Better reconciliation of government and developer interests in offshore wind tenders Interview with Lara Schech on the study by EnBW and Frontier Economics on proposed changes to auction design

EEHH: Together with Frontier Economics, you have published a study that sets out how the offshore subsidy system would have to be further developed in the future in order to achieve the expansion targets. Can you briefly explain the main findings of the study?

Lara Schech: The study concludes that the continued expansion of offshore wind expansion requires a support framework that better distributes risks, ensures investment security and remains market-orientated. In the light of the upcoming reform of the Offshore Wind Energy Act (WindSeeG), Frontier Economics shows how government and developer interests can be better reconciled to increase the likelihood of project realisation.

The study is based on the expected introduction of bilateral contracts for difference, or CfDs for short. A reference price is set in an auction, which is compared with the market electricity price during the operating phase. If the market price is below the reference price, the state reimburses the operator for the difference. If the market value is higher, the operator pays this difference back to the state.

Frontier Economics has compared various design models, in particular production-dependent CfDs, which are measured according to the actual electricity yield of the wind farm, and production-independent CfDs, which are measured according to a reference wind farm. If the latter is suitably calibrated, the difference between the return profiles of the two models is negligible. Nevertheless, the study recommends production-dependent CfDs as the model of choice. They have been tried and tested internationally and are relatively easy to implement. Production-independent models are much more complex and therefore more prone to error by design. This is crucial, especially in view of tight schedules and the implementation risks that already exist. We cannot afford another break in momentum for offshore wind.

Another important component is the indexation of the reference price. The study develops a concrete solution in which particularly cost-intensive and volatile components, such as wind turbines or steel, are taken into account via specific indices. Other costs are adjusted in line with the general inflation rate. This increases the probability of implementation without shifting the risks completely on to the state.

Without a corresponding adjustment of the regulatory framework, the widespread implementation of CfDs risks crowding out the PPA market. To preserve both and ensure their compatibility, the study proposes a two-stage allocation system: after the contract has been awarded, developers have the option – until the final investment decision is made at the latest – to voluntarily carve out parts or even all of the capacity from the CfD regime and market it via long-term power purchase agreements. To prevent “cherry picking”, a return to the CfD is then precluded. However, this approach keeps the path to market integration of offshore wind open.

EEHH: How does the production-based CfD you propose differ from the current German offshore support system in terms of (a) price mechanism, (b) risk distribution and c) flexibility for investors?

Lara Schech: In the past, projects in Germany were funded via a floating market premium. Once we started to see auctions with zero bids in 2017, in which developers waived funding, the auction system was amended to focus primarily on market-driven revenues. The projects that have been awarded in recent years are therefore dependent on future electricity prices or the conclusion of PPAs. In contrast, with a bilateral CfD, the electricity price risk is shared between the state and the developer. The downside risk is assumed by the state, but it also participates in the upside during periods of high market prices.

The indexation proposed by Frontier Economics also shares cost and financing risks. These have a significant impact on the profitability and feasibility of projects. At the same time, the state has a high interest in achieving its energy and climate targets. Since land in Germany is allocated up to seven years before an offshore wind farm is commissioned, indexation is particularly important because significant project risks can materialise during this long period. Nevertheless, indexing is not meant to represent “fully comprehensive insurance” for the developer, but rather only to cushion unproductive risks. Optimisation incentives remain in place through a predetermined non-indexed share.

The recommended PPA exit option offers more flexibility for investors. With this carve-out model, developers can adapt their marketing strategy to changing market conditions and help to maintain the PPA market despite CfD support.

EEHH: Can you briefly describe the expected cost structure of the new production-based CfD model? In particular, the relationship between state and market costs?

Lara Schech: With production-based CfD, government payments are not incurred permanently per se, as is the case with a fixed feed-in tariff, rather in correlation with market price developments. State costs arise when the market price is below the agreed reference price. If the market price is higher, the state is due repayments from the operator. These payments can theoretically cancel each other out over the term, but the final balance depends on market price developments.

The state should rather take on a hedging role in borderline cases. The proposed CfD model also provides for a voluntary switch to the PPA market, which must be decided before any payments have been made between the state and producers. If this option is exercised, there will also be fewer payments by the state

EEHH: No bids were put forward in the last offshore tender in the North Sea. Which specific elements of production-based CfD are intended to prevent this sort of no-bid‑situation (e.g. early price adjustments, exit options, risk transfer mechanisms) and how do they work in practice?

Lara Schech: In recent years, the offshore wind industry has been characterised by great uncertainties regarding cost and electricity price developments, sales markets and project schedules. It was not only in Germany that auctions failed to attract bids last year; numerous European offshore tenders remained undersubscribed. Almost without exception, the reason is that projects are not economically viable under the current auction and support regimes. The imbalance between expected returns and the cost risks is too great.

The CfD model proposed by the study addresses key points here: revenue protection, cost hedging and financial viability. By hedging market price risks, uncertainties about future revenues are significantly reduced. The resulting predictability of cash flows improves the bankability of projects. And indexing the reference price reduces the risk of unexpected cost increases like the ones we have experienced due to the pandemic or the invasion of Ukraine. The risk structure is thus improved overall and economic framework conditions become easier to calculate. This increases the likelihood of bids being submitted once again.

However, I must note that even if a CfD is introduced, futures auctions may still fail to attract bids, for example if the CfD reference price is capped or if implementation deadlines are too rigid. Ultimately, the success of an auction is not measured by whether projects are awarded, but by whether these projects are realised and thus actually contribute to the expansion of renewable energies. The bilateral CfD contributes to this, but its indexing is crucial.

EEHH: The North Sea Summit in Hamburg in January 2026 was very well received by the industry. What do you take away from the event and what should be the next steps for offshore wind energy?

Lara Schech: We also look back positively on the North Sea summit. The signal it sent out was vital for the industry, especially the clear commitment to offshore wind in the context of climate neutrality and competitiveness.

In Germany, the upcoming amendment to the WindSeeG is now the lever for the “new start for the offshore wind industry” proclaimed in the Hamburg Declaration. With the study, we have made a concrete proposal for a solid investment framework for future offshore wind projects. Its implementation would be a crucial next step in the economic realisation of projects. We also recommend, for example, limiting auction awards to “one site per bidder” to maintain stakeholder diversity and avoid cluster risks in offshore expansion.

On a broader level, it is not enough to simply focus on expansion targets in gigawatts. The actual volumes of energy delivered are much more important. This requires sufficient regulatory leeway to holistically develop and optimise the offshore site landscape. Auction design alone can promote system integration and offer corresponding incentives for innovation and flexibility.