Package Bids in Combinatorial Electricity Auctions: Selection, Welfare Losses, and Alternatives

2025-02-13

AI Summary

In electricity combinatorial auctions, the restriction on XOR bundle bids limits bidders’ preference expression and incurs significant social welfare loss. Method: This paper proposes a computationally feasible dynamic envelope bid selection mechanism: (i) it quantifies welfare loss from “exclusive block group” bids in European electricity markets; (ii) it integrates budget constraints and price predictability priors to design a bid-space compression algorithm and a counterfactual equilibrium price simulation method; and (iii) it formulates bid selection as an integer linear program augmented with welfare sensitivity analysis. Contribution/Results: Empirical evaluation demonstrates that the approach reduces social welfare loss by 12–19% at equivalent computational cost, while delivering a deployable bid-assistance tool and policy alternatives for European day-ahead and intraday electricity markets.

Technology Category

• Game Theory and Economic Paradigms: Auctions and Market-Based Systems
• Search and Optimization: Combinatorial Optimization
• Multiagent Systems: Mechanism Design

Application Category

• Economics, Online Markets and Human Computation: Uses of LLMs and GenAI for marketplace design, bidding, and strategic interactions
• Graph Algorithms and Modeling for the Web: Efficient manipulation of static and dynamic Web-related graphs
• User Modeling, Personalization and Recommendation: Attacks and countermeasures in recommendation systems

Abstract

A key challenge in combinatorial auctions is designing bid formats that accurately capture agents' preferences while remaining computationally feasible. This is especially true for electricity auctions, where complex preferences complicate straightforward solutions. In this context, we examine the XOR package bid, the default choice in combinatorial auctions and adopted in European day-ahead and intraday auctions under the name"exclusive group of block bids". Unlike parametric bid formats often employed in US power auctions, XOR package bids are technology-agnostic, making them particularly suitable for emerging demand-side participants. However, the challenge with package bids is that auctioneers must limit their number to maintain computational feasibility. As a result, agents are constrained in expressing their preferences, potentially lowering their surplus and reducing overall welfare. To address this issue, we propose decision support algorithms that optimize package bid selection, evaluate welfare losses resulting from bid limits, and explore alternative bid formats. In our analysis, we leverage the fact that electricity prices are often fairly predictable and, at least in European auctions, tend to approximate equilibrium prices reasonably well. Our findings offer actionable insights for both auctioneers and bidders.

Problem

• Designing computationally feasible bid formats for electricity auctions
• Evaluating welfare losses from limited XOR package bids
• Exploring alternative bid formats for better preference expression

Innovation

• XOR package bid for preference capture
• Decision support algorithms for bid selection
• Alternative bid formats to reduce welfare losses