Simulating the effects of the British blockade will be difficult to do in Civ. Since every city has to produce food for itself, each individual city must be self-sufficent, where as in reality urban centers usually import food. I suppose you could cut off Germany from importing luxuries or resources, but this will be hard because the resource always makes it through as long as a single road link or a single harbor connected by one open sea square exists. I guess it would be possible if you gave the British a crapload of light units, but the AI would just stack them if left to its own devices.
I have not been able to get the scenario to run (computer problems), so I don't know how the naval bombardment aspect is working out. I came up with a possible idea to help protect cities as well as make naval battles important. Is it possible to add a bunch of Coastal Fortress type improvements to a city, like Coastal Fortress 1, CF 2, CF3, ect? Since Coastal fortresses always take the first hit and don't really do anything else, this would make sustained bombardment neccessary, making it impossible to kill a half-million civilians in a week with naval bombardment. I have no idea if this is possible though; I haven't been very successful with the editor
It is unlikely that the Germans could have defeated the entire Grand Fleet. The Germans had better gunnery and armor, and the British employed defective shells, but they also had almost twice the dreadnaughts, and more and bigger heavy guns. Dogger Bank, Coronel, and the Battle of the Falklands were all fairly large engagments.