Block bid is a bid with two characteristics. First, one single bid refers to more than one hour, and second, a bid is to be accepted or not accepted as a whole. This changes the nature of the mathematical problem from being continuous to being one of a discrete nature, i.e. the answer to the problem is not “how much” (within an interval) but “all” or “nothing”.
The objective function was derived from the minimal requirements to a market solution. It expresses the maximisation of the difference between consumers’ utility and producers’ costs, and it is therefore well established in economic theory. Thus, there is without block bids consistency between the market’s specification of the solution and the solution from economic welfare theory.
For the problems with block bids the situation is different. Now the formulated minimal requirements are inconsistent. There seems to be no logical solution to this, so a pragmatic way has been chosen. Thus a model has been formulated where it is not required for block bids that no profit or utility is foregone.
It is clear that properties of the problem in case of inclusion of block bids are less intuitive than for problems without block bids. It is also clear that the formulated problem is an untraditional optimisation problem because it involves both quantities and prices.
The main idea is to choose a combination of block bids that gives the highest possible social welfare value. Sometimes however the block bidder can experience a loss relative to the resulting spot prices. Block bids that have the accepted price level are not accepted.
The SESAM calculation model is constructed to also fulfil the following requirements:
- For sales bids with bid prices that are far from the relevant spot prices tested during the calculation, and therefore rejected or accepted, the sale offers with the lowest prices precede bids with higher prices. And analogous for purchase bids the bid prices that are far from the relevant spot prices tested during the calculation, and therefore rejected or accepted, the purchase offers with the highest prices precede bids with lower prices.
- For two offers with the same price and the same volume, a random selection is made.
- As a consequence of the combinatorial nature of the problem for two offers with the same price, the highest volume doesn’t necessary precede.