Highlighted (or selected) text in any text edit area indicates the text will be the subject of various operations, cut, copy, paste (replace with clipboard contents), or replace with keyboard input. This convention is well established long predates auto-complete.
Most auto-complete fields select the auto-complete suggestion part but do not replace the selection (highlighted text) if the keyboard input does not conflict with the highlighted text. This deviates somewhat from the older convention of always replacing the highlighted text, but still conforms to older convention in many ways. Highlighted text is still vulnerable and still subject to cut, copy and paste.
Option 1, highlighting the text input by the user and not highlighting the auto-complete suggestion completely breaks with established conventions and should be avoided.
Option 3, no highlighting, provides less feedback (what part is user input and what part is suggestion?). Also, it's not an established convention: I type "Mal" and out comes "Malvern" - I don't what "Malvern", what do I do?
Option 2, the "google way" (it's used in many places outside the browser) respects the old established selection behavior well enough and has become in its own right a common enough convention. Definitely use option 2.