Cannot auto unlock using watch after upgrade to WatchOS 7

I had this problem for the exact same reason -- un-pair due to excessive battery drain on watchOS 7 (the un-pairing didn't help the battery either!). None of the usual troubleshooting would fix it. Fortunately I found this procedure at MacRumors. It works for many people and worked for me. Note: some people report having to restart after doing this "Keychain surgery."

1. Open "Keychain Access"
2. In "View", enable "Show Invisible Items"
3. Search for "Auto Unlock"
4. You should see a whole bunch of application passwords for "Auto Unlock: XXXX's ..."
5. Select all records and delete (this will reset/disable auto unlock on other Macs if you use multiple Macs)
6. Whilst still in "Keychain Access", search for "AutoUnlock" (no space)
7. There should be 4 entries for "tlk" "tlk-nonsync" "classA" "classC"
8. Select 4 records and delete (don't worry if they re-appear, the system repairs this automatically)
9. Open "Finder" and navigate to "~/Library/Sharing/AutoUnlock"
10. There should be two files "ltk.plist" and "pairing-records.plist"
11. Delete both files (Some users have reported better success restarting macOS at this stage)
12. Open "System Preferences" and try enabling auto unlock. You may need to enable it twice, the first attempt will fail.

The linked post above has more info and screenshots to help you. There is another Discussions thread that also lists this method, but it's dated after the MacRumors post (which has been updated with new info), so likely the author got his solution there without crediting the original.

Post back if it works for you.

Hey android404,

Thanks for using Apple Support Communities! Using your Apple Watch to unlock your Mac is a great feature, and we understand that's not working as expected for you. We're happy to provide some information to help.

Make sure all your devices are up to date:

How to update the software on your Mac

Update your iPhone, iPad, or iPod touch

Update your Apple Watch

On your Mac go to Apple menu > System Preferences > Security & Privacy > General and deselect "Use your Apple Watch to unlock apps and your Mac". Then, go ahead and restart your Mac: Log out, sleep, restart, or shut down your Mac

Once your Mac restarts, sign in, and then use the steps to set up using your Apple Watch to unlock your Mac here: Unlock your Mac with Apple Watch

Thanks again, and have a great day!