The pricing of ethanol is complicated by the decontrol of petrol prices and administered pricing of sugarcane. Given the cyclical nature of sugarcane, a periodic review of ethanol prices becomes critical. 

The issue of ethanol blending in petroleum is still hanging fire despite several attempts by the government and other stakeholders to arrive at a settlement. The core issue is the controversy over the price at which oil companies will procure ethanol from sugar firms. After much hand-wringing, the government agreed to raise its price to Rs 27 per litre against the earlier fixed price of Rs 21.50 per litre. 

According to the oil companies, the cost of making petrol is roughly Rs 23 per litre, excluding duties and taxes, and paying more than this for ethanol will make blending unviable. 

In this context, a recent paper by Saon Ray, Amrita Goldar and Smita Miglani of ICRIER examines the ethanol pricing mechanism in the country. It notes that the cost of producing ethanol varies with molasses prices and, hence, cyclical variations in sugarcane production largely determine the cost of ethanol production. 

The paper not only explains the price fixation at Rs 27 per litre by the government but also attempts to calculate the price of ethanol for a generic stand-alone distillery and arrives at a price very close to the price fixed by the government. 

Import of ethanol complicates the pricing issue further. Brazil has been the single-largest source for Indian ethanol imports over the years. A comparison of the delivered cost of imported ethanol from Brazil and domestic ethanol shows that in recent months, the cost of imports was higher. 

Further, there are differences in transportation costs as well. The resulting costs incurred would be quite different. Additionally, differences would crop up due to the state from which the ethanol is being sourced. 

While India is one of the largest producers of sugarcane, the lack of competent processing technologies has made its cost of production of ethanol comparatively higher ( Rs 27, or $0.54). At current prices, the ethanol costs for India are comparable to ethanol made from corn in the US.