Offshore wind in Germany: from market premiums to Contracts for Difference?

Briefing

Offshore wind energy plays a central role in Germany’s energy transition and is crucial for achieving climate targets and securing a sustainable energy supply. Since the Offshore Wind Energy Act (WindSeeG) came into force on 1 January 2017, the previously decentralised approval process for offshore wind turbines based on the “first come, first served” principle, has been fundamentally reformed and converted into a centralised tendering process for which the Federal Network Agency (BNetzA) is responsible. These reforms introduced since then are intended not only to increase efficiency, but also to improve transparency and fairness in competition. However, practice shows that strategies such as zero-cent bids and the resulting market uncertainty pose new challenges. This insight examines the structure and dynamics of the current tendering system, analyses the impact on investment and discusses possible reform approaches – particularly the introduction of symmetrical Contracts for Difference (CfD) as a potential future model for offshore wind energy in Germany.

Structure of the central tendering process

The annual tender volumes for offshore wind energy projects in the order of up to 9,000 megawatts specified for the calendar years 2025 and 2026 in accordance with Section 2a (1) No. 2 WindSeeG for offshore wind energy projects in the order of up to 9,000 megawatts are divided equally between areas that have previously undergone a suitability assessment by the Federal Maritime and Hydrographic Agency (BSH) (so-called centrally pre-assessed areas). The remaining shares are allocated to marine areas that have not undergone such a preliminary examination. Different tendering procedures apply to both categories, in particular selection procedures.

Criteria-based award procedure for areas not subject to central preliminary examination

In the bidding process for areas that have not been centrally pre-examined, the BNetzA reviews several economic, social and ecological selection criteria. The decisive factors for the evaluation are the share of renewable energies and green hydrogen in the production process, the projected energy supply, noise pollution, seabed sealing by the turbines, and the creation of training places. Of central importance, with a weighting of 60%, is the bid value, i.e. the lowest state-guaranteed price for feeding the electricity generated into the energy grid.

Competition distortion in the award procedure due to zero-cent strategies

Lower award criteria apply to the areas that have already been centrally pre-examined, where—according to Section 20(1) WindSeeG—the award criteria are based exclusively on the lowest bid value. In the past, this has sometimes led to bid values of zero pence per kilowatt hour to prevail in the procedure.

The dynamic bidding process – an approach to market stabilisation?

In response to the zero-cent strategy, the amendment to the WindSeeG of 20 July 2022 introduced the dynamic bidding procedure in accordance with Section 21 WindSeeG. This provides that, in the event of several bids of zero cents per kilowatt hour, “second bid component” rapid bidding rounds are conducted, in which investors can offer increasing monetary amounts to obtain an award. The revenues generated from this process are intended to be used for public-interest purposes, in particular for reducing electricity costs.

Continued elimination of government subsidies for offshore wind energy

The problem remains that the market premium is completely eliminated for bids of zero cents per kilowatt hour, as it is calculated according to Section 20 (2) WindSeeG in conjunction with Section 23 (1) of the Renewable Energy Sources Act (EEG) as the difference between the bid value of the first bidding round and the market value of the energy. The purpose of the market premium is precisely to compensate for market fluctuations and make renewable energies competitive. Investors who follow the zero-cent strategy, on the other hand, rely exclusively on rising energy prices and not on government subsidies.

Declining investment interest hinders expansion of offshore wind energy

The situation was exacerbated by the fact that individual data, particularly in the selection process for areas that had not been centrally pre-examined, such as the electricity composition in the manufacturing process, were difficult to determine. This reduced investment security. The situation looked even bleaker when not a single bid was submitted in August this year in tenders for seabed areas for offshore wind energy production totalling 2,500 MW.

Reform proposals from the associations: symmetrical CfDs as an alternative?

In response to the reluctance to invest, wind energy associations are increasingly calling for the introduction of bilateral Contracts for Difference (CfD), like the model used in the United Kingdom, instead of the previous market premium.

This model is also based on a central tendering procedure in which investors, like the bidding process, specify a so-called “strike price” that sets the lowest state-guaranteed remuneration for the energy generated. A characteristic feature of the model is that the strike price acts as both a positive and a negative market premium: if the market price is above the strike price, investors must pay the difference to the state, effectively ruling out zero-cent bids, as operators would have to pay their entire revenues to the state.

There are various design options within the specific structure of the CfD. In models that measure subsidies based on the actual amount of electricity fed into the grid (so-called “as-produced models”), a distinction can be made between a fixed bid value, as in the United Kingdom, and more flexible approaches with a defined bid corridor.

Strengthening competition for the German offshore wind industry

Thanks to the symmetrical CfD system, the German Offshore Wind Farm Operators Association (BWO) forecasts a reduction in electricity production costs of up to 30% compared to the existing regulation. Experience from neighbouring European countries such as the United Kingdom, Spain, Italy and France, which have already established symmetrical CfD systems, speaks in favour of this instrument.

Prospects for the national offshore wind energy sector

The current reluctance to bid is not solely attributable to the tendering system but is also linked to the specific risk profiles of the respective tender areas. We refer to our article : Offshore Wind Energy in Germany – Current Challenges. Regardless of this, long-term support is important to promote the offshore wind energy industry in a sustainable manner. The solution proposed by associations such as BWO and BDEW (Federal Association of Energy and Water Management) involving symmetrical CfDs has met with broad political approval. CfD systems have also received support from the Federal Minister for Economic Affairs and Energy, Katharina Reiche, who is calling for a reform of offshore wind energy subsidies through the introduction of CfDs based on the British model. At the supranational level, too, the CfD model has received significant support in a reform proposal by both the EU Commissioner for Energy (Dan Jørgensen) and a large majority of the European Parliament.

Services and Groups Projects, energy & infrastructure