MATRIX, PRAJ INDUSTRIES’s R&D centre spread over 80,000 sq. ft. on the outskirts of Pune, is nothing like I had imagined. For starters, it has no trace of the techno-futuristic aesthetic of the movie it shares its name with. Instead, an overwhelming stench of agricultural waste emanates from the basement. My face-mask offers little protection against swirling dust from rice husk. The whirring of massive reactors provides an ominous soundtrack. This is not a scene from Neo’s world.

But if you ignore those jarring notes, there’s something apparently revolutionary afoot here. This Matrix is home to Enfinity, a patented second-generation (2G) technology that converts the fetid substance in the basement into ethanol for blending into petrol. Unlike first-generation ethanol that depends on food crops—typically corn and sugar cane—for raw material, Enfinity uses a cocktail of enzymes to break down all sorts of agricultural waste—rice husk, palm residue, wheat stalks, corn cobs—into glucose or carbon sugars from which ethanol is extracted. Praj says Enfinity is ready for commercial launch and can scale up to 500 million tonnes of ethanol per day. Think of it as ethanol on tap.

Pramod Chaudhari, founder chairman of Praj, a Rs 1,016 crore biofuels company launched in 1983, claims Enfinity can be a game changer for India’s sagging ethanol industry as well as oil marketing companies such as state-owned Indian Oil Corporation, Hindustan Petroleum, and Bharat Petroleum, which have struggled to source ethanol to meet government-mandated blending norms. “[Enfinity] is a perfect example of converting waste into fuel,’’ says Chaudhari, 67, a soft-spoken man with an academic air, who also chairs the Confederation of Indian Industry’s (CII) national committee on bioenergy. “It marks a new journey on the path of sustainable development.’’

Such lyrical visions are not new in renewable energy cycles. Governments across the world require oil companies to blend ethanol with fossil fuels to reduce pollution and curb spiralling fuel bills. The U.S. leads the way in ethanol production (the predominant raw material there is corn), with an output of over 56 billion litres in 2015. According to American trade body Renewable Fuels Association, “the use of ethanol in gasoline in 2015 reduced CO2-equivalent [greenhouse gas] emissions from transportation by 41.2 million tonnes—equivalent to removing 8.7 million cars from the road for an entire year”. Brazil, the world’s biggest producer of sugar and second-largest producer of ethanol, started using sugar cane-based ethanol in 2003 to power flexi-cars that can run on petrol as well as ethanol. Its neighbour Argentina has ambitious plans to increase blending to 20% by 2019 from 10% at present, and eventually to 26%. Mexico, Thailand, and Australia are also pushing forward with progressively higher blending norms.

In India too, the Narendra Modi government is bullish on ethanol, which complements its larger agenda of harnessing renewable sources to cover 40% of the country’s energy needs by 2030. India’s new biofuel policy doubles the target for ethanol blending in petrol to 10%, and sets an “indicative” target of 20% (including both ethanol and biodiesel, though biodiesel hasn’t taken off owing to challenges with the production of jatropha, a key raw material).

While a ballooning oil import bill—India imports nearly 78% of its crude oil needs—is a major factor, the recent uproar over alarmingly worsening air quality in cities like Delhi and Mumbai has cranked up the urgency. “Using ethanol as transport fuel will bring down greenhouse gas emissions by nearly 86%,’’ says Sanjay Chaturvedi, who heads Praj’s R&D team.

Swiss chemical major Clariant teamed up with Swedish commercial automaker Scania last year to develop Ecotrucks that run on ethanol produced from sugar cane bagasse. After nearly a year of testing the Ecotrucks in Brazil, Clariant says carbon dioxide emissions reduced by about 90% compared with the diesel engines used before. Scania is testing the waters in India as well: In August 2014, it handed over an ethanol-run bus as part of a pilot project in Nagpur. It plans to bid for 55 more as part of a contract likely to be handed out by the middle of the year.

But such examples are rare. Indian oil refiners have missed one deadline after another to meet blending targets, thanks to crippling ethanol shortages. In India, ethanol is mostly generated from molasses, a byproduct of sugar making. It can only be produced during the six-month sugar cane season from November to May. The output depends on the crop yield, which fluctuates yearly. Sugar cane farmers have been hit hard by a severe drought across several states including Maharashtra, the largest sugar producer. As a result, sugar production is expected to decline 10% to 25.5 million tonnes during the current sugar year (July to June), according to credit ratings firm ICRA.

Historically, low prices of ethanol—Rs 37 per litre last year—have been a deterrent for sugar mills, who have chosen to sell molasses to distilleries or chemical plants instead. To incentivise ethanol production, the government has fixed prices between Rs 48.50 per litre and Rs 49.50 per litre. But that’s only a superficial solution. Government price controls are, in fact, the sugar industry’s biggest problem: Local governments, both state and central, fix sugar cane prices that mill owners have found unviable. Add to that a glut in global sugar production and the resultant slump in sugar prices, and you have an industry that is bleeding badly.

