Navigant Research Blog

Research Shows Prepay Pays Off

— April 1, 2013

Although utility prepayment programs are not yet a major market in the United States, which lags behind many other countries that have offered such schemes for decades, Navigant Research has forecast that the North American electric prepaid metering market will grow rapidly over the next several years, expanding at a robust compound annual rate of about 23% from 2013 to 2018.

The Salt River Project (SRP) in Phoenix, Arizona, a prominent trailblazer of prepay, has operated prepaid electric services under the M-Power brand for 20 years. Today, about 126,800 residents are enrolled in SRP’s prepay plan, more than 12% of the residences that it serves.  M-Power customers have consistently demonstrated a high level of customer satisfaction in surveys by the utility, but most noteworthy has been their overall reduction in electricity use: around 12%.  Despite SRP’s results and similar finding by other utilities, establishing a reliable and statistically proven link between prepay and energy usage is still difficult.  However, a recent study led by consulting firm DEFG shows a strong positive correlation between prepayment of energy bills and conservation behavior.

Impressive Savings

Using consumer data from Oklahoma Electric Cooperative (OEC), which launched prepay services in 2006, to compare post-pay and pre-pay customers, the study concludes that participants in prepaid plans on the average reduce their energy usage by 11% (about 1,690 kilowatt-hours per year for an OEC customer) ‑ very similar to SRP’s findings. Compared to other energy efficiency measures ‑ and considering the relatively low cost of implementation, from a utility standpoint, and the ease of adoption for customers (there’s no need to purchase a special energy efficiency device, for instance) – this is an impressive figure.  Since the average monthly bill for OEC’s customers is $146, an 11% energy saving translates into a $192-per-year reduction on the customer’s utility bill.

The energy use reductions can be attributed to several factors, including increased awareness of when and how electricity is consumed.  The study also demonstrates that regular (even daily) communication from the utility to the customer that provides actionable information (usage tied to dollars and cents) changes consumption behavior.

This data provides strong evidence that electric prepayment is a winning proposition for both utilities and consumers, and it should convince more utilities to offer prepay options.  What’s more, according to a recent national survey of 1,000 individuals, 38% said that they were interested in prepaid electric services.  This shift is long overdue.

 

Prepay Opponents Use Outdated Arguments

— June 27, 2012

Prepaid electricity services have been around for at least two decades in the United States, but they’re less common than in other parts of the world, such as the United Kingdom, Ireland, Australia, New Zealand, India, China, the Philippines, Brazil, Mexico, Turkey, South Africa, and many other African nations.  In these countries, prepayment for power is considered a very basic and standard form of utility payment.  Now, according to Pike Research’s report, Prepaid Electric Metering, more and more U.S. utilities are starting to offer prepayment options to their customers, especially with the introduction of new smart metering and communication technology to facilitate these types of services.  Pressure to improve customer service to give more choices to consumers is also a major driver.  In this new “demand” economy, offering more choices has become a corporate imperative.

One of the reasons why U.S. utilities have been slow to offer prepaid services is opposition from consumer advocacy groups, such as a recent report from the National Consumer Law Center (NCLC), claiming that these programs discriminate against low- and moderate-income households by creating an inequitable two-tiered customer delivery system.  This opposition is not new – over the years it’s been dredged up repeatedly by various consumer protection groups.  But a close examination of existing and new prepaid programs invariably shows that these objections are now outdated and no longer relevant.  Today, the majority of prepay programs don’t target a specific customer segment, such as “high risk credit” households.  Instead, most U.S. utilities target all of their customers with these programs, regardless of financial or socioeconomic status.  And many consumers – if given a choice – opt for prepayment because it provides them with greater flexibility in managing their finances, as they can choose the amount and frequency of payments.

Also, customers do not have to pay a large upfront deposit or face a credit check when initiating electric services and are able to avoid paying any disconnect and reconnect fees.  These benefits are especially valuable to the lower-income consumers that NCLC is so concerned about.

NCLC also points out that there could be an immediate loss of electricity when a customer’s credit reaches a threshold or zero.  Again, this concern is no longer valid.  Many utilities offer an emergency credit that can be used by consumers after their credit has been depleted, such as during the night, a weekend, or a holiday.  Furthermore, prior to any disconnect, the consumer receives an alert from the utility – via phone, email, and text message – which is sent far enough in advance to allow him/her to replenish the account balance.  And, if electricity has been terminated for whatever reason, the utility is able to turn the power back on relatively quickly (at least within a few hours) upon receipt of payment, thanks to the advanced technology that supports their prepaid programs.

The NCLC report also neglects to mention another important benefit to consumers.  By prepaying, consumers usually gain access to detailed information about their energy consumption, giving them the opportunity to manage their usage in order to save on their electricity bill.   Studies have consistently shown that prepaid programs can achieve a reduction in electricity use of about 12% to 14%.  This has been the experience of Salt River Project’s M-Power prepaid program, the largest and oldest electric prepay program in the United States.

Considering the general success of electric prepaid services as well as the high customer satisfaction levels among program participants, it’s unfortunate that consumer advocacy groups keep raising objections and stirring up fears that are based upon outdated assumptions and are contrary to the experience of most prepay customers.

 

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