Ethanol

As many as 600 ethanol plants have been approved, but these wouldn’t be enough to meet demand. Besides, around 400 of the 600 approved plants haven’t started operations so far.

People are no longer bullish on ethanol manufactured from sugarcane. While there is some interest in grain-to-ethanol plants due to a large quantity of the grain being sold from government warehouses, many people remain concerned about the quality of grain from these warehouses.

Biorefineries are interested in making value-added products like chemicals from ethanol. These products include glycols, 2-(4-chlorophenylthio)triethylamine hydrochloride (CPTA), etc.

As the chemical industry provides a premium for ethanol, several participants at the conference showed an interest in setting up plants to make ethanol for supply to the chemical sector instead of oil marketing companies or OMCs.

Their main concern was the fact that the chemical industry is unlikely to give a fixed price for their ethanol and would instead give them the market rate. However, it’s possible that they could simply supply to the chemical industry when international prices are higher and sell to OMCs when this is not the case.

As the revenue from ethanol sales for meeting fuel requirements are only adequate to cover the cost of running the plant, there is considerable talk about using the by-products like DDGS and waste products like press mud to generate further revenue, which would be able to generate a profit margin.

Previously, grains stored in government warehouses were quite dirty and had pebbles, etc. in them. As a result, they couldn’t be used directly in an ethanol plant and instead had to be cleaned and pre-processed, which considerably raised costs. This problem has now been fixed.

The Zero Liquid Discharge pollution norms also push the plant-owners to utilize waste products and effluents better. Biogas plants can utilize press mud and spent wash as feedstock. Hence, an integrated plant is a natural fit.

This is an interesting innovation mentioned by a consultant who’s building ethanol plants for Nayara Energy. Napier grass can be grown nearby and used as boiler fuel.

While there may be some cost involved in switching from a coal burner to a grass burner, the boiler fuel cost could be reduced by 87.5%. This would certainly make it a very viable option.

As compressed biogas plants (CBGs) receive significant subsidy from the government under the SATAT scheme, there is considerable interest in setting up these plants. The minimum viable capacity for a CBG plant in such a setup is around 5t per day (tpd) of refined biogas output. This correlates to a 100klpd ethanol plant.

A 5tpd compressed biogas plant can generate a revenue of Rs81m from compressed biogas sales and another Rs7.5m from organic fertilizer sales. Assuming an ethanol price of around Rs50/L, this can represent another 6% gain on a base of Rs1.50bn from ethanol sales.

Green hydrogen

Green hydrogen production is seen as out of reach for most micro, small and medium enterprises or MSMEs. It will primarily be driven by steel companies so as to meet Europe’s green steel requirement.

Biogas

Here, the focus has largely been on compressed biogas plants (CBGs) primarily due to an array of incentives and subsidies that the government has announced for these plants. For context, CBG can replace compressed natural gas (CNG) usage. This is why the main buyers of CBG are OMCs like Bharat Petroleum Corporation or BPCL, Hindustan Petroleum Corporation or HPCL, etc.

OMCs, especially HPCL, also inform the biogas plant developer about the offtake of CNG in that location. They suggest that the developer shouldn’t overbuild the CBG plant capacity. Through this, they hope to minimize the amount of gas that must be transported, thus creating a more decentralized gas grid.

As the above table indicates, CNG prices vary considerably even across cities in the same state. This may primarily be due to the cost of transporting the gas.

Napier grass/elephant grass is considered as high-energy grass and is conventionally used as a cattle feed. It has several positive characteristics which make it very suitable as a feedstock for biogas.

Very hardy crop. It grows to be 10 feet tall and can tolerate floods easily. Its ideal temperature range is 25-40^oC. However, it stops growing below a temperature of 15^oC.

It can be cut multiple times a year. For biogas production, it should ideally be cut every two months.

It has an excellent yield of 150-300t/acre/year, depending on how fertile and water-rich the soil is.

A 5tpd plant is the smallest capacity plant that needs to be set up to obtain subsidy under SATAT. This subsidy is available only after the plant starts operations.

In this cost model, we assume that napier grass is bought commercially at a price of Rs800/kg and the priority sector loan is also utilized to the maximum extent. As we can see, the production cost of biogas is quite low, at about Rs30.7/kg. This could be further reduced if napier grass is grown for captive consumption.

The above table shows the return metrics and cashflow schedule of a 5tpd napier-to-CBG plant.

Currently, most gas for CGD companies comes from domestic production of natural gas.

