Balancing India’s biofuels equation

While Indian original equipment manufacturers (OEMs) are investing in BEVs and hybrids to align with the global shift towards electric mobility, they remain mindful of the challenges and practical realities of the Indian market. 

In the milieu, Indian car manufacturers are proactively diversifying their offerings (e.g., providing flex-fuel vehicles) to cater to the evolving market needs. With strong leadership, industry engagement, and collaborative efforts from OEMs and oil marketing companies (OMCs), the country is on track to achieve a 20% bioethanol blending target in FY2025-26, according to S&P Global Mobility. This serves as a valuable lesson for scaling up bio-CNG adoption in the transport sector.  

Flex-fuel vehicles are also a strategically important option, with the potential to reduce India's reliance on gasoline. This multifaceted approach is essential for decreasing import dependence and fostering a sustainable automotive ecosystem.

CNG, with the support of the government and over 50 city gas distribution (CGD) companies, has established a strong presence, achieving a penetration rate of about 18% in the passenger car segment. The ongoing expansion of CNG refuelling infrastructure provides consumers with a cost-effective alternative.  

Alongside the rapid growth of the CNG vehicle parc, the government's emphasis on promoting bio-CNG has become increasingly important to offset the decline in domestic gas production and the rising share of imported LNG. 

OEMs in India are actively exploring and developing biofuel technologies. Recent developments include:  

• Research and development of engines compatible with higher ethanol blends

• Production of flex-fuel vehicles that can run on varying blends of gasoline and ethanol 

• Collaboration with bio-CNG producers to ensure compatibility and optimise vehicle performance

Gas demand across sectors such as city gas, power, industries and fertilisers is met by a diversified portfolio of gas, broadly classified into domestic gas and LNG. 

Domestic gas in India is primarily sourced from two main categories: Administered Price Mechanism (APM) gas from legacy fields operated by public sector companies with regulated pricing, and newer onshore and deepwater gas with market-linked pricing. 

APM gas is the cheapest option currently and is allocated on a priority basis to the CGD, fertiliser and power sectors. That said, APM gas allocation is expected to decline in the near-to-medium term due to persistent challenges with current gas sources, according to S&P Global Commodity Insights. Additionally, APM gas volumes are decreasing (see figure below), and prices are expected to rise with market liberalisation, making it costlier to fulfil demand from city gas and other gas consumers. Similarly, deepwater gas has limited availability, and the lack of significant new discoveries will eventually lead to a diminished market size. More importantly, this will compel CGD companies to optimise costs or enlarge their gas portfolio with alternative sources, such as compressed biogas (CBG) and LNG. 

While LNG remains crucial due to its scale and availability, CBG offers a unique advantage as a domestic resource that can reduce dependence on imports and be directly incorporated into existing natural gas infrastructure. Although CBG cannot currently match the scale of LNG, its potential lies in enhancing energy security and supporting sustainability goals. 

For CGD companies, sourcing LNG is not a challenge owing to existing aggregators such as GAIL and Indian Oil Corporation Limited (IOCL). However, there are more barriers to CBG adoption, and scaling up its production is necessary to fully capitalise on its benefits. Notably, IOCL has estimated a CBG potential of approximately 62 million ton (89 Billion cubic metres per year). Yet, with 94 operational CBG plants, the total supply amounts to only 36,274 ton (until January 2025 of the fiscal year. India’s fiscal year runs from April to March), a fraction of this vast potential. 

‘Sweet spots’ for biogas

The Indian government provides substantial support through Central Financial Assistance (CFA), which reduces capital expenditure on biogas plants. This includes a scheme to support and subsidise the construction of pipelines connecting bio-CNG plants with CGD networks. Besides, it has other schemes such as Market Development Assistance (MDA) to manage the offtake of fermented organic manure produced from these plants. The assistance, targeting both CGD and CBG sectors, enables better integration of CBG into urban infrastructure, facilitating market access and scalability for producers. 

Furthermore, to increase CBG uptake in transport and industries, the government introduced the Sustainable Alternative Towards Affordable Transportation (SATAT) scheme, which pegs CBG prices to CNG retail prices. The government has also introduced a regulatory mandate for CGD companies to start blending CBG by fiscal 2025-26 (April 2026 onwards), starting with a requirement to have up to 1% of each CGD company’s total transport (CNG)/residential consumption fulfilled by CBG. 

Still, scaling up bio-CNG production and distribution faces challenges  

Sustainable supplies of feedstock: The Indian government recognised the potential of converting waste to wealth and launched the SATAT initiative in 2018, aiming to produce 15 million ton of CBG by FY2023-24 by establishing 5,000 CBG plants. With over 50% of its land area being arable and having one of the largest livestock populations, India has the potential to supply the required feedstock for biofuel generation. However, sourcing, segregating and storing feedstock pose challenges for producers due to its seasonal availability and price uncertainty. The varying production costs, driven by feedstock sourcing challenges and pricing, hinder scalability of and investment in CBG plants. 

