Traditionally a means of recovering or mitigating debt, could pay as you go tariffs gain wider appeal if the price is right?
I pay for what I use, right?
Paying for what you use as you use it is not a new concept. “Pay as you Go” and “Pay per view” are familiar concepts for most households and customers. Paying upfront for a service often works for both parties and removes any perceived credit risk on both sides of the engagement.
Intuitively it feels like paying for something before you have used it, or buying a “block of credit” has benefit to the retailer in planning their inventory. A benefit that in most industries would have a pass through benefit to the end consumer.
But this is the energy industry and things are rarely as they are elsewhere. For many years the term “Pre-Payment” and later “Pay as you go” have carried something of a stigma due to the fact that pre-payment devices have often been fitted due to non-payment. A higher proportion of pre-payment meters across rental or social housing properties also drives a perception of customer transience.
As a result of this “pay as you go” tariffs remain some of the most expensive tariffs in the market.
Typically “Pay as you go” meters are favoured in rental properties, largely as a way of landlords limiting their exposure should the tenant leave them in the lurch and not pay bills they are obliged to. Social housing also sees a higher ratio of pre-payment devices, meaning that on paper at least a portion of consumers would be classed as vulnerable under most definitions.
So why is “pay as you go” more expensive? Essentially this boils down to a number of factors. Mitigation of debt and perceived customer transience to one side, the primary reason stems from the behind the scenes processes that ensure that when a customer “tops up” with credit, that the payment not only credits the energy to their meter but also finds its way to credit the customer’s account with a supplier.
This process of matching payments to meters and meters to suppliers should be a simple and clean one. However, as with any process, the introduction of the human element brings with it a raft of complexity. Payment can be “topped up” on any key or payment device and updated to any compatible meter. This can result in payments being misdirected between suppliers and even within families where they have used the same payment device across multiple properties.
A number of PPMIP providers sit behind the scenes and manage this process, ensuring the right payment makes its way to the right supplier. The supplier then matches payments to their own customer accounts. Broadly this process works well but when payments can’t be matched to a supplier or take a while to find the correct home then effectively this “risk” is carried by the end consumer through the slight premium applied to their tariff.
Coupled with this, there are a number of quirks and concepts in energy that impact “pay as you go” in ways that don’t exist when topping up a mobile phone. Each meter has the capacity to allow a customer “emergency credit”, to remove the risk of customers being left without energy in the event they have run out of credit. The meter will deduct this emergency credit the next time the meter is topped up, meaning that the customer is using more energy than they are paying for. This can build up over time and result in a debit position building on the customer’s account, despite them “paying for what they use”.
The legacy of pre-payment meters being used for the recovery of debt also play a part as debt settings have historically been set directly on the meter with an agreed recovery rate taken from every top up. These settings are accessible on all meters and checking for debt is a simple process for those who know what they are doing. However, checking for debt is not the first thing on a new occupiers list when they move into a property. The potential is obviously there for a customer to be paying for a previous occupier’s debt and not realise.
It’s not all doom and gloom. The range of pre-payment meters has both narrowed and diversified in recent years with key meters by far and away accounting for the bulk of pre-payment devices in the UK in consolidating the old world. On the emerging technology side, the application of SMART metering into pre-payment also provides opportunities to both monitor usage and provide more intuitive ways for customers to “top up”.
The strides forward in technology and greater supplier collaboration around the PPMIP infrastructure bode well for the future, along with a shift towards “Pay as you go” customers being seen as desirable by suppliers. Let’s hope that these translate into savings for the end consumers who like to pay as they go.
Is there room in the market for a “premium” pay as you go offering that leverages all of the benefits of this model whilst mitigating the challenges?