The pay-as-bid algorithm can be used by Storage System Operators (SSOs) to allocate storage products.
The pay-as-bid algorithm applies for storage auctions with a predetermined runtime which consist of an offer starting time and an offer ending time. The SSO chooses the allocation algorithm when creating the offer. Shippers can place bids during that offer-runtime. When the auction closes, the algorithm allocates the available capacity according to the price that the shippers are willing to pay, stated in their respective bid.
The process is shown below and explained in detail in the following sections.
After the auction closed, all bids are sorted in descending order according to the bid price (similar to the uniform price evaluation). The algorithm validates against the maximum bid amount of the respective first bid in the list and allocates the maximum amount as long as it is lower or equal to the available capacity amount. If the highest bid has been allocated, the bid with next highest bid price is considered with the same logic.
Where available capacity is lower than the requested maximum bid amount, the available capacity is validated against the minimum bid amount. If the available capacity is higher than the minimum bid amount of the next-highest bid in the list, the full amount of available capacity is allocated to that bid (see Example 1 below). If the available capacity is lower than the minimum bid amount, no capacity is allocated to the bid, and the next-highest bid is considered (see Example 2).
If there are multiple bids with the same bid price, they are all grouped together to one price group. The maximum amount vaildated by the algorithm is the sum of all maximum bid amounts in the price group. When the maximum amount cannot be fulfilled, the algorithm allocates the available amount pro-rata (see Example 3).
Bids where the bid price is lower than the reserve price are excluded from the allocation procedure.
- Shippers can place bids while the auction is in OPEN status
- Each bid must specify a minimum capacity amount, a maximum capacity amount, and a bid price
- Evaluation of the placed bids and the allocation of capacity begins once the auction status is set to FINISHED
- Shippers do not see the reserve price set by the SSO
Bid consolidation and ranking
- After closing the auction, all received bids are evaluated
- Only bids that are above the reserve price are considered valid
- The auction algorithm ranks all valid bids in descending order according to the bid price of each individual bid
- Depending on the valid bids, the allocated amount is determined by either the fill-or-kill procedure or the pro-rata procedure
- Both procedures are described below:
Example 1: Fill procedure
- Bid B2 is the filling bid, since the sum of the maximum amounts of A1, B1, A2 and B2 would exceed the available capacity
- The “fill” procedure is used, because the sum of the maximum amounts of A1, B1, A2 and the minimum amount of B2 do not exceed the available capacity
- B2 is “filled” until the sum of the maximum amounts of A1, B1, and A2, and the B2 partial allocation, equal the available capacity
- Successful bids are charged with the bid price, that had been stated by the shipper
- Due to over-demand and the comparatively lower bid price, B3 is not considered
Example 2: Kill procedure
- The minimum amount of B2 exceeds the available capacity, therefore it cannot be a filling bid
- B2 is taken out of allocation (“killed”)
- The auction algorithm then considers the next bid in the descending list, given the B3 minimum amount added to the sum of maximum amounts for A1, B1 and A2 does not exceed the available capacity
- B3 is the lowest considered bid, since the sum of the maximum amounts of A1, B1, A2 and B3 does not exceed the available capacity
- B3 is fully allocated, and shippers are charged according to their bidding price
Example 3: Pro-rata procedure
- As they have the same bid price, B2 and A3 are equally ranked
- In this case the pro-rata procedure is used for the allocation
- The pro-rata key is calculated by dividing the available capacity by the sum of maximum bid amounts for B2 and A3
- The potential capacity allocation amount is then calculated by multiplying the individual maximum bid amount by the pro-rata-key
- B2 and A3 are allocated pro-rata as long as the minimum amount is fulfilled for both bids
- If not, the bid for which the minimum bid amount is higher than the potential capacity allocation is excluded, and the capacity allocation is recalculated