The procurement prices of CBG for an OMC is set at 80% of the local retail price for CNG. The floor price is Rs54/kg. There also appears to be a cap at Rs74.29/kg for CBG. This corresponds to a CNG price of Rs92.86/kg.

The above table shows the slab-wise procurement and retail prices of CBG.

As we can see from the above table, OMCs make a gross margin of only around 14-15% from CBG.

As CBG procurement prices are a function of retail CNG price, it makes sense to compare gross profit from CBG and natural gas for a given retail price. Based on the table above, we can see that at a retail CNG price of Rs60/kg and below, it can become more profitable for a CGD company to sell biogas instead of natural gas. Also, as CBG boosts rural incomes, the government is more likely to keep CBG procurement prices high at the expense of OMCs’ profit margins.

This can lead to profit erosion for CGD companies who primarily use APM gas.

Under the SATAT initiative, from Sep 2019 to May 2023, only 16,271t of CBG have been sold to CGD companies. However, the government has set a target of 15mmt of annual CBG production by FY24F under the SATAT initiative. LoIs for 29,875tpd of CBG capacity have been signed as of May 2023-end.

The above table shows us the CBG blending targets and the CBG production capacity required to meet them.

The table above shows how many LoIs have been issued by CGD companies and how much biogas production may be expected from these LoIs as a function of biogas consumption for CGD usage.

We can clearly see that as more and more CBG plants are set up, it would be very easy to obtain the entire gas for CGD consumption from CBG plants. In fact, there would be around 3.8mmt of CBG production leftover even after the CGD consumption requirement is met. This could then be sold for industrial purposes.

Given the current structure of retail and procurement prices of CBG, it is more expensive than APM gas (domestic CNG production). However, it can often be cheaper than imported LNG.

Thus, while CGDs may be required to buy and retail a certain amount of biogas, the primary usage of biogas will be in replacing imported LNG for industrial usage. The primary industrial usage of CNG is in ammonia production for nitrogenous fertilizers. Here, the cost of gas can be reduced by 30%. More importantly, natural gas prices are fluctuating and often quite seasonal owing to heating requirements in the northern hemisphere during winters. Thus, biogas can provide security of supply and ready availability too.

Currently, some innovative companies like Kajaria Ceramics are also using biogas to replace their imported LNG usage. On a blended basis, this helps to reduce their gas cost by approximately 10%. If they shift entirely to biogas, the gas cost can be reduced by 30%. This can improve margins by 2-7%, depending on natural gas prices, and also provide them with steady fuel cost.

As, traditionally, biogas plants in India were primarily at the farm scale, they utilized livestock and especially cattle manure. These biogas plants aren’t highly commercialized operations. In fact, due to inadequate optimization and improvement in technology, several biogas plants faced closure.

Several biochemical solutions are present to improve the quantity and quality of biogas generated. One of these is a nutrient formula pack by Revy Environmental Solutions which improves the methane content of biogas from 60% to 72% (claimed). In lab tests, Revy Environmental Solutions has found that the methane content can be boosted to 85%, and thus the 72% claimed methane content is a realistic number.

Boosting the methane content has some key benefits such as:

Higher CBG production.

Lower filtration and purification costs.

This increases the revenue while also reducing the opex and capex for a biogas plant as a smaller and hence, cheaper filtration and purification system is required.

Biodiesel

Biodiesel is made from vegetable oils, animal tallow, used cooking oil, acid oils, jatropha oil, palm stearin, etc. All these sources are organic in nature and are most often waste products from vegetable oil and food processing industries.

The chemical process of biodiesel production is explained in the above chart. Methanol is used for transesterification and the glycerol obtained is refined into glycerine for sale to the soap industry.

The minimum viable plant size is around 20tpd. This plant can produce approximately 20mt of biodiesel per day and would have a minimum of 300 operating days in a year. These plants are multi-feed and can take any of the raw materials mentioned above.

As the plant is multi-feed, it can take any vegetable oil or animal fat as feedstock. However, different feedstocks have different biodiesel yields, as can be seen in the table above. When 1kg of feedstock with 95% biodiesel yield is fed into a biodiesel plant, it will generate approximately 950gm of biodiesel and 50gm of glycerine.

Carbon credit production is based on the amount of biodiesel produced. The lifecycle emission of biodiesel is around 80% lower than conventional diesel. As each metric tonne (mt) of conventional diesel generates an equivalent of 3.15mt of carbon dioxide emissions, we can say that each kg of biodiesel produced will account for 2.52 carbon credits (80% of 3.15mt).

