In UCG, the coal seam is gasified underground, by injecting either steam/hot air or a combination of both, converting the hydrocarbons to a syngas mixture, rich in inert gases. This mixture can then be further processed to remove the inert gases and produce synfuels. The highlights of UCG are NOx emissions which are comparable to combined cycle power plants, lesser ash volumes and lower capital costs. (See the GCC blog for results from a life cycle study on UCG compared to other "clean coal" technologies.) On the other hand, the operation of a UCG plant/reactor requires detailed knowledge of the stability/safety of the coal seam. Because the coal in the ground is being gasified, some subsidence will occur. Additionally, care must be taken to make sure that the ground water does not get contaminated by the organics produced during UCG. Accordingly, the UCG well should be located below the water table, and should be operated under negative pressure to ensure no leakage of fluids to the ground water. Additional details about UCG are given in the links below. By far, the best example of a UCG facility has been the Chinchilla project in Australia, which was the longest running demonstration project of its kind.
Update: I recently became aware of the Majuba project in South Africa (Thanks David!), which is supposedly more technically challenging than Chinchilla.
Whereas both the Majuba & Chinchilla projects converted/convert the gases from UCG into power, the gases could also be converted to synfuels. My opinions after the jump.
I am very interested in UCG, because this represents a unique combination of challenges in mine safety, mine engineering, coal gasification (fuel science) and potential CO2 sequestration. Moreover, when the ash content of the coal is too high (~30-40%), it may be economical to gasify it in-place instead of mining and gasifying it ex-situ. This is useful especially for Indian coals which have a higher ash content compared to most US coals. Therefore, a future CTL plant in India need not entirely be an above-ground structure. In fact, partial gasification to produce syngas and the conversion of this produced gas above ground to liquids might be cheaper. A phenomenon which is closely related to UCG is coal fires (UCF), which result from the burning of the coal seam. Examples are Centralia (PA), and fires in the Jharia coal seam. See Prof. Anupma Prakash's web page for more information on these phenomena.
Hat tip: Green Car Congress
Best practices in UCG
Underground coal gasification: A new clean coal utilization technique for India
Primer on UCG