Market Insight

Interest grows in prepayment metering in US

November 18, 2014

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Itron Utility Week highlights growing interest in prepayment metering in US 

One of the most surprising things at last month’s Itron Utility Week was Itron’s apparent bet on prepayment solutions in North America. In a society that is very much credit-oriented, it seems like a difficult prospect to encourage consumers to pay for their electricity prior to use, rather than afterward. Still, the option of prepayment has been discussed for years in the U.S., and indeed, there are a few utilities that have adopted some form of prepayment in last few years. Most notably the Salt River project has been billed as a success, among a few others. Although IHS does not expect there to ever be a very large market for traditional keypad or card-activated prepay in North America, the combination of a large installed base of advanced-functionality communicating meters and new innovations do suggest that there may be a future for prepayment after all.

Still, in the U.S. market, where electricity is considered more of a right than a service, and in some cases can be the difference between life or death, utilities are having a difficult time selling the process to regulators and the public. In a region where all other bills tend to be paid after the service has been rendered, utilities may find considerable resistance to the notion. IHS believes that simplification technologies such as Itron’s Centian prepayment meter, which displays usage in currency rather than the traditional kilowatt hour, or PayGo’s remote prepayment app will help make the solution more palatable in the region. After all, IHS has estimated that almost 35 percent of all mobile phone subscriptions in the U.S. in 2013 were prepay, which suggests that consumers are not necessarily against the idea.

The first hurdle to overcome is to keep it from being a punitive measure. Perhaps the biggest benefit in the U.S. to the utility is that with a prepayment option, billing defaults become non-existent. This would imply that a utility should first install a prepayment meter on those homes that are most likely to default. This has been tried a number of times, and in almost every case, there has been some degree of consumer backlash. Rather, it should be billed as a premium service, with opt-in rather than opt-out policies. For those individuals who default, it should be offered as a way to help them budget their funds better and to gradually be able to pay off their debts, by using a proportion of their prepayment towards what they already owe, and allowing another proportion to be used for the actual utility service.

Another challenge to prepayment is that there is strong evidence showing that it actually reduces consumption. A common rule of thumb number is a 12 percent reduction for the consumer who uses a prepayment meter rather than a traditional credit meter. While on the surface this may seem like a good thing, it creates a perverse incentive for utilities. The less that is used, the less they sell, while operational costs continue to stay high. Regulatory bodies should help to ensure, and even encourage the conservation of energy through creative rate programs and aggressive conservation goals and quotas.

 

Conclusions for Technology Providers

Although the North American prepayment market is still quite small and it remains to be seen whether adoption of the programs ever become more than a niche, it is certainly something that metering companies should explore as a possibility. Many other regions of the world have implemented prepayment solutions successfully, both the simple keypad or card variety, and the smart variety, so why should North America be the only exception to the rule? If the topic is treated with a level of tact, and regulators, consumers, and utilities are willing to find flexible ways to implement the solution, it could show a benefit to all stakeholders.

Technology providers should watch this trend closely in the coming years as this could potentially add new revenue opportunities to them. They should watch to see utility interest levels, flexible regulatory reforms, and how consumers react to these systems to see whether this is something that is worth pursing in the future. Given that the metering market in the US has been artificially high for a number of years due to large government grants and subsidies following the economic crises of 2008 and is expected to reduce back to near pre-recession levels, adding additional applications to meters such as advanced prepayment functionality may give suppliers a higher margin solution to specialize in. 

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