Think of the knapsack problem but you're trying to fill your knapsack while minimizing costs. You have a given amount of demand, you fill your knapsack using a

Think of the knapsack problem but you're trying to fill your knapsack while minimizing costs. You have a given amount of demand, you fill your knapsack using a simple greedy strategy. You pick the lowest bid, then you pick the next lowest bid and so on, until the knapsack is full. Now the question is, why is everyone paid as much as the most expensive bid that was needed to fill the order? Because those bidders could simply predict what the most expensive bid is and then set their bid accordingly, if their prediction is too high, you actually made electricity more expensive by not paying everyone the same clearing price. If their bid is too low they get free money simply by predicting a higher price. So you can just make the system honest and pay everyone the equilibrium price. Of course, the big question that arises is "what if the last producer needed to clear the market is unreasonably expensive?", then there is suddenly a windfall for all the cheap producers called producer surplus. The opposite is also true when you get rid of these expensive producers, the price collapses down to the second highest bid. This is consumer surplus.