Chennai: Rising interest rates coupled with a drop in wind speeds have slowed this fiscal year’s wind energy capacity addition by 10% in Tamil Nadu, which produces half of India’s wind power.

According to K. Kasthurirangaian, vice-chairman of industry body Indian Wind Power Association (IWPA), capacity addition in the state would be between 400MW and 450MW for the year ending March, compared with 500MW added in 2006-07.

Investors are also moving cautiously as more than one-third of wind mills, some 800MW of installed capacity, in the southern districts of Tamil Nadu were not utilized in the peak season because the state electricity board did not have infrastructure to “wheel" in the power produced, or infrastructure to match generating points to users, IWPA claimed. Around 2,400MW is concentrated in southern districts of Tamil Nadu.

Wind speeds this year have declined by 10%, resulting in shortage in power generation in Tamil Nadu, which has 3,684MW of installed wind energy capacity.

“Locations which have lower wind energy generation have become unviable, as there has been a considerable reduction in IRR (internal rate of return) compared with last year," said S.D. Singh, president of Vestas RRB India Ltd, which manufactures wind energy equipment.

IRR is a measure to determine project viability—a higher IRR is preferred and usually investors prefer IRR to be higher than their cost of funding.

Singh said, in general, an IRR of 12% is considered a break-even point, but with borrowing costs increasing by at least 300 basis points in the past year, projects that have lower wind energy potential are becoming unviable. The amount of power produced from a windmill depends on the wind speeds, which, in turn, are based on the location.

Within Tamil Nadu, a wind farm with 1MW capacity can generate between 18 lakh and 34 lakh units annually based on the location. In the caseof Maharashtra, it would range between 1.8 million and two million units per annum, said Singh.

P. Nataraj, managing director of KPR Mill Ltd, a Tirupur-based textile maker, agrees that underutilization of installed capacity along with increase in cost of funding does bring down the IRR. KPR gets three-fourths of its power requirements from wind energy.

Both Singh and Kasthurirangaian are hopeful that investors would come back to wind energy, in part because the Tamil Nadu Electricity Board is planning to lay new lines by next windy season, which will commence around May 2008.

“The project will be viable provided a customer is taking benefit of income tax depreciation and is captive user of the power. Carbon trading is also making these project more attractive and gives additional revenue to the investor," said Singh. Vestas received $55 million (Rs217.25 crore) investment from Merrill Lynch and is increasing production of wind turbines and blades.

Suzlon Energy Ltd is the other major wind energy company in India.