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

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.