The above table shows the astounding financial returns that can be generated by a 20tpd biodiesel plant. However, it should be noted that raw materials for such a plant aren’t readily available and as their production is largely seasonal, a biodiesel plant operator needs to store the feedstock. Thus, we see that while the equity capital required may not be a problem, working capital could become a serious constraint for a biodiesel plant.

At the conference, biodiesel received very little attention. However, as the cost model above indicates, biodiesel has the potential to be even more profitable than CBG and ethanol.

Exhibitors believe that biodiesel will have its moment of reckoning as diesel can’t easily be substituted by another fuel in industries like trucking, mining, etc. As green audits start happening in India as well, these industries will have to find ways to abate their greenhouse gas emissions cheaply. Here, biodiesel will play a key role as there’s no change in the machinery required.

As much of the feedstock is seasonal, there is a requirement to carry inventory.

As the table above indicates, inventory can become very costly. The inventory cost of annual stocking is equivalent to around 10 times the capex cost. Thus, it can become very difficult to operate this business.

The government, through recent regulations, has made it harder to operate this business as it has allowed the export of biodiesel feedstock while increasing the regulatory burden when it comes to exporting biodiesel.

Previously, jatropha oil was thought to be a great source of biodiesel. However, the jatropha plant is still wild and undomesticated. It isn’t a complete crop like napier. So, further research is needed in farming jatropha effectively as well as finding more suitable crops which can serve as feedstock for biodiesel production.

Using farm products as feedstock would help solve the operational requirements of having a large inventory of feedstock on hand. Especially, if the crop is a fast grower.

Biomass briquettes

Solid farm waste like cotton husk, etc. is compacted into briquettes. These briquettes can be used as fuel.

As the raw material is produced on a seasonal basis, the raw material often must be bought once or twice a year and then stored for the rest of the year. This greatly increases the working capital requirement.

The raw material as well as the finished product are bulky. Thus, transporting them is a problem. This leads to differential pricing across the country.

A special biomass burner must be installed in order to utilize the fuel. This reduces operational flexibility for fuel consumers and hence, acts as a constraint.

Biofuel, biomass trading

Help reduce supply chain uncertainty for many biofuel industries and consumers.

As many biomass gas buyers are quite price-sensitive, the transportation cost and platform charges can end up making many of these businesses unviable. However, with better economies of scale and a more active trading network, these problems can be avoided. Else, biomass trading platforms can become an unviable business.

Overall views from the conference and expo

By and large, the exhibitors comprised EPC firms, biofuel plants and specialized equipment manufacturers, and some new technology providers. The visitors at the expo were primarily MSME businessmen who were looking to get into the biofuels space and manufacture these fuels. Most didn’t have a background in the industry.

Investment ideas

As CBG accounts for a greater proportion of India’s gas mix, domestic gas produced can be used by industrial gas users. As domestic gas is much cheaper than international gas, industrial gas users can benefit greatly from cheaper prices.

Kajaria Ceramics: The company has already invested in and set up a captive biogas generation plant which is able to meet around 18% of its gas requirement, but it is facing some technical hurdles in further usage of biogas.

Deepak Fertilizers and Petrochemicals: Engaged in nitrogenous fertilizer production.

Chambal Fertilizers: Engaged in nitrogenous fertilizer production.

Gujarat State Fertilizer Company: Engaged in nitrogenous fertilizer production.

The government has come out with a blending policy for gas, which is similar to its ethanol blending policy. According to this policy, CGD companies have to sell atleast 1% of biogas as a proportion of their total sales volume by 2023F, 3% by 2024F and 5% by 2027F. Given the high biogas production targets, we expect the government to set a target for 10% biogas blending soon after that.

In the table above, we can see the gas blending policy’s impact on EPS of Mahanagar Gas or  MGL, Gujarat Gas and Indraprastha Gas.

There is only one listed entity in the compressed gas cylinder space, which is Everest Kanto Cylinder.

In this industry, companies who manufacture CNG-fuel vehicles and those who have exposure to rural sales can benefit. This is because CNG vehicles can easily use automobile grade CBG as fuel. So far as rural sales are concerned, as biogas production will be mainly in rural areas, we expect wealth generation and investment to occur in the agri sector.

Bajaj Auto: Has sizeable exposure to CNG automobiles.

Escorts Kubota: Manufactures tractors and other related machinery.

Like other renewable energy plants, biogas and biodiesel plants can generate a large amount of carbon credits.

EKI Energy Services: It is the only listed carbon credits company in India.