Confronted with this complex legacy, ethanol blending in 2015-16 stuttered to a paltry 3.2% against the previous government’s already modest target of 5%, according to Praj’s annual results presentation. Chaudhari points out India needs 5.3 billion litres of ethanol to achieve the 20% mark. At present, it produces less than a billion litres. “If we can get to 10% blending by next year, that will be good enough,” Chaudhari says.

To get around production bottlenecks, oil companies have started taking matters in their own hands. For instance, Indian Oil last year set aside Rs 16,000 crore to build its own ethanol plant. Hindustan Petroleum also put in a $9 million (Rs 60.65 crore) bid for two closed sugar mills in Bihar earlier this year, per a report in petrochem news outlet ICIS. But doubts remain over ethanol’s purported energy efficiency. A section of economists reckon ethanol, which has a lower calorific value than petrol, only makes sense as fuel when crude oil touches $70 a barrel or more. It is currently a shade under $50 per barrel amid global oversupply. Producing ethanol is also an energy-intensive process. A Cornell University study suggests it takes 1,2900 British thermal units (Btu) to produce one gallon (about 3.8 litres) of ethanol, which has an energy value of only 76,000 Btu.

Also, ethanol production isn’t just an economic issue. In emerging economies, it has been at the heart of a stormy “food vs. fuel” debate. Do governments have the right to divert farmlands or foodstock into transport fuel, while millions of people starve? Can the planet even supply enough land to support a global ethanol push? The business analysis journal Knowledge@Wharton quotes Jerry Melillo, senior scientist at the Marine Biological Laboratories and chairman of the federal National Climate Assessment in the U.S.: “We have 148 million sq. km. of land on the planet, with 16 million of them in crops. Building a worldwide ethanol network would involve at least doubling that.” In non-scientific parlance: The world needs a miracle.

THE WASTE-TO-ETHANOL formula promises to be just that. “I am making a very tall claim: If we can use the country’s entire surplus biomass to produce ethanol, we will no longer need to import any oil,’’ Chaudhari tells me. Sensing my disbelief, he offers up some statistics. “The [shortfall in ethanol] can be easily [covered] by converting just 40% of the surplus biomass available from 10 or 11 states,’’ he says. Punjab alone can generate nearly 1.17 billion litres of ethanol by converting 40% of its surplus rice straw per year that would otherwise be burnt. Even the seemingly daunting 20% blending target could be achieved by 2022 using Enfinity, Chaudhari adds. That’s not all. Enfinity could also provide relief to the drought-affected agricultural sector. Farmers can earn additional income by selling waste to ethanol producers.

Growing up in the sugar belt of Maharashtra’s Ahmednagar, where his father was an agricultural officer, Chaudhari has intimate knowledge of India’s ramshackle sugar infrastructure and pricing mechanisms. Cane price, which accounts for more than two-thirds of a mill’s realisation, is fixed by the government. Sugar prices, on the other hand, are volatile; so when they fall, the mills suffer. This is what happened over the past few years. The fair and remunerative price (FRP) of sugar cane set by the central government before every sowing season, akin to the minimum support price for rice and wheat, was Rs 2.30 per kg. State governments can, however, set their own price. Uttar Pradesh, India’s largest sugar cane producer, fixed prices at Rs 2.80 per kg. Meanwhile, the price of sugar slumped to Rs 23 per kg last July amid global oversupply. This wasn’t enough to cover mill owners’ costs, pushing them into losses. They stopped buying cane from farmers and defaulted on thousands of crores in arrears. (Uttar Pradesh accounted for more than 60% of the total dues.) Several mills around the country shut down.

Praj’s profit also slipped nearly 9% to Rs 69.5 crore in the previous financial year, as order intake slumped 16% to Rs 1,013 crore. With sugar prices rebounding to Rs 40 per kg and the government doling out Rs 6,000 crore in interest-free loans to mill owners last year, a recovery is under way. For the first time since the blending mandate has been in place, oil marketing companies have finalised contracts for 1.3 billion litres of ethanol for the coming year (with the 5% target in view), according to Praj’s annual results. They have also floated a tender for 2.6 billion litres to meet the 10% target. That could translate into a Rs 2,000 crore opportunity for Praj.

Pramod Chaudhari, chairman, Praj Industires.
Pramod Chaudhari, chairman, Praj Industires.

ICRA says a “very significant part” of the revenue and profit of sugar mills comes from byproducts such as bagasse and molasses. It takes a positive view of the current policy-level push to ethanol. The renewed focus on blending, higher ethanol prices and removal of excise duty are “expected to augur well for the profitability of the industry”, it says in a note published in April. Tax benefits for sugar mills have increased the average realisation on ethanol by Rs 3 per litre. This, Chaudhari believes, will spur capacity expansion.

