FUTURE FOR BIOFUELS IN INDIA

OUTLINING A POSSIBLE FUTURE FOR BIOFUELS IN INDIA Swedish commercial vehicle maker Scania recently presented a whitepaper to Nitin J Gadkari, Union Minister of Road Transport and Highways, spotlighting the benefits of biofuel adoption in India. In this second part of the whitepaper titled Increasing the Adoption of Biofuels for Vehicle Use in India, Scania talks about the possible future for biofuels in India, and its recommendations on implementing biofuel in the country. Excerpts: Biofuels are less of a novelty and more of a commodity. Almost any given organic compound can been turned into energy in gaseous or liquid forms, including solid waste, waste water, agricultural residues, trees, grass, and fats (animal or vegetable) [1]. The millions of rural households in India digesting manure in concrete pits for use as cooking gas (traditionally called gobar gas ) is one example of how the basics of this technology is well tried and tested. The challenge ahead is about scaling up production, ensuring all stakeholders in the value chain have a viable business case, stimulating consumer adoption and making it all safe and secure. 20 REACHING 14 % BIOFUELS IN THE ENERGY MIX THE DIFFERENCE BETWEEN DEFICIT & SURPLUS In our perspective, India has all the fundamentals for replicating the achievements of Sweden in adopting biofuels. Our calculations indicate that an all-out move on ethanol, biogas, and biodiesel could generate energy equivalent of 14 % of the forecasted demand in India within 10-15 years [2,3 ]. This is based on the following assumptions: :: Assuming that India will generate 123,000 tonne organic solid waste per day in 2020 [4], this could be used to produce close to 5 bn m3 biogas per year. In addition, 130,000 mn l of waste water [5] can theoretically be used to produce additional 3 bn m 3 biogas per year. Combined, these 8 bn m 3 translates into a total energy generated of 220 PJ, equivalent of 6 bn l of diesel. :: Using all suitable crop residue potential in the Indian agriculture, estimated at 170-250 mn tonne by 2020, could yield up to 50 bn l of ethanol yearly. This is approximately equivalent of 26 bn l of diesel per year, and can also be compared with a forecasted demand for 40 bn l of petrol in 2020. :: Using a combination of crop rotation and land currently classified as waste

land (pastures, barren land, etc.) could help produce up to 20 bn l of biodiesel. This would go some way to substitute the forecasted demand of 120 bn l of diesel in 2020. :: Following a strategy including both low and high blends of biofuels will be vital. The Blend Wall (when it is not possible to low-blend more ethanol into petrol, and biodiesel into diesel, due to the technical status of the existing vehicle park), will be reached at already very low blends, due to the existing car and HD fleet in India. In total, should all efforts be made to substitute diesel fuel, India could replace over 40 % of the forecasted demand for diesel in 2020. Another way to look at this is that the energy generated from biofuels is equivalent to 340 mn barrels of oil or over $ 25 bn [6]. Considering that the currentaccount deficit of India is around $20 bn at current [7], biofuels could be the difference between deficit and surplus. Realising this potential would require an all-out coordinated move by public and private stakeholders, and we admit that the political challenge to make this happen might be insurmountable. The investment side of this business goes beyond the scope of this white paper, but the sheer potential should be enough to carefully investigate this and already now initiate quick-win pilot projects to create local reference cases along the lines of the subsequent sections. REQUIREMENTS ON WASTE MANAGEMENT AND FEEDSTOCK CULTIVATION The production technology for biofuels is already widely available, to a certain extent already locally in India and the balance can easily be introduced though technology transfer from countries that have trodden down this path, for example, Sweden. The larger challenge is upstream in the value chain. Feedstock for ethanol production The basic production process of ethanol stipulates the use of sugar or starch as feedstock for the fermentation process that generates the fuel. The first-generation fuels that made Brazil and US global leaders in ethanol production are mainly 1 Ethanol feedstock availability and production potential based on sugars and to a lesser extent on starch. The second-generation ethanol production that uses starch- and celluloserich crop residues is especially attractive to India. Agriculture waste is in abundant supply, estimated at over 800 mn tonne each year [8]. Not all of this waste is suitable for ethanol production, but a detailed estimate from 2011 found that by 2020, 170 mn tonne of suitable agricultural waste would be generated in India on an annual basis [9]. Should India make good on its target to increase the yield in the fields, this could go up to 250 mn tonne per