We pay for things before we use them every day. Food in our cupboards, petrol in our cars, airline tickets, wood for the fireplace. So why do we get hung up about prepaying for electricity?

It does not help that power suppliers used prepay meters over the years to target bad payers – those wicked electricity users who insisted on having trouble paying infrequent and often sizeable power bills. “Here, have one of these,” the industry says, installing yet another punitive device the customer has to climb a ladder in the dark to recharge. Don’t these silly people realise we do all this for their own good?

Now suppose for a moment that electricity metering technology had evolved differently, permitting an elegant and intuitive ‘buy-as-you-need-more’ approach from the outset. The cumbersome ‘send-the-bill-afterwards’ model may never have appeared.

Excellent experiments have been done worldwide which prove many customers prefer to pay for power in smaller lumps more often. How many families could cope with a $1600 bill from the supermarket every two months? The problem has been a combination of prepay metering limitations and the electricity industry’s attitude to customers. Thankfully, both are changing.

USING PREPAY STRATEGICALLY

Consider how we might use prepay strategically. ‘Weekly customers’ is a good way to think about those who prefer to buy power like any other commodity. They often have budget constraints and buy nearly everything else on a weekly basis, so they would like to do the same with electricity. It surprises many energy industry managers to learn that this weekly market segment can be over one third (sometimes even exceeding one half) of their total customer base. Customers simply prefer it to the alternative as it helps them stay in control. It is possible they have been influenced by the popularity and convenience of mobile phone prepay services.

Let’s review the basics. If we could start the customer relationship afresh, we may consider doing what banks do and let customers drive their own accounts. A prepay meter is really a small, self-contained billing system managing a single account. With the latest consumption information always on tap, it provides the customer with a continuously accurate ‘bill’. If all customers purchased electricity this way, the central billing computer would be redundant.

The ‘problem’ with prepay is not the customer; it is the way we define the problem. Banks allow customers to operate their accounts in either credit or debit. The norm is to ensure the account has enough funds to cover expected activities while remaining in credit, otherwise an arrangement must be made to operate the account in debit.

The customer understands that if he chooses to operate in debit, he will pay the bank a fee for this borrowing privilege. The bank understands that this fee covers both the cost of funds extended and the risk that the customer could default. It actively manages credit risk on a customer-specific basis, depending on how it judges the risk. Credit card companies take this idea further, encouraging controlled borrowing with higher interest payments. Customers can choose to avoid the borrowing fee by paying the credit card bill before it is due.

What if we applied this thinking to prepaid electricity? Assume prepaid electricity operates like a bank account. For clarity, we will assume the account is in credit if the instantaneous balance is positive. Suppose also the electricity supplier has preloaded the prepay meter with the following three rules:

Rule 1: If the account balance is negative, charge a 10% ‘cost of money’ surcharge on all units used until the balance is again positive.

Rule 2: If account balance is negative for more than one week by more than $50, then restrict supply to less than 500 Watts until the account is returned to positive balance.

Rule 3: While the account balance is positive by more than $50, reduce cost of all energy by 2%. If still positive by $50 each midnight, award five extra loyalty points. (Loyalty points can be cashed in for specific discounts or chances to win 12 months of power credit.)

NORMAL TRADING RELATIONSHIPS

The exact nature of these rules is not the issue. The point is that they signify a ‘normal’ trading relationship between the electricity supplier and the electricity user. They allow customers to decide how they wish to conduct their electricity purchasing affairs. The energy supplier now manages a portfolio risk just as a bank does, ensuring the additional premium charged if operating in debit covers the risk incurred by extending this service in the first place.

The ‘pay-afterwards’ norm today has this additional risk premium built in, as the central account is operated perpetually ‘in debt’. Those not operating in debt would avoid this borrowing cost.

As with banks, customers would effectively fund their own risk behaviour. The arrangement does not disadvantage the less well off, as no lower limit need be placed on the transaction value. To discourage silly behaviour (such as multiple purchases per day) a sensible number of transactions (such as one per week) would be free, with purchases above this attracting a cost reflective transaction fee. Customers can avoid this additional cost if they wish.

In fact, the general rule seems to be: signal all costs to the customer and give him practical mechanisms to minimise them if he chooses.

It is important we do not confuse ‘purchasing terms’ (such as those outlined above) with ‘payment options’. The purchasing terms set the rules of the game. Payment options determine how the customer elects to pay for his purchases. The nature of the technology platform chosen will determine what specific options are available to transfer the ‘receipt of payment’ information to the prepay meter. This function is transactional in nature and should not eclipse the prime purpose of the service, being the purchasing terms. Similarly, how you operate your credit card and how you subsequently choose to pay the credit card bill each month are two completely separate functions.

Operated this way, the prepay service becomes a customer managed energy contract which could transform the nature of retailing electricity. Bad debt would virtually disappear for all the right reasons, as would the cost of operating a centralised billing system. The latter would be replaced by a straightforward reporting service, regularly presenting utility managers with the sum of all current account balances in the meters and flagging any exceptions.

LEVEL THE PLAYING FIELD

Prepay systems are only complicated in a business sense today because they serve so few customers, yet we insist on trying to link them to cumbersome and dominant centralised billing processes. What would happen if the playing field was levelled? What if the number of ‘buy-before-use’ customers equalled or exceeded the number of ‘pay-after-use’ customers? This new balance is exactly what customer research says will happen.

Consider what might happen if a competitor started a new service along these lines in your area. It would most likely attract those customers who prefer to do business this way, leaving you with all those reliable, low risk pay-afterwards customers. Left with fewer customers supporting the same billing system infrastructure, the cost to serve each remaining customer rises. Not good.

All utilities trade in diversity – but lack of diversity through treating all customers the same way now constrains the business. Your competitor, having re-injected diversity by design, is now managing a distributed cash accounting infrastructure tracking the perpetually positive cash flow its customers are loaning it. Sounds like a smart piece of strategy!

Can’t happen? Prepay vending infrastructure too costly? Prepay meters too expensive? Not any more. Look what is happening in Europe right now. A wave of new generation, two-way communicating, networked meters are being installed to support a whole host of new functions. Prepay on this type of infrastructure needs only a premise disconnect switch, costing a fraction of a single truck roll.

Done this way, prepay becomes a lower cost lifestyle choice, no longer equipment dominated but now a lightweight and flexible software application which can be tailored ito a market of one. And we already know what electricity users will do when they see such new services, so it’s only a matter of time before they appear.

Here is a suggestion. If you have not already done so, design yourself a smart prepay service like this, then commission some research to see what your customers think. Better still, get your customers to help you design it. If they like the result, consider starting a ‘competitor’ to yourself offering this new service on one of the new emerging metering platforms. Perhaps you might like to own the new platform and offer some of the other services as well.

Strategy is not about predicting the future. It is about preparing yourself with the right mix of information, skills, IP and assets to take advantage of the inevitable. The era of strategic prepay is just around the corner.