Chaudhari’s ambitions are not limited to the local market. Praj has built Britain’s biggest ethanol plant—the size of seven football fields—and several others across Europe, U.S. and southeast Asia. Its most fertile overseas market is South America. Praj entered the continent in 2000, setting up an office in Bogota, Colombia. Since then, it has set up all of Colombia’s seven ethanol plants. Last year, it won a contract from Ingenio Tabacal, one of the largest sugar and ethanol producers in Argentina, to expand its existing alcohol and ethanol plant. Praj estimates Argentina will need 1.75 billion litres of additional capacity to meet its increased blending targets. The company is eyeing up to Rs 3,000 crore in orders from this—half the overall contracts—given its track record in South America.

Recently though, Praj suffered a setback in the region, thanks to a corruption scandal at Brazilian oil major Petrobras that delayed a Rs 235 crore order. Praj’s stock has shed more than a fifth of its value since scaling a year-high last July, as the Petrobras contract continues to hang in the balance.

To safeguard the business against such shocks, Chaudhari has moved into new areas like waste water treatment, high-purity water, critical process equipment, and bioproducts. These businesses contributed a quarter of Praj’s operating income in the previous financial year. The company plans to improve the overall revenue mix to 50:50 by FY17.

Amit Mahawar, analyst at equity research firm Edelweiss, says the critical equipment business alone could fetch Rs 400 crore in new business, as the government implements the Bharat Standard VI diesel norms, triggering a Rs 40,000 crore investment in modifications and upgrades of refineries by oil marketing companies. (Praj’s equipment is already used by nearly 70% of India’s ethanol industry.) Praj’s brewery business, which brought in 12% of revenue in the previous financial year, also has headway for growth as global beer producers such as Diageo, SAB-Miller and Carlsberg, ramp up their presence in India.

ENFINITY IS THE OUTCOME of a 10-year R&D drive at Praj. From calculating the surplus biomass or agricultural waste available in the country to testing out nearly 700 samples of biomass from across the world, it says it has put in some 800,000 man hours into the project. First, it needed to find a way to separate lignin and ash—parts of feedstock that cannot be converted into ethanol—from the cellulosic substance that contains sugars. The next step was to perfect the “enzymatic hydrolysis process’’ to break down the cellulosic matter into sugars and finally into ethanol. “Different feedstocks have different chemical compositions, and we had to create a technology that can tolerate the huge variability,’’ says R&D head Chaturvedi.

The company, which employs nearly a hundred scientists, now wants to set up a large-scale bio-refinery, along the lines of a traditional oil refinery. The bio-refinery will use only agricultural residues to produce ethanol and other fuels. “It will be the first of its kind in the world,’’ says Chaturvedi. Praj will also offer a bolt-on model to existing ethanol producers, helping them get 2G-ready with only slight modifications. It is “installing a 12 million tonne per day 2G-integrated bolt-on smart bio-refinery demonstration plant” in India. (Rival Indian Glycols launched India’s first 2G ethanol demonstration plant at Kashipur in Uttarakhand, with a capacity of 10 tonnes of biomass per day.)

Initially, capital expenditure to use 2G technology could be as much as 4 times higher: Since both molasses and bagasse are produced in-house, there is no real cost for producers in existing models. Bringing down the conversion cost of cellulosic material into ethanol holds the key, per a World Bank paper. Pre-treatment costs are high compared with sugar cane-based ethanol, because the process requires high temperature and pressure and expensive enzymes for hydrolysis. The overall conversion efficiency of cellulosic raw material is also lower than sugar and starch raw material.

Over time, Chaudhari says 2G’s running expenses would turn out considerably lower. “You only use agricultural waste as feedstock,” he explains. “The real expense will come from aggregation, collection and processing of waste, and logistics, but the return will be profitable.’’ From his position at CII, Chaudhari is throwing his might behind building acceptance for the technology. He is a prime mover in lobbying efforts to secure concessions such as accelerated depreciations and tax holidays for new players.

Changing hardened habits can be a backbreaking endeavour, especially in the petrochem sector. Last year, Fortune India narrated the story of Delhi-based Creatnet Technology, whose technology to produce emulsified fuel oil faced wide rejection despite proving to be a better alternative to polluting fossil fuels. Such stories don’t bother Chaudhari, who says he is driven by patriotism. After graduating from IIT Mumbai, he joined Bajaj Tempo, another pioneering company that is credited with shaping India’s auto sector, unlike most of his classmates who travelled overseas and never returned. At Bajaj, Chaudhari learnt many tricks of the trade, including the nuances of using imported technology. “I was nationalistic. I wanted to hang around and try my luck,’’ he says.

The question isn’t whether 2G technology will take off or not, but when, Chaudhari tells me. “You have watched the news on TV about blizzards, warm winters, and other such anomalies. The writing is on the wall. Every bit of effort to save the planet will be important.” In his eyes, Enfinity will have a role in that—even if it lacks Neo’s glamour.

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