Prepayment Meters

Introduction

There are 5.8 million prepayment meters in use in Great Britain. 14% of electricity consumers (3.6 million) and 10.4% of gas consumers (2.2 million) use prepayment. The numbers installed have increased substantially over the past decade – including a 150% increase in gas prepayment.

This increase has corresponded with a significant decline in disconnections from electricity supply, from almost 48,000 in 1991 to 600 in 2005. Over the longer term the same is true of gas disconnections, which peaked at just over 60,000 in 1987 but had fallen to 2,300 in 2005.

This variation in disconnection rates is mainly attributed to safety concerns. Whereas electricity suppliers can unilaterally install a prepayment meter even when the householder is not present, gas suppliers cannot do so. This partially accounts for the more widespread use of prepayment in electricity where it is widely regarded as simply one of many payment options. For gas consumers, prepayment was more generally associated with debt recovery and meters were only installed where other payment arrangements had failed.

Who uses prepayment?

Prepayment meter users generally are on lower than average incomes. 21% of gas consumers with an annual income of less than £10,000 use prepayment; the equivalent figure for low-income electricity consumers is 23%. As might be expected, prepayment meters are more likely to be used by lone parents, those in receipt of welfare benefits, those with no bank account and those with payment difficulties.

The disadvantages of prepayment

There are a number of disadvantages associated with prepayment. Some of these are related to the technology used and the infrastructure that serves the payment method. The customer must have access to charging facilities for cards, keys or tokens and these will not always be easily accessible or even open. However the biggest disadvantage is the surcharge that prepayment meter use often attracts. Suppliers maintain that additional charges are necessary to finance the additional costs of the meters themselves and the cost of maintaining a comparatively expensive infrastructure. However despite these arguments some suppliers do not make any additional charge for prepayment use and charge the same tariff as for quarterly credit.

Where additional charges are levied these can be considerable. energywatch estimates that prepayment can cost in the region of an additional £173 for gas and £113 for electricity in annual bills.

The consumer view of prepayment

There is evidence that prepayment meters are popular with those who use them; satisfaction rates are commonly 70-80%, even higher amongst those on low incomes. Most of those paying off debt would want to continue using prepayment once arrears are paid off. The major advantage is the discipline of controlled expenditure and the avoidance of unexpectedly high bills.

Ofgem suggests that the success of pay-as-you-go mobile phones has helped to remove any remaining stigma associated with a payment method historically associated with debt. There are few complaints or reservations about the inconvenience of recharging cards or keys and in any event the pressure applied over these and other service standards by Ofgem has led to overall improvements.

However there is some uncertainty about the extent to which consumers appreciate that prepayment is the most expensive payment method and hence about the reliability of expressions of satisfaction. Research variously reports that:

•  50% of users believe that they are using the cheapest payment method
•  fewer than 30% would change to another payment method even if it meant price reductions
• the large majority of users do not realise that they pay extra for prepayment

Switching supplier 

Initially switching rates among prepayment meter users were significantly lower than for other payment methods. This situation has improved in recent years and currently some 41% of electricity prepayment customers have switched at some point whilst the figure for prepayment gas customers is rather lower at 36%. Ofgem does not believe that existing debt (which can pose a barrier to switching) is a significant issue although at December 2005 almost 1 million prepayment customers were paying off a debt.

NEA policy

NEA’s position has been to support the availability of prepayment as an alternative to disconnection and as a payment method which many low-income consumers value for its budgetary advantages. In practical terms this takes the shape of supporting the licence requirement which obliges suppliers to offer prepayment terms and seeking refinements and improvements to the relevant codes of practice and guidance notes governing standards of service. 

However given the evidence that users are predominantly on low incomes, and that many self- evidently have difficulty in affording their fuel bills, concern has also been consistently expressed about the practice of charging the most disadvantaged consumers the highest prices. This view is shared by other consumer groups, but positions which are based on notions of social justice carry little weight in an environment dominated by economists who maintain that the consumer interest is best served by a fully functioning competitive market. Purists assert that any consequent social disadvantage is a matter for the social security system.

Arguments in favour of reintroducing cross subsidies for prepayment are countered by observations that this would mean charging higher prices to many low-income pensioners, who tend not to use prepayment or to incur debt. 

NEA shares the ambition of both Government and the regulator that competition should not lead to disproportionate gains for one group of consumers at the expense of others. However whereas their interpretation of this is likely to be satisfied by reducing, or ideally eliminating, differentials between prepayment and quarterly credit, NEA takes the view that this should mean savings for prepayment users comparable to those of direct debit payers i.e. the £60 per year saving identified by Ofgem. 

NEA has also consistently made the point to Ofgem that prepayment consumers should be considered a priority group for assistance through Energy Efficiency Commitment funding. Since many have obvious payment difficulties, and most are on low incomes, helping them to reduce fuel bills via energy efficiency improvements would be a means of compensating them for the disadvantage they currently experience in the competitive market. Some suppliers already target programmes in this way. NEA believes others should follow suit (and also maintains that this approach should be adopted for customers in debt and those who pay weekly/fortnightly). Ofgem has yet to be persuaded, asserting that prepayment is a poor proxy for fuel poverty. But so too is receipt of means-tested or disability-related benefits, the current criteria for determining priority group status.