India’s ahead-of-target attainment of 20% ethanol blending in petrol is a major energy security milestone.
Since 2014, the Ethanol Blending Programme (EBP) has mixed ethanol, an alcohol made from crops like sugarcane and maize, into petrol so that part of the petrol sold in the country is homegrown and not imported. This has also created an additional market for agricultural produce such as sugarcane, maize and surplus rice. Countries like Brazil and the United States have long relied on high ethanol blending mandates of up to E85 (85% ethanol) and E100 (nearly pure ethanol). So far, according to Indian government data, EBP has substituted ~270 lakh metric tonnes of imported crude oil, saved roughly Rs 1.59 lakh crore in foreign exchange, and farmers in states such as Uttar Pradesh, Maharashtra and Karnataka have earned Rs 1.18 lakh crore.
But the next phase cannot be more of the same. In April 2026, the Ministry of Road Transport and Highways (MoRTH) released a draft notification to recognise flex-fuel vehicles running on E85 and E100, and ~48 retail outlets of public oil marketing companies started rolling out E85 fuel in June 2026. E20-compatible vehicles cannot run on E100 without changes to engine calibration and fuel-system components. Higher blends, therefore, require dedicated flex-fuel vehicles, new consumer demand, and a larger ethanol supply base. This analysis by the Council on Energy, Environment and Water (CEEW) identifies four issues that merit closer examination.
What happens to ethanol when EV adoption expands?
If E20 blending continues and flex-fuel vehicles account for even 20% of new vehicle registrations by 2028, India’s ethanol demand could rise from around 1,016 crore litres in 2025 to about 1,600 crore litres by 2028 – an increase of more than 50$. India’s installed ethanol production capacity, currently ~1,700 crore litres, could theoretically meet this demand in the near term.
Figure 1: Falling petrol demand can leave ethanol plants stranded with excess capacity
But the longer-term outlook is more uncertain. CEEW’s transport fuel modelling suggests that petrol demand could peak at ~5,700 crore litres by 2032 before falling to 3,700 crore litres by 2050, as more electric vehicles enter the two- and four-wheeler segments, as they are (or become) cheaper to own and operate. Ethanol plants are long-lived assets with operating lives of 20-30 years. Capacity additions made now could face a shrinking market within a decade, creating the risk of stranded assets.
To mitigate this risk, the government has proposed blending isobutanol — a derivative of ethanol — with diesel to extend the programme’s relevance to heavy-duty vehicles, which may continue running on diesel till the 2040s. This proposal is still early-stage: long-term trials have yet to establish its performance and reliability in heavy-duty use, and, because isobutanol requires further processing of ethanol, it is likely to cost more per-unit than existing blends.
What is the true public cost of ethanol?
The price that OMCs (oil marketing companies) pay to procure ethanol does not capture the full fiscal cost of the programme. When subsidies for feedstock (the corn, sugarcane, maize or vegetable oils used to produce ethanol and biodiesel), electricity and fertiliser, as well as the foregone GST revenue are aggregated, the true cost of ethanol procurement in ESY 2024-25 (ethanol supply year, running from November 1, 2024 to October 31, 2025) was approximately Rs 87,390 crore, as compared to the OMC procurement cost of Rs 62,566 crore. The gap of Rs 24,824 crore represents additional public expenditure or foregone revenues, with fertiliser and electricity subsidies accounting for nearly half (~46%) of this additional outlay. Therefore, an increase in ethanol demand to 1,600 crore litres by 2028 (as projected) would lead to an even higher public expenditure/foregone revenues amounting to ⁓Rs 38,226 crore (not accounting for any future increases in procurement cost).
While the effective retail selling price of ethanol is the same as petrol (as it is blended with petrol), this additional fiscal expenditure is only partly recovered by the government through the 5% GST levied on the price of ethanol (and smaller recoveries from freight, etc.).
Figure 2: True cost of ethanol procurement
Feedstock choice shapes this cost significantly. For instance, rice-based ethanol has a true cost of ~Rs 126 per litre, more than twice the oil marketing company procurement price of Rs 60 per litre. Maize-based ethanol costs ~Rs 95 per litre. Sugarcane juice and B-heavy molasses (an intermediate by-product produced during the second stage of sugar extraction from sugarcane) remain the lowest-cost options at Rs 85.5 per litre and Rs 71.7 per litre, respectively.
Yet India’s feedstock mix has shifted towards grains in recent years. That shift has direct implications for the programme’s fiscal footprint.
Figure 3: A shifting feedstock mix has material implications on fiscal footprint
Are flex-fuel vehicles cost-competitive?
Flex-fuel vehicles,, which are designed to run on more than one type of fuel using a single fuel tank and engine, are unlikely to be cost-competitive without additional support.
Ethanol has ~28% lower gross calorific value than petrol. Although ethanol’s higher octane rating allows engines designed for it to operate more efficiently and resist engine knocking, this efficiency gain does not fully offset its lower energy content. As a result, vehicles running on ethanol typically deliver 20-25% lower fuel economy per litre, raising the effective fuel cost per kilometre despite any pump-price advantage. CEEW’s total cost of ownership (TCO) analysis for four-wheelers in 2028 tested three pricing scenarios across six states. At current retail prices, petrol is 2-14% cheaper than flex-fuel (E100). At OMC procurement prices, petrol is ~15% cheaper. At the true cost, petrol is 15-25% cheaper than ethanol.
