India's Cabinet Committee on Economic Affairs this week adopted a fixed ethanol price and made other changes to the policy as part of an effort to reach its target for blending 5% ethanol into the gasoline pool.
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The changes replace market-based pricing introduced last year that allowed oil companies and ethanol suppliers to set a uniform price including transportation costs and taxes.
On Wednesday, CCEA fixed the ethanol price for the current season at Rupees 48.50-49.50/liter (78-79 cents), depending on the distance between the sugar mill and depot.
Suppliers must pay all transportation costs and state and federal taxes.
The cabinet said ethanol blending has been hampered by low gasoline prices and other factors causing uncertainty in the market.
Oil marketing companies buy ethanol based on average gasoline prices for the previous fiscal year.
State-owned refiners Indian Oil, Bharat Petroleum and Hindustan Petroleum coordinate on ethanol buying and tenders.
The buyers have typically not been able to secure enough ethanol, CCEA said, citing offers received in 2013 for 45% of the total requirement that year.
Transportation and local permitting issues have also hindered ethanol sales for gasoline blending, the committee said.
In response, it directed oil marketers to sign annual agreements with states for uninterrupted inter-depot transfer of ethanol within the states. A source at one of the refiners said such agreements would ease the difficulty oil companies now face in several states.
Last year, oil companies issued two tenders to buy ethanol, one for imported supply.
Domestic prices were Rupees 41-44/liter, while landed costs for overseas supply were Rupees 69-92/liter, which made imports unviable.
Oil companies issued tenders to buy 1.56 billion liters for the 2014 sugar-crushing season, which starts in October and buyers secure supply as early as July. But suppliers responded with only 355 million liters, the refinery source said.
Plans for a second tender were scrapped, but the source expects it to be issued again soon now that the fixed price is in place.
If refiners and marketing companies reach the government's 5% ethanol blending target, they will have an annual surplus of 1.15 billion liters of gasoline worth $766 million in foreign exchange, according to CCEA estimates.