year, further enhancing the ethanol production potential. With these feedstock assumptions, India could theoretically produce 31-47 bn l of ethanol in 2020, a radical increase from the current annual production of 2 bn l, 1. Countries such as the US and Brazil that were early adopters of first-generation ethanol based on corn grain and sugarcane triggered a wild debate on the societal benefits of using eatable agricultural produce to make vehicle fuels popularly known as the food vs fuel debate. This is a subject that must be addressed proactively by governments; else the planned adoption timeline might derail and possibly grind to a halt, especially in a country like India, where the food security debate is already a hot topic. The European Commission has found that the effect of ethanol production at levels of 3 % of the total grain produced (2010/11), has had a minor upward effect on the global market price of grain of 1-2 % [10], indicating that the problem is real but limited. In 2013, a World Bank report concluded that most of the food commodity price increases are accounted for by crude oil price (more than 50 %), stock-to-use ratios and exchange rates (15 % each), and our results imply that biofuels effect on food prices is not as strong [11]. Usage of land must be seen from a holistic perspective, and cannot be simplified as food vs fuel [12], which is often the case in media and popular debate. For example, increased revenue to farmers would allow them to invest in better farming machinery, improved seed quality, enhanced irrigation and similar items that would increase the agricultural yield. Also, the example of good land and crop management shows that it is possible to efficiently produce food, feed and fuel from the same land. The whole European ethanol industry could also serve as a good example on efficient land management for producing both food and fuel, whilst freeing up land for other purposes. Of the grain grown in the EU in 2014, only 2 % was used for producing fuel (9 bn l of ethanol annually), using an area of 1.9 mn hectare (MHa), corresponding to only 0.7 % of the available agricultural land. This area is actually less than the unused farmland in Romania alone. While doing so, it saves 1.4 MHa, due to the co-production of animal feed that displaces the need for crop imports [13]. Also, much higher yields per hectare is expected, by using existing farming method improvements in EU, India and the rest of the world. It is important to acknowledge that the pie is not constant, and by growing the pie, both food production and limited biofuels production could realistically be accommodated. Additionally, development has been undergoing in the modern industry of utilising second-generation feedstock (i.e. produce that cannot serve effectively as human food) such as straw, leaves, biogases, and other agricultural residue. Though, the technology for extracting ethanol from such fuels is different and more advanced compared to first-generation plants, with higher production costs impacting the recovery price at the pump, 2. Any aspiring producer of ethanol for autotechreview March 2016 Volume 5 Issue 3 21

EXHIBIT 15. ETHANOL PRODUCTION COST ESTIMATES, 1 VS 2 GENERATION 2 Ethanol production cost estimates, 1 st vs 2 nd generation [14] vehicle fuel should have a well prepared case against the simplistic arguments and should strive to build support in the local farmer community. Substrates for biogas production The process for generation of biogas can be applied to a vast range of biomass types. What is particularly attractive with the process is that it can be applied to biomass that is normally considered as waste. Combining the experiences of Sweden with the situation of India, there would be three major waste streams to consider using as substrates for biogas production; :: Waste water collected by STP s in cities hold a lot of organic content. India generates around 70 bn l of waste water every day, a volume that is expected to double in the next 15 years [14]. Through building biogas generation and upgrading facilities at the STP sites, the output can theoretically substitute for 350 mn l of diesel, 2.3 GWh of natural gas-fired power, and over 8 mn LPG cylinders [16] each year. By colocating bus depots with the biogasproducing STPs, the distribution costs can be kept to a minimum. :: Municipal solid waste, typically kitchen and hotel waste being the lowest-hanging fruit, is also available in abundance in India and the collection and final processing of this waste is fragmented and unclear. Supposedly, a lot of this goes into landfills where no energy is extracted and GHGs are allowed to freely emit into the atmosphere. India generates in the range of 80,000 tonne organic solid waste every day [17]. Provided this entire waste stream could be diverted to co-digestions reactors, around 8 mn m3 of gas of equivalent energy content as natural 22 gas could be generated. Where the scale of such co-digestion plants permit, the biogas produced can be