The cost of privacy in local energy markets: Auction vs central mechanisms

The design of local energy markets (LEMs) must balance economic efficiency with the privacy concerns of participants. In this paper, we compare two mechanisms for distributing locally generated energy; combinatorial auctions and centralised optimisation, and quantify the trade-off between social cost and information privacy. We model consumer utility as a combination of energy cost and the weighted preference for a clean energy mix. Using a case study based on real demand and local generation data from Spain, we demonstrate that centralised mechanisms can reduce the total social cost by approximately 11% compared to combinatorial auctions. However, this cost reduction comes at the expense of consumer privacy, as centralised mechanisms require full disclosure of energy demand and preferences to a central planner. In contrast, the combinatorial auction preserves consumer privacy but results in higher system-wide costs. Additionally, centralised schemes do not explicitly define how benefits are allocated between local energy providers and consumers, raising questions about fairness and incentives. Our findings highlight a fundamental trade-off in LEM design; while central coordination improves overall efficiency, it introduces challenges in reward allocation and data sharing, issues that must be addressed for scalable and equitable energy community frameworks.