Modeling the Impact of Auction Design Changes on CfD Levels and Cancellation Risk for Offshore Wind Projects

Germany’s offshore wind expansion is under pressure following an unsuccessful tender in 2025, the postponement of the 2026 tenders, and press reports of cancellation risks for several sites awarded in earlier auctions. A key challenge of the current regime is developers’ extensive exposure to power price and cost volatility during the extended period (three to five years) between bid submission and final investment decision (FID). As a result, developers have to price this risk into bids through cost buffers and/or rely on “option-based bidding,” i.e., retaining the ability to cancel projects before FID if costs rise unexpectedly (see our paper on the German 2017 auctions when option-base bidding first became apparent for a more extensive description).

With the Offshore Wind Act under review, Iberdrola commissioned NERA to assess the potential impact of shortening this period of uncertainty by increasing the amount of information provided to bidders at the time of auction. This would allow developers to take FIDs much closer to the award date, reducing the risk they need to price into their bids.

NERA’s analysis examined empirical evidence on cost uncertainty and how it shapes bidding behavior and project viability. In a second step, NERA assessed to what extent moving FID and bid submission closer together reduces bid prices and the risk of project cancellation.

We developed an economic modeling framework to assess the proposed tender framework changes. This combined an analysis of historical price indices for key cost components (e.g., materials, equipment, and financing costs relevant for offshore wind farms) with a stylised financial model of offshore wind projects under a Contract for Difference (CfD) regime. Using an options-based model with Monte Carlo simulations, we compared bidding strategies under different timelines and risk appetite.

The results show that providing bidders with additional information through enhanced pre-development of auction sites and the shorter timelines from bid date to FID that it brings can materially improve offshore wind auction outcomes.

• For bidders relying on option-based bidding, the risk of project cancellation falls from more than 30% to close to zero, with minimal impact on strike price levels.
• For risk-averse bidders that rely on cost buffers rather than optionality, CfD bid prices could fall by up to 30/MWh euro as cost buffers become less necessary, rendering their bids more competitive and thus potentially increasing competition in auctions.

Our study finds that switching to CfDs without further changes to the regulatory regime is likely to result in continued high levels of cancellation risk. We conclude that bringing bid submission closer to FID can further strengthen competition in tenders and significantly increase the likelihood that projects are delivered.

Please find the study here. Iberdrola was supported by Managing Director Dominik Hübler, Senior Consultants Leonie Janisch and Maximilian Czernin, and Associate Analyst Melchor de la Cruz Rothenfusser.

The project demonstrates how economic modeling can support practical improvements to renewable energy policy design. NERA regularly advises investors, developers, and regulators, combining rigorous economic analysis with advanced modeling to support policy design and investment decisions in renewable energy markets across Europe and beyond.