The government has ordered Coal India to guarantee 20 years of supplies to private power producers in a bid to curb chronic electricity shortages that have threatened economic growth, an official statement said on Wednesday.
The state-run company, which accounts for about 80% of coal production, aims to produce 464 million tonnes in 2012/13, but it is already struggling to meet a scaled down target of 440 million tonnes in 2011/12.
India has hiked its coal import target by over a third to about 114 million tonnes in the fiscal year ending March.
Until now, Coal India's long term contracts were for a five year period. It signed the last set in 2009.
The company, which has trouble obtaining environmental clearances and land acquisition approvals quickly, has now been asked to sign 20-year fuel supply deals with power projects that have just started working or are due to be commissioned by 2015.
The government directive followed intensive lobbying by India's top power executives, who had sought the help of Prime Minister Manmohan Singh to boost supplies of coal, which fuels more than half of India's electricity generation.
"These arrangements would provide relief to power plants with an estimated capacity of more than 50,000 MW," the statement said.
"The proposed set of arrangements is being seen as a major step forward in solving the problems of the power sector in the country and is likely to boost investors' confidence in India's power sector," it added.
Some analysts, however, said the attempt to boost supplies to power producers will be constrained by stagnating local coal output.
"Local coal production is not going up and without that how is it possible to meet fresh commitments Coal India may make through new fuel supply agreements to power companies," said V Srinivisan, sector analyst with Angel Broking.
Shares in top private power producers rose after the statement, with Reliance Power rising 12.9% and Tata Power gaining 5.9%. Adani Power closed up 13.78%.
India's fuel supply problems have been compounded by lower-than-expected natural gas output, high fuel import costs and hefty subsidies on power tariffs that the inability of producers to increase electricity prices for consumers for political reasons.