By Gill Owen

Prepayment meters for gas and electricity have a long history of use in Great Britain, dating back to the coin-in-the-slot meters that were used until the 1980s, when they began to be replaced by meters using tokens, keys or cards. The meters are used extensively – 3.6 million for electricity and 2.3 million for gas.

While prepayment meters have both advantages and disadvantages, they are generally popular with those who use them, largely because of the budgeting control that such meters provide. This article (based on a new report from Sustainability First*) examines the future for prepayment in Great Britain in a smart meter world.

FROM TRADITIONAL TO SMART PREPAYMENT
In Great Britain, prepayment meters are not used exclusively by low income households but many on low incomes – notably single parent families – are the main users. Prepayment meters have a unique advantage over all other currently available payment methods for households on a tight budget – they prevent the household from getting into debt as the supply is only delivered when the meter account is in credit. This facility is also seen by some as a major drawback because the household can “self disconnect”, although this is a problem only for a minority of prepayment meter users. The other disadvantage of prepayment meters has been the extra costs, which mean that households have tended to pay significantly more than those who pay by other methods – particularly compared to direct debit and online tariffs – although many British suppliers have recently reduced the differentials.

There are around 50 countries where some use of prepayment meters is made, although some of these are small island states. Prepayment is widely used in a relatively small number of countries outside Great Britain, e.g. Northern Ireland, Tasmania and South Africa. Outside Great Britain prepayment metering is almost always used just for electricity and not for gas. In a number of countries there has often been considerable opposition to the use of prepayment from consumer organisations and parliamentarians.

Three key factors have limited the attractiveness of prepayment as a payment method from a customer point of view and have led to its use being limited in many countries. These are the higher prices paid by prepayment meter users, inconvenience, and the risk of self disconnection either due to lack of money or difficulties adding credit. These factors have led to gas and electricity prepayment being perceived as a payment method of last resort for people who have got into debt or have difficulties in budgeting.

The government has decided that all homes in Great Britain should have electricity and gas smart meters by 2020. The rollout of smart meters should help to provide major improvements in prepayment – greater convenience, flexibility, new services and lower prices. At the same time the new technology will bring some new consumer protection issues to address.

NEW DEVELOPMENTS THAT ARE CHANGING THE CONTEXT FOR PREPAYMENT
There is very wide usage of prepay mobile phones in the UK and elsewhere in the world. In the UK, for example, 61% of mobile phone subscriptions are prepay 9 (although many of these are children, students, and people with second phones). Outside the mobile phone sector, the use of prepay has also been growing, for example with Oyster cards for public transport in London and payment cards (Mastercard or Visa). This growing acceptance of prepayment as a normal method of paying for telephone, travel and other services could help to change attitudes to prepayment for electricity and gas.

Northern Ireland Electricity (NIE, the main electricity company in Northern Ireland) has been installing the Liberty keypad meter (manufactured by PRI) since 2000. The keypad meter in fact operates as a “semi smart” meter, because it does not incorporate a two-way communication module. Communication between the meter and the supplier and vice versa (credit activation, meter readings, etc.) is via the customer-inserted vend code, obtained when the customer buys credit either from agents or by telephone or internet using a debit card. The Northern Ireland keypad meter has a conveniently placed customer display that enables them to monitor consumption, credit available, etc.

Around 30% (230,000) of all electricity customers in Northern Ireland were using the keypad prepayment meters by mid-2009, with new connections continuing at the rate of 2,000 per month. About 58% are on low incomes but 32% are on middle or higher incomes including 17% who are “wealthy achievers” (Acorn classification).

Three key factors have driven the high levels of take-up of these prepayment meters: 

  • Firstly, customers receive a discount compared to standard credit of 2%. This reflects lower costs for NIE because of the reductions in bad debts, meter reading, call centre, billing and debt management costs. 
  • Secondly, the range of credit top-up facilities (including phone and internet) have attracted a broader range of user and removed the stigma of prepayment. Whilst 86% of top-ups are still done in cash, internet and phone top-ups increased 37% in 2009 compared to 2008. 
  • Thirdly, the “friendly credit” means users cannot self disconnect at weekends or between 4:00 pm – 8:00 am (extended to 11:00 am on request). This safeguard was required by Ofreg (the Northern Ireland regulator) due to concerns from consumer groups and others about self disconnection. Clearly, electricity used during periods of friendly credit has to be repaid at the next top-up.

These examples from other sectors and from Northern Ireland all suggest that prepayment can become a normal method of payment, provided that it is made attractive to customers through tariffs reflecting the cost savings made by suppliers, convenient credit top-up arrangements and limiting the scope for self disconnection at certain times.

PREPAYMENT PRICES
The cost differentials between credit and prepay should reduce as smart meters are rolled out, as the same meters could have credit and prepay facilities built in, therefore eliminating the difference in capital costs and the costs of having to visit properties to change a meter from credit to prepay. With the rollout of smart metering, suppliers will need to update all their administration systems and there may be less need for a separate differentiated system for prepayment. Also, if the numbers of customers on prepay increase, then this would mean that any extra fixed costs of prepayment administration would be spread over more customers.

