How we pay for energy – and why that matters

We recently completed a research project for Lewisham Council, funded by Smart Energy GB, looking at consumer attitudes towards smart meters. We’ll be publishing the final report here fairly soon, but I wanted to ruminate a while on a topic that came up for discussion quite frequently: how we pay for energy.

In recent years, we have seen a shift from good data / slow payment, to poor data / fast payment. What do I mean?

Historically, a meter reader would appear (or you would crawl about under the stairs with a torch). A meter reading would be provided to the supplier. A bill based on consumption would appear every quarter and a payment – usually by cheque – would be despatched.

In the poor data / fast payment world, we have moved to a model of estimated billing which catches up to reality as and when anyone remembers to submit a meter reading, combined with monthly payments that go regardless, with some sort of annual reconciliation to match everything up afterwards. This has its advantages. For energy companies, it’s rapid, regular cashflow, with a reduced staff bill for meter readers and presumably lower default rates. For customers, it’s also a cashflow thing, smoothing payments for energy across the year rather than leaving you facing the moment of panic when the post-winter bill comes in.

But: it’s a hideously inefficient system. It’s like buying a pair of curtains without measuring your windows. You use them for six months, during which they either drag along the floor, or let the light in, depending on whether they’re too long or too short. After six months, you get them adjusted – paying more if they need lengthening and getting a refund if you return some fabric. It makes very little sense…

So, now we enter the world of smart meters, which promises a combination of good data / fast payments. Moment by moment information, accurate readings (without the hassle of the meter reader’s ill-timed knock on the door) AND the advantages of direct debit to keep everyone cashflow-happy.

As part of our research, we tested consumer responses to a range of ideas about smart meters, including how they could enable you to pay for energy in different ways. We talked to credit meter and prepayment customers, including some who already have smart meters. We talked to people who pay by direct debit, prepayment top up or when the bill comes in. We even heard from people who still pay by cheque…

We found that people like their default: if someone currently pays by direct debit, they don’t want to change to post-payment or pre-payment. People on prepayment meters recognise the advantages to them of how they pay – in terms of self-management, control, budgeting – even if they’re rightly annoyed that their per kWh costs are higher than everyone else’s.

So if people aren’t that interested in switching between current ways of using and paying for energy, how about new modes? Time of use tariffs were interesting to people – although most people in our research felt that they had limited options for activities that they could switch to, say, a nighttime tariff (most of our participants had gas central heating; we might have had different results from people with electric storage heating, though they would recognise a time of use tariff as their default).

We also talked extensively about bundled tariffs for energy. I was prompted to write this blog by seeing a Twitter link to Green Star Energy’s Unlimited tariff, so here we go:

Our research participants got what was meant by an unlimited tariff. They talked about mobile phone bundles, home broadband bundles, and the differences between a Travelcard (bundled) and Oyster pay-as-you-go (apologies for the London-ness). They talked about water bills – effectively bundled right now unless you have a meter. People were quite happy with these bundled approaches (apart from some frugal water users who really want their meters installed!).

But when it came to energy, there was strong resistance to the concept of bundled tariffs. Why? Because in the context of smart meters, bundled tariffs risk undoing all of the good that smart meters are posited to do. Better insight into your energy data? No longer relevant if you’re on a bundled tariff. More incentive to reduce your energy usage? Again, no longer relevant if you’re paying anyway. Accurate metering and billing? Who cares, if your bundle is simply based on an overall total?

One of the key findings from our research was that people value the simple things about smart meters: the ability to link consumption of kWh to expenditure of pounds and pence. Bundled tariffs no doubt offer many benefits, but the logic of product design means that the energy company must expect a majority of people to pay for more energy than they actually use.

I am all for innovation in the energy market, especially where it supports customers in understanding more about their energy use and engaging in ways to reduce that use. Bundled tariffs don’t seem to fulfil either of those goals. They make consumption murky and they incentivise extravagance.

One of our focus group participants was on a district heating system and pays a flat rate £20 per week every week of the year regardless of consumption: effectively a bundled tariff. He described himself as naturally frugal but wondered why he should bother saving energy when his neighbours were jacking the temperature up. He was also angry that he was unable to see the relationship between how much energy he used and how much he was charged.

Reassure me, energy companies, that your bundled energy tariffs will provide good quality information and incentives to reduce consumption. Email liz.warren@se-2.co.uk and we’ll post your response here. Similarly, if others of you have views about this topic, or tariffs in general, please do get in touch!

(Note: in the interests of balance, personally, I have mixed views on smart meters. I'd also like to make clear that Smart Energy GB were not involved in the design, conduct or analysis of the research project.)