An incentivized automated market maker-based batch auction mechanism for network-aware local energy markets with loss allocation

The rapid proliferation of distributed energy resources demands efficient, fair, and scalable local energy markets (LEMs) that maximize community self-consumption while ensuring equitable trading outcomes. This paper introduces an incentive compatible Automated Market Maker-based Batch Auction (AMMBA), a novel peer-to-peer (P2P) market mechanism that leverages decentralized finance (DeFi) pricing principles to overcome liquidity scarcity, mitigate price volatility, and enable continuous market participation even in thin LEM environments. The pricing function parameters are optimized to balance consumer utility and supplier profit, while a penalty-driven mechanism guarantees dominant-strategy incentive compatibility, preventing misreporting and strategic withholding by market agents. To ensure technically valid operation, an integrated on-chain power flow formulation enforces distribution network constraints, including voltage and power flow limits, and automatically applies least-cost corrective demand or generation adjustments. Additionally, an ex-post loss allocation scheme, based on the concept of marginal loss factor, fairly assigns positive or negative power-loss impacts to participants, and trading payments are adjusted accordingly to maintain economic fairness. All trading, grid-feasibility assessment, loss allocation, and settlement processes are executed via blockchain smart contracts for full transparency and automation. The proposed AMMBA model is prototyped and evaluated using real-world household profiles and benchmarked against traditional double auction and uniform-price auction mechanisms. Results demonstrate that AMMBA significantly enhances community self-consumption, stabilizes clearing prices, increases social welfare and equality of benefit distribution, and reliably enforces grid operational constraints while ensuring fair loss allocation.