There are some extra costs of prepayment that may not reduce with the introduction of smart meters but overall the costs of prepayment will reduce and the attractiveness of prepayment customers to suppliers should increase. Furthermore, costs could also fall if prepayment meter customers switch to electronic means of topping up credit, reduce the frequency with which they top-up and do so in larger amounts. Suppliers could encourage this through the sort of incentives used by prepay mobile phone operators (e.g. top up for a minimum of £10 and get £1 free credit).

WAYS TO ADD CREDIT
Based on experience with prepay in Northern Ireland and prepay mobile phones, the range of ways of topping up credit is likely to expand. Payment over the phone and internet will be the earliest additions, but others could include ATMs and supermarket checkouts.

Suppliers will be keen to move more customers to electronic means of adding credit as the costs are likely to be lower than those for cash transactions. However, customers will need debit cards (and hence bank accounts) to access some of the new payment methods (7-12% of low income households in the UK do not have a bank account). Other than debit cards there are two other options that might enable customers to add credit to their prepayment meters electronically. Firstly, using mobile phones, i.e. some of the credit added to the prepay mobile phone account via cash could be transferred to the electricity or gas account. Several of the mobile phone operators are very interested in offering this facility to energy suppliers and their customers. A second option could be electronic cash cards (e.g issued by Visa or Mastercard).

NEW WAYS OF REDUCING SELF DISCONNECTION
One of the key features of prepayment meters is that when credit is exhausted the supply runs out, ensuring that debt cannot be built up. However, this also means that the household can “self disconnect” if they have forgotten to top up their credit, or due to some practical difficulties (e.g. access to a charging point) or lack of money.

At present in Great Britain, most suppliers provide customers with an amount of emergency credit (typically £5), if they are unable to top up the credit on the meter. Some suppliers operate a “no disconnection” policy in the evenings. The cost of any fuel used during such emergency credit or no disconnection periods is paid for when the meter is next credited (at the normal rate).

Research suggests that self disconnection is a significant problem for only a minority of prepay customers – between 10-25% – and most of those who self disconnect do so rarely, once or twice a year, and usually for periods of 1 day or less. However, as found in Northern Ireland, limiting the times at which supply can be disconnected does make prepayment a more attractive option. There are a number of ways to minimise self disconnection: 

  • Emergency credit, i.e. a fixed value of gas or electricity (e.g. £5) available to be consumed at any time of day regardless of credit status 
  • Specific non disconnection or “friendly credit” periods where supply will not disconnect regardless of credit status and however much is used 
  • Trickle flow or load limiting. This is only applicable to electricity, allowing a minimal amount (e.g. to keep lights on), to be available at all times regardless of credit status. Examples include Argentina and Belgium.

There is an important role for energy regulators in setting periods for friendly and emergency credit as was seen in the Northern Ireland case. Another example is Tasmania, which has had prepayment meters for electricity since 1995 – about 22% of customers currently pay for electricity in this way. As there has been considerable opposition to use of prepayment meters from consumer groups, the codes of practice established by the regulator have built in a number of customer protection standards. A “prepayment meter code” was introduced in Tasmania in May 2007.

Under the Tasmania code, new prepayment meters (installed after January 2008) cannot disconnect the customer between the hours of 2:00 pm and 8:00 am. Older prepayment meters cannot disconnect the customer between 8:00 pm and 8:00 am. In addition all prepayment meters must provide an amount of emergency credit (i.e. which can be used at any time of the day, including in the daytime when self disconnection is allowed) of not less than $10. This amount is reviewed by the regulator every two years to ensure that emergency credit is maintained at a level equivalent to the average cost of three to five days electricity supply.

More extended “emergency or friendly credit” periods would help those who forget to charge their cards/keys and those who have run out of money at the end of the week when they are waiting for their next wages or benefit payment. However, for the customers with the most severe money problems, the solutions lie beyond the meter in areas such as tariffs, incomes, and improving energy efficiency.

REMOTE SWITCHING FROM CREDIT TO PREPAY
Smart meters will be able to be switched from credit to prepay mode remotely by suppliers. This will deliver cost savings to suppliers that should help to reduce prices for prepay customers. However, there are concerns that remote switching capability could lead to customers in debt, or with poor payment histories, being switched from credit to prepay without the safeguards and processes that currently apply. In Great Britain, energy suppliers will still need to follow existing supply licence conditions for debt recovery and disconnection, irrespective of smart meters, and the Energy Retail Association’s debt protocol is also designed to minimise disconnections or prevent them altogether in the case of vulnerable households. However, licence conditions will need to be reviewed by the energy regulator to ensure they are fit for a smart meter world.

CONCLUSIONS
Smart meters will reduce prepayment costs for suppliers and bring major benefits to consumers, including new payment methods, more customer friendly forms of emergency and friendly credit and lower prices. The new technology will bring some new consumer protection issues to address, but smart meters should provide the opportunity to make prepayment a more mainstream method of payment and promote wider take up.

* Report available at www.sustainabilityfirst.org.uk