Pricing mechanisms: In India, domestically produced gas was historically benchmarked to international oil products. However, the government has intervened to regulate gas prices despite its eventual goal of moving towards liberalised markets. For example, APM gas is currently linked to 10% of the Indian crude basket (Derived basket comprising sour grade (Oman and Dubai) and sweet grade (Dated Brent) crude oil), with a cap of $6.75/MMBtu for legacy fields, and deepwater gas prices are set twice in a fiscal year with a ceiling price cap. Under the SATAT scheme, CBG prices across the country are pegged to tranches of CNG retail prices. For example, if CNG retails at INR 75 per kg (approximately $17.5 per MMBtu), the corresponding CBG price is INR 62 per kg (approximately $14.5 per MMBtu) (see table below). However, CNG prices are set by individual city gas companies based on their supply mix, and prices vary widely across the country ($16-23 per MMBtu). As a result, the price mechanism only works for certain feedstocks in specific geographies. On average, feedstock accounts for 26% of the total cost, and in some cases, using more expensive feedstock is not viable due to the CNG indexation linkage.

Expanding CBG marketing to sectors beyond city gas will drive further growth. However, a more robust and flexible pricing mechanism than the CNG linkage is required to accelerate CBG adoption. The existing linkage of biogas (compressed to create CBG or bio-CNG) prices to CNG retail prices results in regional variations, hindering market competitiveness and sector growth.

Investments and project progress: Biogas needs to attract more investment. Despite government support, the sector has made slow progress. As a result, the target of establishing numerous plants to tap biogas potential has not been met.

India, with its vast agricultural landscape and large population, generates substantial organic waste from various sources, making it an ideal candidate for bio-CNG development. Among other feedstocks for bio-CNG production, such as organic municipal waste and animal waste, agricultural residues, including paddy and wheat residues, are the major ones. Utilising agricultural residues also addresses the critical issue of wasteful burning of crop residues in fields. This could prevent up to 3 billion ton of carbon emissions, according to the United Nation’s Food and Agriculture Organization, while improving air quality. Building infrastructure to enhance the use of agricultural residues for biofuels will create additional income opportunities for farmers.

Measures to support sustainable feedstock supplies:

• Assuring availability: Mapping and monitoring of agricultural residues as feedstock to ensure its long-term supplies. Long-term supply contracts can also help mitigate risks related to feedstock supply and cost 

• Regional integration: Establishing a regional ecosystem for feedstock collection from the farm gate, storage, and bio-CNG production units, further connected to bio-CNG offtake networks, for reduced cost curves. The offtake of bio-manure is a critical component that needs to be assured to complete the value chain

• Technology and process improvements: Ensuring uninterrupted supplies for feedstock collection and processing equipment, along with efficient technical knowhow to sustain and improve bio-CNG production yields

An S&P Global Commodity Insights’ analysis (see figure below) of the price ranges for various gas supply options for city gas companies indicates that CBG prices ($10.7–$17.3/MMBtu) are closely aligned with import prices of LNG, particularly spot LNG ($10.6–$16.6/MMBtu), during the 2025-30 timeframe. This makes a compelling case to index CBG prices to LNG import prices, and the transition to this proposed pricing regime is expected to have minimal impact on the profit margins of city gas companies. 

Additionally, volatility in LNG prices could be mitigated through the value of carbon credits, providing a steady incentive for CBG adoption. Currently, a national carbon offset mechanism is being developed. Several linkage options can be explored to make this transition feasible. For instance, the government could regulate CBG prices by setting premiums or discounts relative to LNG import prices. Once the market is sufficiently large, premiums or discounts can be determined by the market. One possible approach is to link CBG prices to India’s average LNG landed price over the past three months. Alternatively, prices for the upcoming month could be set based on a weighted formula, such as 110% or 120% of the average LNG import price between the 26th of the previous month and the 25th of the current month—an approach similar to that currently used for APM gas. 

Linking CBG prices to LNG import prices uniformly across the country can provide producers with the flexibility to reach all gas-demand sectors, ensuring economic viability, particularly as feedstock costs and regional variances come into play. This approach can help bridge the gap until a mature market develops. 

Indexing CBG prices to LNG import prices can also offer greater stability and predictability. The government can regulate CBG prices by setting premiums or discounts relative to LNG import prices until market forces take over. 

The CBG sector’s progress has been slow despite government support. It needs to attract more investment. With an estimated production capacity of 88 Bcm per year, CBG has the potential to serve a large number of gas consumers. Our analysis suggests that CBG prices can compete with LNG import prices, particularly spot prices. Adopting a price indexation mechanism linked to LNG import prices for CBG could attract investment and foster growth of biogas consumption across all sectors, especially transport. In addition to the current policies, the government can adopt several strategies to boost investment in and adoption of CBG. These include introducing segmented pricing, with lower rates for transport and domestic gas and higher rates for commercial use, as is the case for APM gas. Offering carbon credit incentives to producers and CGD firms, similar to the European Union model, could enhance competitiveness and make CBG a viable option for hard-to-abate sectors. 

Along with supportive policy frameworks, indirect enablers such as low-priced biofuels (as in the US and Brazil) and lower tax rates or tax exemptions for bio-CNG and flex-fuel vehicles can boost production and co

India's commitment to net-zero emissions requires a multi-faceted approach, where biofuels play a crucial role alongside BEVs and hybrids. While bioethanol blending has gained momentum, scaling up bio-CNG production will necessitate addressing feedstock constraints, pricing inefficiencies and investment bottlenecks. Strategic policy interventions, supply chain optimisation and industry collaboration are essential to unlock bio-CNG’s full potential. A well-structured framework, combined with targeted incentives, can position bio-CNG as a viable and competitive alternative, driving India towards a self-reliant and sustainable energy future.