Recently, I wrote about how India’s petrol prices are set, and why they barely move even when crude oil crashes or rises. If you missed it, you can read it here.
But today, I want to talk about what’s slowly replacing petrol itself.
Fundamentally, India has two main problems when it comes to its energy mix. We import about 85% of our crude oil requirements, spending close to $100 billion a year on it. And the other is that we need to make our fuel mix cleaner in terms of carbon emissions and pollution.
The good part is that India is working on a solution. India has been running one of the world’s most ambitious fuel experiments for the past decade. The idea: replace a chunk of imported petrol with ethanol, an alcohol fuel made from crops grown right here. And in 2025, India quietly hit its E20 (20% Ethanol + 80% Petrol) target, five years ahead of schedule.
If you’ve recently read the news, India is formulating a policy to move to E85 (85% Ethanol + 15% Petrol) and E100 (Near-pure Ethanol).
With ambitions as grand as these, it warrants a closer look by us to understand what’s happening in this space.
What Is Ethanol, and How Is It Made?
Ethanol is an alcohol, the same compound found in beer, just made in industrial quantities and at much higher purity. When blended with petrol, it can power a standard vehicle engine.
To understand how ethanol is made, lets take an example of sugarcane-based ethanol. Cane is crushed, the juice is fermented by yeast, the resulting liquid is distilled to concentrate the alcohol, and then dehydrated to remove the last traces of water. What you end up with is anhydrous (a substance with no water) ethanol, 99.9% pure, ready to blend with petrol.
Some other feedstock used to make ethanol in India is maize (corn) and rice.
Different Technologies of Producing Ethanol
When the actual food part of a crop is used to produce ethanol (as seen in the example above), it is called 1G or First Generation technology. The process here is simpler and more straightforward. This is the ethanol that is currently commercially viable and available at scale.
The drawback, of course, is that the crop gets diverted from food to fuel.
To address this, India wants to move to 2G or Second Generation ethanol, which is produced using agricultural residue instead of the crop itself. The technology is more complex and expensive, and while our OMCs have set up a few plants, they are still in early stages.
Beyond 2G, there is also 3G ethanol, which is algae-based, and 4G, which uses CO₂ as a feedstock. Both are still in the research phase and nowhere close to commercial deployment.
Ethanol vs Petrol: The Honest Comparison
Additionally, there’s one more issue with ethanol blending. Older cars, especially before 2010, were not designed for ethanol blends. Ethanol absorbs water and can corrode older rubber seals and fuel components over time.
Why Going Beyond E-20 is Hard
Hitting E20 was genuinely impressive. Going beyond it will be harder. Three structural problems keep coming up.
Food vs Fuel
India’s ethanol programme has shifted heavily toward grains. Maize now contributes more ethanol than all sugarcane-based sources combined. In 2024, India imported maize for the first time in decades, partly because so much domestic supply was diverted to distilleries. When a food crop becomes a fuel crop, prices move and food security questions follow.
Sugarcane Economics Are Squeezed
The government controls both ends of the transaction: the price distilleries pay farmers for sugarcane, known as the FRP (Fair & Remunerative Price), and the price at which distilleries sell ethanol to OMCs.
Over the past three years, the FRP has risen 16.5% but the ethanol selling price hasn’t moved.
Distilleries are caught in the middle where their input costs are rising, but their revenue is capped leading to a squeeze in their margins.
Engine Compatibility Is a Ceiling
E20 works in standard petrol engines with minor tuning. E85 and E100 need a Flex-Fuel engine, a different architecture that most vehicles on Indian roads don’t have. Until a meaningful share of the vehicle fleet is Flex-Fuel-capable, higher blending targets remain on paper.
Why Everyone Keeps Talking About Brazil
Brazil, the biggest success story in ethanol, is becoming the benchmark for India.
Brazil launched its Pro-Álcool programme in 1975, right after the first oil shock. The government guaranteed purchase prices, subsidised distilleries, and mandated blending. Within a decade, they had the world’s largest ethanol industry.
Today, nearly all Brazilian petrol contains at least 27% ethanol (meaning, no pure petrol). Around 80% of new cars sold are Flex-Fuel. A driver can choose between between blended ethanol (eg. E20) & E100 at the same pump.
Who Is Playing in This Space?
The ethanol value chain has several distinct segments. Each has a different set of players and a different set of risks.
The Final Takeaway
India hitting E20 is a genuine milestone. The infrastructure has been built, the supply chains are working, and the habit of buying blended fuel is becoming normal. That part of the story is largely done.
The next chapter, getting from E20 to E85 and E100, is a harder problem. It requires more Flex-Fuel vehicles, a bigger feedstock base that doesn’t compete with food, and pricing policies that keep distilleries economically viable.
Brazil took 50 years. India is about 10 years into a serious attempt. The direction is right but our success would depend entirely on how consistently the government manages the overall policy for fuels.
If you enjoyed this newsletter, feel free to share it with your friends and family using the link below.
Till the next time,
Vijay
CEO – InCred Money
P.S. I share my thoughts on Investing and the Economy regularly. You can follow me here.
