Faced with high oil prices and increasing oil imports to meet the country's rising demand for transportation fuels, there is now a perception that India's energy security is threatened. In addition to securing overseas oil fields, alternative options include biomass-based fuels and coal-to-liquid (CTL) fuels. While the production of biodiesel has now become a national mission, CTL fuels are also gaining currency as a commercially attractive proposition because of the potentially cleaner characteristics. Broadly, there are two different methods to convert coal to synthetic liquid fuels: the first is direct liquefaction, which adds hydrogen to a slurry of pulverised coal and recycled coal-derived liquids in the presence of catalysts. The process is efficient, but further refining is needed to achieve high-grade fuel characteristics. The indirect liquefaction process first gasifies coal using oxygen and steam to form synthesis gas, or syngas (a mixture of hydrogen and carbon monoxide). Using the Fischer-Tropsch process, the syngas is purified and catalytically combined to produce high quality, ultra-clean products. Several CTL projects are being considered in India. Coal India Ltd and Oil India Ltd plan a $2.5-billion project based on direct liquefaction of 3.5 million tonne of low-ash, high-sulphur Assam coal to produce about 2 million barrels of diesel and naphtha. Endorsed by the finance ministry's investment commission, the Tatas and Sasol of South Africa are promoting a large $8-billion indirect liquefaction project using Sasol's gasification technology to convert high-ash, open-cast mined coal into 80,000 barrels per day (bpd) of liquid products, which can then be refined to produce diesel, naphtha, jet fuel, LPG and base oils (lubricants). About 1-1.4 billion tonnes (bt) of extractable open cast coal mining reserves will be needed to produce the annual coal requirement of 28-31 mt. More recently, Reliance Industries has also put forward an $8-billion proposal for an indirect liquefaction pithead plant using Mahanadi coal to produce 80,000 bpd of synthetic oil products. Reliance plans to use US technology, and has requested the allocation of three coal blocks with 1.6 bt of reserves in the Talcher region.While CTL projects may make commercial sense given current high oil prices, there are some concerns about the benefits of converting a solid primary fuel, which is the dominant source of electricity production, into a liquid primary energy resource. As the Sankar Committee and the integrated energy policy reports point out, India does not have surplus coal to meet the demand for power generation and the fact that India only has an estimated 56-71 bt of reserves, out of 250 bt in resources. Under these conditions, investing in CTL might compromise the ability to meet electricity demand using domestic coal. So, large CTL plants will exacerbate coal import dependence and could threaten India's energy security. Furthermore, the volatility of oil prices dramatically affects the commercial viability of CTL plants. In the late '70s, assuming high oil prices, the US invested in six CTL projects. But by the early '80s, all its products became unviable due to a sustained drop in oil prices.These were terminated in 1985. Hence, Companies are demanding government subsidies and incentives to maintain commercial viability. However, specific incentives just for CTL would promote distortions.