Windflow sees fat margins in UK turbine market
by Pattrick Smellie
Nov. 17 (BusinessDesk) – Christchurch wind turbine innovator Windflow Technology Ltd. says it sees fat margins both for itself and for the Scottish farmers it is targeting under a British government subsidy scheme to encourage small-scale wind generation.
At a media briefing in Wellington on the NZAX-listed company’s $5.4 million equity-raising bid, Windflow chief executive Geoff Henderson said government-guaranteed feed-in tariffs for turbines installed under the new scheme are 10 times better than is being achieved in New Zealand, at current low wholesale power prices.
The emergence of the British scheme has thrown Windflow both a lifeline, as it has no forward orders beyond its sole customer, Te Rere Hau windfarm, where construction is almost complete, and a large, previously unexpected sales opportunity.
The capital-raising is being positioned as a “coming of age” for Windflow, after two decades of product development.
Depending on average wind speeds, a UK customer buying a Windflow 500 could expect a three to four year payback time, at internal rates of return between 20% and 30%, says a presentation prepared for the briefing.
Windflow is optimistic its 500 kilowatt two-bladed turbine will be a hit in the UK because the cut-off size for the highest level of government subsidy is a 500Kw unit, the 22 pence per kilowatt hour feed-in tariff is guaranteed to early adopters for 20 years, and Windflow is one of only two competitors whose product has International Electrotechnical Commission certification.
Windflow is also confident that even with a strong New Zealand dollar against the British pound, the firm’s $1.23 million asking price per turbine delivers sustainable profit margins.
“The market is so lucrative we expect to be able to adjust price to preserve profitability” at approximately $250,000 per turbine, said Henderson. “Significantly higher gross profit on sales to UK versus New Zealand means substantially fewer turbines need to be sold per year to achieve profitability.”
However, the capital-raising is driven largely by a requirement from Windflow’s bankers that it put foreign exchange hedging in place and strengthen its currently debt-free balance sheet before starting to export.
Windflow’s Scottish sales agent, Ventus Green Energy, has already taken deposits on 29 turbines, subject to resource consenting, with a strike rate on consents of around 50% expected, said Henderson.
Part of the scheme’s attraction was that it involved single turbines rather than windfarms, which face tough hurdles from community opponents.
Windflow has also taken 370 inquiries under the scheme, 113 site surveys have been carried out, and planning applications are lodged at 17 sites.
“Most of our discussions (with VGE) have been about quickly we could ramp up production,” said Henderson. VGE’s exclusive sales contract assumes 20 turbine sales by next June and 48 at June 2012. While the feed-in tariff will be reviewed in 2013, it would only be likely to be lowered if uptake on the scheme was outstripping expectations, he said.
The scheme was confirmed on its existing terms in the so-called “black Budget” delivered in Britain earlier this month.
Henderson said Windflow’s 20% cornerstone shareholder, state-owned MightyRiverPower Ltd., was reserving its position on the capital-raising while approaches to other investors occurred.
Expressions of support have been received from U.S. investors and the U.K.-based Goldsmith family, who hold a significant interest.
There was also little momentum at present to build the consented Long Gully windfarm, behind Wellington, for MRP, because of low New Zealand wholesale electricity prices. Henderson revealed that Long Gully could be advanced with another investor, operating on a community ownership model.