Modelo de Datos

Payment methods

Chapter Summary

For many low income customers, paying more for their electricity is a fact of life because they use prepayment meters (PPMs) or pay in small cash instalments. This allows them to control their expenditure on energy and avoid getting into debt, but at a price. Paying in this way usually means they:

Z have the highest tariff costs of all available tariffs

Z have the inconvenience of having to leave their homes to “top-up”;

Z pay more in transaction charges, and

Z may self-disconnect when they are not able to “top up”

Energy costs are a critical factor in identifying fuel poverty9_{, where households need} to spend in excess of 10% of their income to maintain a satisfactory heating regime. Official Government policy since the late 1990s has been to tackle fuel poverty, though the fuel poor have been the least likely to benefit from any drop in fuel prices10_{. Despite} repeated government policy and energy supplier initiatives, those who can afford to pay least for their energy still pay the most.

There are a number of recent developments that could transform the costs of providing energy services to low income customers. The most significant of these is the roll-out of ‘2nd generation’ smart meters, which will be more flexible and convenient for the customer, allowing them to top-up remotely from home, and will be less expensive to service for the supplier.

In addition to the roll-out of smart meters, the range of pre-pay options in a number of services is likely to expand significantly providing other options. These include mobile phone payments and pre-paid payment cards which can be aligned with other financial transactions including receiving and withdrawing cash, direct debit payments and (depending on supplier) free cash withdrawal. While it is clear that these accounts, payment cards and associated benefits will not be free, they may be significantly cheaper than the current options for paying for energy. Cash handling remains an expensive option and there was little appetite amongst RSLs involved in this Warm Homes Fund project to provide a cash payment facility for energy supply.

The consumer credit requirements for an ESsCo providing credit services credit and debt collection services, would not be onerous and should not present an obstacle for an RSL ESsCo.

Although generally low income customers do not tend to switch energy supplier, a small survey of RSL tenants undertaken for the feasibility study for this project indicated a high level of awareness of the option of switching and that a high

Payment methods

Grampian Housing Association

9 Defined as spending more than 10% of household income on adequate heating

10 Boardman, B. (2004) New directions for household for household energy efficiency: evidence from the UK. Energy Policy 32 (2004) 1921-1933

proportion of tenants had done so. Both the literature review and the survey indicate a degree of consumer scepticism about energy suppliers. However, many of the tenants who took part in the survey, who tended to have a positive attitude towards their landlord, approved of the idea of their landlord becoming an energy supplier as long as this did not increase costs.

1 Introduction

Consumer Focus published research11 _{in 2011, exploring the costs and implications} of money management for low-income consumers, indicated ‘that the precariousness of low-income consumers’ finances and personal circumstances meant that they often have to prioritise control (predictability, without hidden fees or penalty charges), clarity (easy to understand terms and conditions) and convenience (easy access and limited barriers) over long-term cost. …. they cannot afford to take the risk of the fees and penalty charges for missed payments that come with more mainstream products. Instead, many low-income consumers rely on more expensive payment methods and financial products, such as cash, certain types of credit (eg home-collected credit, payday loans) and prepayment meters (PPMs), which are better suited to their priorities for day-to-day money management.’

The report emphasized ‘that low-income consumers’ choices are based on an active weighing up of the costs and benefits of the products they consider available to them. Often this means having to make difficult trade-offs between cost and other priorities, given the limited choices on offer. By choosing sound financial management with the aim of avoiding debt, low-income consumers’ priorities can result in expensive choices. Making sensible decisions for their financial circumstances can actually increase low-income consumers’ poverty premium and vulnerability to debt.’

This is borne out in the way many low income households pay for energy, using a PPM or card top-up (cash). Paying for energy in these ways incurs the highest tariff costs for the customer and compares poorly to tariff rates available to direct debt customers. However, PPMs, are the preferred option for some because, they allow customers to manage their budget, to avoid getting into debt or to repay an existing debt. The trade- off is that customers may then:

Z pay more for their energy

Z have the inconvenience of having to leave the home to “top-up” Z ‘lose’ an additional amount each time they top-up to repay any debt

Z may self-disconnect so that energy is available when they know they will need it

most, and

Z may go without energy completely when they do not have funds to top-up their

PPM card or cannot get to the top-up point.

For an ESsCo focused on low-income customers, where the likelihood is that large numbers of customers have PPMs, finding cheaper and more user-friendly payment methods is key to providing a more cost effective service and improved customer experience. The costs associated with PPMs and card top-up payment methods are

one of the factors responsible for the higher charge to customers, and identifying alternative payment methods which reduce these costs will be critical to the profitability of the ESsCo.