Large Language Models as Strategic Bidding Agents in P2P Energy Trading Markets

Abstract

Peer-to-peer (P2P) energy trading markets rely on double auction mechanisms to match prosumers and consumers in smart grid distribution networks. However, the strategic behavior of bidding agents in such markets remains not fully explored, particularly in repeated settings with bounded rationality. This paper proposes a novel framework that integrates large language models (LLMs) as reasoning-driven bidding agents in repeated P2P energy double auctions. We compare the performance of three bidding strategies: random bidding, an $\varepsilon$-greedy multi-armed bandit (MAB) approach, and an LLM-based strategy. Simulation results show that the LLM-based strategy achieves superior cleared trading volume over the first episodes compared to $\varepsilon$-greedy MAB and random bidding baselines, eliminating the exploration burn-in period that statistical learning algorithms inherently require before converging to productive price arms. Importantly, when tested in an environment different from the one used during learning, the performance of the $\varepsilon$-greedy strategy drops significantly, while that of the LLM-based bidding strategy continue to achieve higher surplus and successful trades. Nevertheless, the LLM's advanced contextual reasoning also gives rise to an important market dynamic. In a homogeneous population of LLM agents, sellers increasingly exploit buyers' rational outside options to drive clearing prices above the Nash equilibrium, resulting in a progressively more asymmetric allocation of surplus in favor of sellers that does not converge within the observed time horizon.