For flex-fuel vehicles to reach parity with petrol, ethanol would need to retail at ~Rs 52-73 per litre across states. This is well below the production cost of any commercially viable feedstock assessed. Reaching a 20% market share for flex-fuel vehicles in the petrol segment could require an additional Rs 3,500 crore to bring their Total Cost of Ownership (TCO) on par with standard petrol cars.
Electric vehicles offer a useful comparison. They already have lower running costs across passenger categories and could deliver higher CO₂ savings per rupee of public expenditure. This does not eliminate ethanol’s role, especially in segments (like heavy-duty transport) where electrification may take longer, but it does mean ethanol capacity should be planned alongside other clean mobility pathways.
Could higher ethanol blends affect food, land and water security objectives?
India’s ethanol programme relies almost entirely on first-generation (1G) feedstocks such as sugarcane, rice and maize. Expanding to higher blends could intensify pressure on food systems, land use and water resources.
In ESY 2024-25, the government allocated ~52 lakh metric tonnes of surplus Food Corporation of India rice, released below the minimum support price, for ethanol production. Rice remains central to India’s food security and is a staple for lower-income households. Continued diversion at this scale risks affecting prices and availability.
Maize is also seeing stronger demand signals. In the 2025-26 kharif (monsoon cropping) season, maize cultivation rose by ~9 lakh hectares, while the area under oilseed declined. Higher maize-based ethanol prices (which grew at 11.7% annually between 2022 and 2025) could pull farmers away from pulses and oilseeds, deepening import dependence and complicating India’s crop diversification goals.
Feedstock choices also have implications on water available for agriculture. Paddy cultivation remains a primary driver of groundwater depletion in Punjab and Haryana, both regions identified as critical in India’s National Water Mission. Sugarcane and maize are also water-intensive feedstocks, requiring ~210 litres and ~500 litres of water per kilogram of feedstock, respectively. This matters for states like Maharashtra, where sugarcane cultivation is expanding in regions with varying water availability across districts. Scaling up rice-based ethanol for higher blends without accounting for regional water stress could therefore exacerbate scarcity in already vulnerable districts.
How India should plan the next phase of ethanol blending
Ethanol blending has delivered real gains for energy security and rural incomes. But its next phase should be planned with clearer accounting and sharper trade-off analysis before further expansion:
- The government should publish annual estimates of the programme’s full public expenditure. The Ministry of Petroleum and Natural Gas (MoPNG), in collaboration with the Ministry of Finance, could put in place an annual disclosure covering procurement costs, as well as feedstock, fertiliser and electricity subsidies, and foregone tax revenue. A consolidated account would allow ethanol to be compared fairly with other clean energy investments.
- Feedstock incentives should be reviewed periodically by the MoPNG, in consultation with the Ministry of Agriculture and Farmers Welfare, and the Cabinet Committee on Economic Affairs. Rice-based ethanol, given its high true cost and food and water implications, deserves closer scrutiny. Savings from rationalising grain-based support could be redirected towards second-generation ethanol (made from agricultural residues), where India still needs stronger technology, logistics and commercial models.
- Invest in second-generation ethanol development. Second-generation (2G) ethanol from agricultural waste would address many of the food, water, land-use and emissions concerns associated with 1G (first generation) feedstocks, which are edible food and crops. However, 2G-ethanol faces substantial barriers: production costs are significantly higher than for 1G, India’s first utility-scale 2G plant (IOCL, Panipat) is not functioning at design capacity, indigenous technology is underdeveloped, and biomass collection and logistics infrastructure do not yet exist at the required scale. Savings from rationalising 1G grain-based ethanol subsidies should be redirected towards resolving the specific barriers to 2G: developing cellulosic conversion technology and biomass aggregation infrastructure, using the IOCL Panipat plant as a learning platform.
- Ethanol capacity additions should be aligned with petrol demand and electric vehicle adoption. If petrol demand peaks around 2032, new ethanol capacity should not be planned as if liquid fuel demand will continue to rise indefinitely. The Ministry of Petroleum and Natural Gas, working with the Ministry of Heavy Industries and NITI Aayog, could develop a phased plan for these additions that reflects expected trends in petrol demand and electric vehicle adoption. Where electrification is already cost-effective, public resources could deliver higher returns through charging infrastructure, renewable power and battery manufacturing.
India’s Ethanol Blending Programme has displayed success in building energy security and boosting rural economies. Its next phase deserves the same care that brought the first phase its credibility, anchored in a clear-eyed view of what ethanol really costs and how that sits alongside India’s clean energy transitions.
Dharshan Siddarth Mohan is a Programme Associate, Aishwarya Joshi is a Programme Associate, and Kushi Naidu is a Consultant at the Council on Energy, Environment and Water (CEEW).
With inputs from Sabarish Elango, Shalu Agrawal, Karthik Ganesan, Hemant Mallya and Chandan Jha.
This opinion piece was first published in a CEEW blog.