compressed and used as vehicle fuel. For smaller-scale plants, there s great savings potential for households, hotels, and restaurants to use the produced gas for cooking. :: In addition to the above, India can also retrofit its existing landfills to capture the methane gas emitted by the natural process. The methane concentration in the gas extracted from these landfills is generally not enough to upgrade to vehicle fuel, but it can be used to fuel generator sets. There are generator sets today that produce electricity from gas with methane concentration as low as 20 % [18]. Distributed generation of biogas and bioethanol Getting the supply chain is important to contain the total cost of a biofuels system. Costs for transportation of feedstock and distribution of the fuel can kill both the financial and the environmental business case for biofuels. Experiences from Sweden and the rest of Europe show that biofuel more than petro-fuel is a local ecosystem. Often the entire value chain from feedstock supply to end-user vehicle is in the same administrative region, in stark contrast to an offshore oil value chain or a large coal-fired power plant. India could, for example, strive towards a set of local value chains such as: :: Biogas city buses fuelled by upgraded gas (in pure form or mixed with CNG) fuelled at depots co-located with sewage treatment plants in the suburban city areas; :: Bioethanol city- and inter-city buses in urban areas surrounded by high-yielding agricultural lands; :: Biogas plants located in the centre of a remote village, where the pooled food and agricultural waste is used to fuel a generator set that gives the village electricity; and :: Captive ethanol plants for larger agricultural cooperatives, where the cooperatives own produce is partly used to generate fuel for distribution trucks serving the business. Job creation opportunities Besides the environmental and fiscal benefits described above, the local value chain of biofuels has the potential to create a vast number of job opportunities in India. By shifting the raw material production from the OPEC states to inside India s border jobs are also shifted, giving farmers, logistics workers, and construction workers increased opportunities to provide for their families. The UN Food and Agriculture Organization (FAO) concludes that Investment in bio energy could spark much-needed investment in agricultural and transport infrastructure in rural areas and, by creating jobs and boosting household incomes, could alleviate poverty and food security, and there is great potential for co-production of food and fuel using existing methods and technologies [19]. In India, a scenario as described in 1 for ethanol has the potential to create over 700,000 new jobs, when targeting the base potential only [20]. These would be distributed over several high-priority sectors: :: Building the 300-350 ethanol plants required for these production levels would require 180,000 workers of different skill levels up to 2020; :: Collecting the feedstock that is now classified as waste and largely disposed of in the fields, would require 75,000-100,000 people on a continuous basis; :: Transporting the feedstock from the fields to the ethanol plants would also create around 200,000 new jobs in the transportation sector; and :: Operating the plants will also require engineers, administrative staff, and workers for a total of around 200,000 full time jobs. These jobs would be created in the states that embrace this development early. States with a combination of high agricultural activity and large fuel consumption,

such as Maharashtra, UP and Punjab would naturally be best positioned to exploit this opportunity, 3. RECOMMENDATIONS FOR BIOFUEL IMPLEMENTATION IN INDIA With regards to biofuel implementation, Scania has drafted a set of recommendations and ideas for Indian policymakers to take into account. Regulations International experience shows that long term policy support is crucial for a successful biofuels introduction. We recommended setting a long term target for renewable fuels in the transport sector, with relevant milestones, e.g. 5 % in 2020, 10 % in 2025 and 20 % in 2030. Due to Blend Wall issues, the targets could be complemented with sub-targets for high-blend and low-blend volumes. To drive commercial implementation of biofuels in scale, whilst ensuring fuel and vehicle quality, it is essential to implement fuel standards for the major biofuels biogas, bioethanol and biodiesel as soon as possible. To build on learning from the leading countries in biofuels adoption, and to facilitate technology transfer to India, we recommended using existing international standards, such as: :: For biogas: SS 155438 :: For natural gas: ISO 15403-1 :: For biodiesel: EN14214 :: For bioethanol for diesel engines ED95: SS 155437 It is also important to extend the existing safety regulations/ recommendations for EXHIBIT 16. JOB CREATION FROM NEXT-GENERATION ETH 3 Job creation from next-generation ethanol in india by state [21] handling and storage of fuels, with additional regulations for the new biofuels, such as ethanol and biodiesel. Specific recommendations, from international experience, are further developed in Appendix C and Appendix D. Experience shows that the public sector is not capable to drive this development alone. Private actors must be given the opportunity to monetise technology if they are to take the risk of making an early move. Affordable vehicles with drivelines adapted to biofuels constitute an opportunity that should be handled by the private sector. The technology is known to most OEMs, though, such vehicles are today mostly developed for Euro V and Euro VI standards, and would hence come at a cost premium in an Indian setting, and which may delay wider adoption. Provisions have already been made in the Motor Vehicles Act for conversion of existing engines to use biofuels [22], which is technically possible for most leading OEMs in the sector. To speed up the transition, India could consider relaxing the used vehicles trade rules and allow import of used HD vehicles fulfilling Euro V emission standards, or possibly HD biofuels-powered vehicles fulfilling Euro V emission standards. The experience internationally, shows that supply and demand must grow hand-in-hand, and availability of well-functioning vehicles is key for that to happen. Public procurement is another proven tool for kick-starting biofuel introduction. Stipulating goals for biofuel use in fleet (bus and truck) procurement in municipalities and state-owned enterprises is a cost-efficient intervention to quickly establish fuel volumes at a minimum infrastructure cost. We recommend setting demands for HD biofuel vehicle use (buses and/or trucks) in selected key cites/ states. Such an approach would allow India to evaluate outcomes on a limited scale, and subsequently develop national models for biofuel introduction and tender structures that can be replicated in other states. Furthermore, public tenders for biogas generation should not stipulate end-use of the energy. Often, tenders prescribe that biogas generated at a Sewage Treatment Plant (STP) shall be used to feedback power to the STP. Relaxing this demand and allowing the generation partner to upgrade the gas and sell it as vehicle fuel would allow much higher value creation and leave plenty of margins for the contractor to pay for grid electricity for the STP. Subsidy and tax structure To be able to compete with the established diesel and petrol markets in the early implementation stages, biofuels need support and incentives. Based on international experiences, the following subsidies are recommended: :: Allow full tax exemption for biofuels used in transport, in order to make them competitive with fossil fuels during a build-up phase, e.g. 10 years; :: Allow tax exemption on the Motor Vehicle Tax (and other vehicle/ road related taxes/ duties), for vehicles that use biofuels and electricity produced locally in India and fulfils Euro V emission levels; :: Link the tax exemption eligibility for biofuels to stringent minimum sustainability criteria. The EU Renewable Energy Directive model has a well proven record, and can serve as inspiration to India; and :: Allow for grants or interest-free loans for investments in production of biofuels and biofuel refuelling infrastructure. By allowing a temporary tax exemption for biofuels, our assessment is that the cost per kilometre for a bus operator would be equivalent for ethanol and biogas compared to diesel. This could be achieved through a green tax switch, where a minor increase in diesel tax could finance the tax break for biofuels, making it cost-neutral to the government, 4. Subsidies as above can be combined with minimum blending quotas, as already outlined in the National Biofuels Policy of India. The policy has so far not managed to achieve its targets, and without imposing substantial penalties on oil marketing companies, it is doubtful if it ever will. By pushing for pure biofuels, (e.g. ED95 and CBG) and incentivising the development properly, it may give the early thrust the fuel suppliers need to subsequently achieve the set blending targets. Supporting research and development While the main processes in biofuels pro- autotechreview March 2016 Volume 5 Issue 3 23

