Need for action in offshore auctions: Study proposes new approach to CfD funding

Hamburg/Karlsruhe. The financing of offshore wind projects is coming under increasing pressure. Rising costs and growing risks are leading to auctions in Germany and other European countries sometimes ending without any bids. This jeopardizes further offshore expansion and thus the overarching energy policy goals of affordability, security of supply and climate neutrality.

In Germany, the government has postponed the offshore auction process for 2026 to the following year in order to fundamentally redesign it. At the same time, the current funding framework under the Renewable Energy Sources Act (EEG) will cease at the end of 2026. The EU stipulates that financial support should be provided in the future by means of bilateral Contracts for Difference (CfDs). A new legal framework is therefore needed for the auctions planned from 2027 onward.

Frontier Economics has conducted a study on behalf of EnBW to examine the most efficient model for achieving offshore expansion targets. The independent study recommends the introduction of a production-dependent bilateral CfD. This state protection model is linked to the amount of electricity actually generated and can be viewed as a refinement of the current sliding market premium model.

Since the CfD is awarded several years before any construction work begins, investors face risks in the intervening period that are difficult to calculate. It is therefore important to improve planning certainty by adapting key cost factors such as interest rates and raw material or component prices to the risk profile of an offshore project during the development and construction phase.

In addition to government support in the form of CfDs, private-sector power purchase agreements (PPAs) also remain important. According to EU requirements, both instruments should be interlinked in order to boost project financing and promote decarbonization of industry. Several years pass between the submission of bids and the possible PPA delivery start date in Germany, which means that the PPA contracts generally cannot be concluded at the time they are awarded. A one-off option to exit the CfD until the investment decision is made gives developers the necessary flexibility to hedge parts or all of the generation using PPAs instead of the CfD. This strengthens the market for green industrial electricity and opens up additional financing paths.

Michael Class, Head of Generation Portfolio Development at EnBW explained: “EnBW is committed to making the transition of the energy system as climate-friendly, secure and affordable as possible. The CfD model proposed in the study cuts system costs while making it possible to better plan offshore projects, thereby increasing the likelihood of them being built. Energy and climate targets thus remain achievable despite rising costs.”

Dr. Matthias Janssen, Executive Director at Frontier Economics, added: “The findings of our analysis show that a production-dependent CfD with phase-appropriate price adjustment reduces uncertainty and cuts financing costs, increasing the likelihood of projects actually being implemented. What’s more, CfDs and PPAs complement one another in the model. This model is attractive to the state because funding is only used when it is actually needed to achieve the offshore wind targets.”

About EnBW Energie Baden-Württemberg AG
With a workforce of some 30,000 employees, EnBW is one of the largest energy supply companies in Germany and Europe. Providing energy to some 5.5 million customers, EnBW serves all stages of the value chain, from generation and trading to grid operation and the sale of electricity, heat energy and gas. In the company’s transformation from a traditional energy provider to a sustainable infrastructure group, the expansion of renewable energy sources and of the distribution and transportation grids for electricity and gas, including hydrogen, are cornerstones of EnBW’s growth strategy and the focus of its investment spending. By 2030, EnBW plans gross investments of up to 50 billion euros, around 85 percent of which is earmarked for Germany. By then, around 80 percent of EnBW’s generation portfolio is set to consist of renewable energies. The phase-out of coal is targeted for completion by the end of 2028, provided the framework conditions allow it. These are key milestones on the way to achieving the company’s internal net zero target for greenhouse gas emissions by 2040. www.enbw.com