPD distillery at Sabitgarh (Bulandshahr) in April 2019. Two more – a 160 KLPD molasses/cane juice distillery at Milak Narayanpur (Rampur) and another 40 KLPD grain-based at Muzaffarnagar – are to be operational before the 2022-23 sugar season.

With the Ministry of Road Transport and Highways notifying the mass emission standards for 12% and 15% ethanol-blended petrol in October 2021 (https://bit.ly/3eS9cn1), the stage has already been set for the manufacture of E12 and E15 compliant motor vehicles. The UP government can, perhaps, take the lead in enforcing 12% and 15% blending for new vehicles within the state. This makes sense, especially when Ganna Pradesh is well poised to be India’s ethanol hub with all its cane, sugar mills and distilleries. 12%, 15% and 20% blending (all vehicles produced after April 2023 are supposed to be E20 compliant) is worth pursuing first in UP, Maharashtra and Karnataka rather than in the states that cultivate little or no cane!

The road ahead

Sugarcane requires more water than most crops (see table below). This is mainly because it is grown over 11-12 months, compared to 4-5 months for paddy or wheat. Also, the worst sugarcane grower will harvest at least 40 tonnes per hectare – UP’s average is two times that – whereas the best wheat and paddy farmers’ yields are 7-9 tonnes/hectare. Sugarcane consumes less water per day and even less for every unit weight of biomass produced. That has to do with it exhibiting ‘C4’ photosynthesis, a more efficient mechanism of deploying solar energy to convert atmospheric carbon dioxide and water into plant matter than the common ‘C3’ photosynthetic pathway (https://bit.ly/3qOX1gr). Sugarcane is one of the world’s few ‘C4’ crops – along with maize, sorghum and tropical grasses.

Water requirement for different crops (millimeters over growing period)

 Source: http://agropedia.iitk.ac.in/content/water-requirement-different-crops.

Mother Nature has, in a sense, already made sugarcane highly efficient at carbon sequestration and a prolific biomass producer.  Its green top leaves supply much of the fodder needs of UP farmers’ cattle and buffaloes during the winter and spring months. This is before straw and stover becomes available from wheat in April-June and jowar/bajra in July-October.

It is necessary to also note that cane contains around 70% water and 30% solids, the latter comprising 14-15% each of sugars and fibre. The high water and fibre content in cane allows for sugar to be a unique industry generating its own steam and power requirement. This, again, is on account of biomass, which is nothing but stored energy from photosynthesis that gets released as heat on burning. The high-pressure boilers used in modern sugar mills can generate around 130 kilowatt-hours of electricity from every tonne of cane (i.e. 300 kg bagasse or 660 kg steam). After deducting 25 units of in-process consumption by the mill and another 11-12 units of auxiliary consumption in the boilers/turbo-generators, about 95 units is exportable to the grid. Not for nothing that Balrampur Chini alone has a total installed cogeneration capacity of 278.47 megawatts (MW) at its 10 sugar mills in UP that can together crush 76,500 tonnes cane per day. Out of the 278.47 MW, as much as 168.70 MW represents saleable cogeneration capacity. DCM Shriram’s four mills of 38,000 tcd, similarly, have a combined cogeneration capacity of 141 MW, of which 84 MW is exportable.

As regards water, we have already noted that it accounts for 70% of sugarcane by weight. Out of that 70%, 15% goes into bagasse (the fibrous residue burnt as fuel in the boilers), 5% each into molasses and press mud, and 25% used during crushing/juice extraction and lost due to evaporation. That still leaves 20% surplus water from the cooling towers/spray pounds, which can be treated for use in irrigation. Sugarcane is, thus, a source of both surplus energy and water even after processing in mills.

The challenge next is how to make sugarcane part of a circular economy, wherein it gives back to nature what it takes, to the maximum extent possible. For farmers, ganna is both a cash and fodder crop, the cane being sold to mills and the tops fed to their animals. Ganna’s potential as an energy crop – producing sugar, ethanol and power – is also being harnessed by UP’s mills.

But it doesn’t stop there.

The press mud from mills – the residue cake after clarification and filtration of sugarcane juice – is used as a fertilizer, being rich in organic matter and also containing some nitrogen, phosphorus, potassium, calcium and magnesium (https://bit.ly/3HyND7o). Mills supply the raw press mud (about 3 tonnes is produced from every 100 tonnes of cane crushed) to farmers, who apply it in the soil after composting. A more recent initiative has been to use press mud as a feedstock for production of biogas using anaerobic digesters. The raw biogas is, then, upgraded to more than 95% methane content (after removing carbon dioxide, hydrogen sulphide and other impurities) and compressed for filling in storage cylinders (cascades). This final product – BioCNG – can be utilized as green fuel, whether for automotive, domestic or commercial application. The residue sludge coming out from the digester after extraction of biogas is a source of liquid fertilizer and organic manure (https://bit.ly/3JE8xUi and https://bit.ly/32TyvTh). In August 2021, a 9 tonnes-per-day compressed biogas plant of Indian Potash Ltd at Rohana Kalan in UP’s Muzaffarnagar district was dedicated to the nation by Prime Minister Modi. The gas produced by this plant is being marketed by three retail fuel outlets of the Indian Oil Corporation in Muzaffarnagar (https://bit.ly/3qWDkDv).

Another useful byproduct and potential fertilizer source is the spent wash from distilleries. This liquid effluent generated during alcohol production can pose serious environmental problems, if discharged into land and water bodies without proper treatment. There is, however, technology now  to simply concentrate the spent wash to 58-60% solids and feed it along with bagasse (as supporting fuel in 70:30 ratio) into an incineration boiler. The resultant ash coming out from the boiler in dry form has been found to contain up to 28% potash and 16.5-21% when converted into granules. For a country fully dependent on potash imports, this alternative production route can supply over a tenth of its consumption of the nutrient (https://www.aidaindia.org/Presentations2019/Delhi/Dr.%20Arvind%20Krishna.pdf). The Centre has even notified Potash Derived from Molasses (containing 14.5% of the nutrient) as a fertilizer and included it under the nutrient-based subsidy scheme.

UP’s sugar industry is today at an inflexion point where it can harness the full potential of ganna that engages almost a tenth of the state’s people. Co-0238 is evidence of what varietal breeding can do for cane yields and sugar recoveries. There is tremendous scope to also grow the crop in an environmentally-sustainable way using less water and giving back to Mother Nature what is taken from it. Mills in UP have gone beyond sugar to producing ethanol, cogeneration power and organic fertilizers. With forward-looking government policy, whether on biofuels or transparent formula-based pricing of cane (linking it to realizations from sugar and by-products), Ganna Pradesh can do much better than Brazil!

This note, part of the Understanding the Rural Economy series by CPR, has been authored by Harish Damodaran