India’s Strategic Shift Toward Domestic Coal: Legal and Regulatory Implications for the Power Sector

Summary

In early 2026, the Government of India signalled its policy intent to reduce the power sector’s dependence on imported thermal coal by encouraging greater utilisation of domestically produced coal. The proposed reduction reported to be in the range of 30 percent for certain power generators, forms part of a broader strategy to strengthen energy security, utilise growing domestic coal inventories, and promote self-reliance in fuel supply.

While the initiative is currently being pursued through administrative guidance rather than binding statutory mandates, the policy direction carries significant operational, contractual, and regulatory implications for stakeholders across the power sector, including generators, distribution licensees, coal suppliers, and financial institutions.

Background

Coal continues to play a dominant role in India’s energy mix, accounting for roughly three-quarters of electricity generation. Although India has accelerated the deployment of renewable energy as part of its commitment to achieve net-zero emissions by 2070, coal-based generation remains critical to ensuring baseload power supply.

Against this backdrop, the Government has encouraged power producers particularly those historically reliant on imported coal to progressively substitute imported fuel with domestic supplies produced primarily by Coal India Limited and other domestic mining entities. The policy objective is to reduce exposure to volatile international coal markets while utilising increased domestic production and available inventories.

Policy Context

Domestic coal production has grown steadily in recent years, with Coal India Limited reporting record production levels in the previous fiscal year. As a result, coal stockpiles at power plants and mining sites have risen significantly.

In response, the Ministry of Coal and the Ministry of Power have encouraged thermal power generators to increase the proportion of domestic coal used in their fuel mix. In practical terms, several power plants designed to rely substantially on imported coal are being encouraged to blend higher percentages of domestic coal.

The initiative forms part of India’s broader policy objective of strengthening domestic supply chains, improving energy security, and reducing the country’s import dependence.

Operational Considerations

For certain generating stations, particularly coastal plants designed specifically to operate on imported coal, transitioning toward higher proportions of domestic coal may require technical adjustments.

Imported coal generally has higher calorific value and different combustion characteristics compared to many domestic coal grades. Consequently, generators may need to undertake measures such as:

• boiler recalibration and combustion optimisation;
• modifications to fuel handling and milling systems; and
• additional capital expenditure to maintain operational efficiency.

Such operational changes could have cost implications for generators and may ultimately affect tariff determinations.

Legal and Regulatory Implications

Impact on Power Purchase Agreements

Most thermal power projects in India operate under long-term Power Purchase Agreements (PPAs), which allocate fuel supply risks between generators and procurers. Changes in fuel sourcing or blending practices may affect contractual arrangements relating to:

• fuel cost pass-through mechanisms;
• heat rate assumptions; and
• operational performance parameters.

Where the government issues binding regulatory directions affecting fuel procurement, generators may examine whether contractual relief mechanisms such as change-in-law provisions are applicable. However, policy guidance alone does not automatically trigger such claims and must be assessed against the specific wording of the relevant PPA.

Regulatory Oversight

Tariff regulation for interstate generating stations falls under the jurisdiction of the Central Electricity Regulatory Commission, while state-level projects are regulated by State Electricity Regulatory Commissions under the framework of the Electricity Act, 2003.

If adjustments in fuel mix result in material cost variations, generators may seek tariff revisions or cost pass-through approvals from the relevant regulatory commissions, subject to prudence review.

Regulators may also issue guidance regarding coal blending practices or compliance mechanisms if such policies are formalised through regulatory instruments.

Implications for Coal Supply Contracts

A reduction in import volumes may also affect existing international coal supply agreements. Generators that have entered into long-term import contracts may need to manage contractual obligations relating to minimum offtake commitments, pricing arrangements, or termination provisions.

Consequently, careful contractual review and risk management will be essential for companies adjusting their procurement strategies.

Sectoral Impact

Although the policy initiative primarily targets the power sector, imported coal may continue to play an important role in other industries such as cement and sponge iron manufacturing, where specific coal grades are required.

At the same time, India is expected to continue expanding coal-based generation capacity in the medium term to meet rising electricity demand, even as renewable energy capacity grows rapidly. The current policy therefore represents a recalibration of fuel sourcing strategy rather than an immediate reduction in coal-based generation.

Conclusion

India’s evolving policy approach toward reducing imported thermal coal in the power sector reflects a broader effort to enhance energy security and strengthen domestic supply chains. While the initiative is currently being advanced primarily through policy guidance, it has meaningful implications for fuel procurement strategies, project operations, and contractual frameworks within the electricity sector.

Power producers, distribution utilities, and investors should closely monitor regulatory developments and government directives in this area. In particular, stakeholders may need to review existing PPAs, coal supply agreements, and tariff structures to ensure alignment with the evolving policy landscape.

As the policy direction develops further, additional regulatory clarification and commercial adjustments across the power sector are likely to follow.