EXHIBIT 17. 4 Example of tax switch to make biofuels competitive without revenue loss duction today are well understood, adaptation to local conditions will require learning more. Creating Indian institutions similar to the Swedish Gas Technology Centre (SGC), and BioDriv (an initiative to support liquid biofuels), which are owned by the private actors in the sector, sponsored by the Swedish Energy Agency, and includes a number of university faculties, can greatly accelerate the knowledge of how the best yield from biofuels can be achieved with Indian feedstock and substrates. Sequencing the transition To get the full potential from biofuels in India, a coordinated big move would be desirable. However, with respect to the complexities in the value chain and the regulatory space, such an approach would be immensely difficult to coordinate. A more robust approach would be to execute a phased journey that creates stable value chains on pilot scale for each of the fuel types that can gradually expanded and replicated across the states. Such an approach could be structured in four initial waves: :: Wave 1: Start building local integrated systems focused on city bus transportation, to build fuel production capacity at a minimum infrastructure cost. For bioethanol, this would imply constructing (or improving existing) ethanol plants in an area with high production volumes of suitable crops and a Tier II or Tier III city nearby. For biogas this would look similar, with the difference that the big STP s that are suitable for large-scale generation of biogas are already located near city centres. Municipalities should secure land to co-locate bus depots with these biogas plants to minimise logistics and piping costs, taking into account 24 EXAMPLE OF TAX SWITCH TO MAKE BIOFUELS COMPETITIVE WITHOUT REVENUE L perimeter security required under the PESO Act [23]. Municipal transport operators should be given clear targets on the expected number of buses to be operable in these pilots. In our view, there should be a potential for creating at least 100 plants under this model, each serving a fleet of 50-100 buses (and also waste collectors and distribution trucks) which should give India a flying start. :: Wave 2: Extending the reach of biofuels from city bus usage to intercity transport could be the next step. This would require deployment of refuelling stations at strategically located points on high-frequency routes, green highways. This would allow controlled testing of the likely required truck-based distribution of compressed gas, as is being done in Sweden today, or similarly for liquid ethanol in suitable fuel trucks. At this stage it is also of interest to start introducing local production of ethanol and biogas in smaller communities. This production would be either for vehicle use or for electricity generation to create cost efficient, smallscale, local energy solutions. :: Wave 3: With the experiences from the limited long-range distribution in Wave 2, the next step would be to increase the density of public biofuels pumps. This would address the range anxiety of car drivers and make them confident that they would not be standing without a refuelling point. Taxis, autos and other high-mileage light vehicles should be the prime targets and municipal incentives such as restricted access to airport could be applied to stimulate adoption. For wider acceptance among private drivers, incentives such as reduced tax on biofuels and one-off subsidies for alternative fuel vehicles (funded by an increase in taxes on conventional fuel and cars) would likely be required. :: Wave 4: With the full business model proven for commercial and private vehicles, India would likely be at a similar situation where Sweden is today. From there, the internal learning of India will be much more valuable than what we can tell here. The waves above are focused on bioethanol and biogas. In parallel with these, India can gradually increase the blending levels of biodiesel in the regular diesel fuel. Given the current starting point, even reaching a 7 % blending level (similar to what is allowed under the EU fuel quality directive) would likely consume most of the production of biodiesel in India for the coming 10 years. References [1] Source: The Economist, 2013 [2] Source: Business Sweden, Perspective on Biofuels in India, preliminary calculations [3] Biofuels could theoretically generate 1,800 PJ (petajoule) in 2020 as compared to a forecasted total demand of 12,700 PJ [4] Source: The World Bank, What a waste: A global review of solid waste management, 2012 [5] Source: McKinsey Global Institute, India s Urban Awakening, 2011 [6] Assuming an oil price of USD 75/barrel [7] Source: The Economist [8] Source: Bloomberg New Energy Finance, Next Generation Ethanol, 2011 [9] Ibid. [10] Source: SOU 2013:84 [11] Source: Long term drivers of food prices, World Bank 2013 [12] Source: Ibid. [13] Source: epure, State of the Industry Report 2014 [14] Source: Bloomberg New Energy Finance, Next Generation Ethanol, 2011 [15] Source: McKinsey Global Institute [16] Cylinders of 14.2 kgs [17] Source: Business Sweden estimate [18] See for example www.cleanergy.com [19] Source: Making integrated food-energy systems work for people and climate, UN Food and Agriculture Organisation (FAO), 2011 [20] Source: Bloomberg New Energy Finance, Next Generation Ethanol, 2011 [21] Source: Bloomberg New Energy Finance, Next Generation Ethanol, 2011. [22] Source: National Policy on Biofuels [23] PESO=Petroleum and Explosives Safety Organization. Alternatively, the relevant government body could consider relaxing PESO for biofuels with the purpose of accelerating deployment of distribution points in land-scarce areas. Read this article on