The New Mega Trend Driving Pre-Payment

Earlier this year, I wrote a blog on prepayment trends and how utilities are facing industry headwinds that require better and more efficient consumer outreach around deregulation and competitive alternative energy sources.

I’d now like to talk about energy consumers and some of the headwinds they are facing. Utilities are in a position to offer their customers more information to enable them to better control their energy consumption and flexible payment options to better control their budgets. It’s important that utilities  engage their customers to ensure they stay their customers in the future. A decade ago, utilities weren’t faced with the current marketplace challenges and the focus now needs to be on the future of energy and today’s energy customers.

The COVID-19 pandemic has wreaked havoc on the U.S. economy with millions out of work throughout most of 2020 and even into 2021. All levels of government; local, state and federal have tried to provide needed assistance for those hit hardest by the impacts of the COVID-19 mitigation strategies. Included in the citizen assistance policies were moratoria on utility service disconnections. This meant that many of the utilities’ customers were not paying their monthly utility bills because of lack of income and because they would not be disconnected from services. Utilities are up against a mountain of residential accounts that are in arrears.

Currently, there is estimated to be over $50 billion in utility services consumer debt. The average arrears for these consumers is close to $2,000 and some much higher. Utilities are facing 3-4 times the normal outstanding payments compared to pre-COVID days. Struggling consumers are having to balance which payments to make first. Most of their budgets are directed first toward housing (rent/mortgage), credit cards, student and auto loans. Utility bills are typically some of the last bills to get paid. Utilities normally attempt to contact customers in arrears and arrange new payment plans. According to the Prepay Energy Working Group, part of the Distributed Energy Financial Group (DEFG), pre-COVID studies have shown that payment arrangements fail over 60% of the time with over 22% becoming write offs. COVID impacts are driving these statistics even higher.

Energy assistance programs, such as the Low Income Home Energy Assistance Program (LIHEAP), can help consumers pay off some of that debt. In the last round of COVID relief legislation, the federal government included some extra funding for lower income households that are facing utility debt but this extra funding is only covers a fraction of the total amount.

Utility commissions are taking a hard look at this mountain of debt and are concerned about raising utility rates being used to cover the losses. Investor-Owned Utilities are also being scrutinized from the investment rating agencies for the large amount of arrears on their books. This could hurt their bond ratings, impact their investors and their financial health. Public Power utilities (municipalities and cooperatives) are concerned that they will need to raise their rates across the board to recoup their losses, something they are chartered to avoid.

To truly be successful in dealing with this huge amount of arrearages, utilities will have to take a portfolio approach by incorporating payment arrangements along with government assistance and adopting new and flexible payment options for their customers.

One flexible payment option allows customers to pay in advance for their energy use. Prepaid energy is a voluntary bill pay option for consumers to pay ahead for energy consumption in the future. Many consumers appreciate the convenience and flexibility of the option. Others appreciate an alternative to security deposits or payment arrangements. Customers can pay multiple times a month in smaller increments than the traditional one big monthly payment. Consumers are already very familiar with this type of payment plan with their cell phones, internet and cable services.

According to Global Industry Analysts, the global market for prepaid service across all industries is projected to reach $1.3 trillion by 2022. This is being driven by the growing need for inclusion of unbanked consumers (those who are new to banking or have poor credit history for various reasons), innovative features and services, increasing volumes of online transactions and the rising demand for cost-effective electronic payment solutions.

Energy prepayment solutions are currently more common with utilities in Europe, South America and Africa where they can have upwards of 90% of their customers enrolled in these programs. Although, not as popular North America, utility prepay billing has been implemented in the U.S. with high consumer satisfaction ratings of over 80%.

Itron has been selling and managing these types of metering services for the past 25 years with over 20 million metering endpoints supporting this billing option.

Valuable benefits for energy consumers:

• Once consumers begin using this flexible payment option, their energy consumption, along with their energy bill tends to drop significantly as a result of the near real-time and easy to understand consumption information. Getting this feedback on a regular basis, delivered via text or email and mobile phone apps, helps consumers change their behavior and usage habits. Consumers gain better control over their energy usage with frequent communications that present the info in in easy to understand formats such as dollars and cents and how many days left. Having more granular information more often than once a month helps consumers change their behavior and habits to become more energy efficient. This gives environmentally conscience consumers the ability to reduce their carbon footprint.

• The popularity of smart speakers and devices, such as Amazon’s Alexa and compatible devices also allows the consumer to get updates and statuses on energy usage and prepay account balances. This relatively new convenience of getting real-time data and ease of use helps consumers control their usage and habits as well.

• In addition, the ability to make smaller, more frequent payments helps consumers manage their budgets more effectively. They are no longer blind to their household energy usage and hit with a large bill at the end of the month.

 

Valuable benefits for utilities:

• Prepayment ensures that utilities are paid for the energy they are providing.

• Flexible payment options, like this type of pay in advance method, greatly improves customer satisfaction which helps utilities to retain customers.

• Studies show that combining this prepayment option with the other payment programs in the utility’s portfolio helps utilities recover over 90% of their arrearages.

 

Combining a flexible prepayment billing option and a program around debt repayment along with partial debt forgiveness helps both the consumer and the utility.

The Prepay Energy Working Group’s extensive research has identified nine policy areas most critical to the future of prepaid energy service:

• Service must be voluntary
• Applicability of weather protections
• Concerns for vulnerable populations
• Service disconnection warnings
• Account communication and notifications
• Arrearage management and deferred payment plans
• Cost of service (includes: security deposits, tariff, penalties and fees)
• Payment channels
• Availability of and synergies with payment assistance

 

According to the DEFG, it is estimated that over a million Americans will be using prepay energy in the next couple of years.

As you can see, this type of utility prepayment billing option is part of an intensifying mega-trend. Many Americans, representing all demographics and across many industries are happier using prepay billing because it provides more control, security and transparency plus it is convenient to use. To learn more about the Itron Smart Pay solution, contact us at SmartPay@itron.com.