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Statistical relationship between electricity prepayment and conservation

DEFG’s “Prepay Energy Working Group” has been studying the potential for energy conservation as a result of prepayment. Using billing data from Oklahoma Electric Cooperative, an economist hired by DEFG applied econometric techniques (statistics) to estimate the effect of prepayment on electricity usage. Cindy O’Dwyer, DEFG’s lead for the Prepay Energy Working Group announced, “The major finding is that participation in prepaid electricity service results in an average reduction in energy usage of 11%.”

This is huge! A white paper released on March 20, 2013 explains that the cost savings are due to reductions in energy use, and not disconnection (“service disruption”). For more information on prepaid electricity, click here.

This finding implies that better informed consumers make better decisions. Customers at the Oklahoma Electric Cooperative can check their usage daily and adjust usage accordingly by paying closer attention to energy waste. The daily feedback is thirty times more information than we normally receive from a monthly utility bill, and it is more timely.

This writer receives prepaid electricity at his home in Houston (since May 2012). Each day I receive a text on my phone indicating the daily usage, daily cost, account balance, estimated days remaining, cost per kWh, etc. That’s a lot of information packed into a simple text. I ignore it or review it daily depending on my need. I learn what it costs to power my major appliances.  I note the savings when I am out of the house for a day, and learn the value of adjusting my thermostat.

Energy Conservation and Energy Prepayment

We have issued the seventh “Series of Regulatory Choices” white paper at no charge to the public. Michael Ozog, a respected economist, sets forth a methodology to measure the impact of energy prepayment (prepaid electricity) on energy consumption. (Download the paper.)  The simple truth is that when you pay in advance, you give more attention to how you spend your money! Prepayment removes the utility or competitive energy supplier from the role of money lender. It places the consumer into the role of energy manager which is compatible with the role each of us plays as home budget manager for everything we buy.

How much does this matter? Previous studies show about 10% savings simply because consumers pay more attention to how they are using the electricity. I expect this to grow over time as consumers seek new channels of information, new technologies and new services to reduce energy use through increased investments in efficiency. A portion of the energy savings will go to consumers who make these choices. And a portion of the savings will go to the businesses that come up with products and services that allow the consumer to be more efficient.

The 7 billion bodies question

A lot of people are worrying about the world population this week as we approach 7 billion. (US and World population clock.) I am an optimist; I believe we can find new resources, develop new technologies and use the existing resources and technologies more appropriately. That is, we can be much, much more efficient. We can reduce the impact of the industrial revolution on the planet, even as we approach 10 billion people in the coming decades.

The blunt, inefficient tools of the industrial age create pollution and waste. We can use information technologies to put an end to this. The old tools were great in their day — in the 18th, 19th and 20th centuries. It is time to move on to the information age.

Aren’t we there? No, we are not out of the industrial age. It is premature to declare that we have entered the information age. Smart phones, mass communications and the Internet are just the tip of the iceberg of necessary advances. We must educate and inform ourselves. We must make a transition to much greater efficiency to lessen our waste of resources.

Freedom, education and wealth are excellent ways to promote the stabilization of the population. Population grows more slowly in places with freedom, education and wealth. Education and awareness lead to changes in the patterns of our behavior. We freedom, education and wealth we develop new technologies and tools that can lessen the impact of humans on the planet.

A lot of Americans are ready to criticize other countries for their population growth. Let’s stop finger pointing. It’s easy to talk about what other people should do. Find a mirror and take a look. Education and self dicipline are great tools for each of us to apply to get our literal and figurative houses in order. Nearly every major issue facing the US today would be resolved if we were more efficient and less wasteful.

Prepaid Energy: Choice, Technology, and Consumer Protections

DEFG’s research regarding the potential for prepaid energy service has revealed some differences among stakeholders. These differences parallel the approaches people take with regard to utility service. Is it a monopoly with costs and services shared equitably? Or is it a service provided in the market place with consumers exercising choice.

Some stakeholders consider prepaid energy service a positive innovation for consumers — a 21st century payment channel that uses the investments in advanced meters and leverages the capabilities of the smart grid. Others view prepaid energy as potentially predatory and discriminatory toward low-income consumers. A new DEFG white paper (in the “Series of Regulatory Choices”) discusses the low-income issues.


There appears to be a common desire to see low-income consumers pay fair rates for electric service. There is also a universal desire to protect consumers during dangerous weather periods (moratoria on disconnections). Despite these common concerns, the biggest barrier to prepaid energy service seems to be that industry stakeholders do not see eye-to-eye. There are significant differences in how they frame the issues, and this make it hard to resolve policy differences.

Can DEFG identify a basis for trust to address the challenges, concerns and opportunities presented by prepaid service? DEFG has four screens that create an analytical framework to examine existing regulations. Let’s see whether a fundamental principle involved, such as “everyone must be served equally”? A rule formulated decades ago may be based on a practice that could not anticipate 21st century technologies. New technological capabilities may allow a change in the rules without giving up our basic principles. To what degree will consumers be permitted to make choices and express their preferences? How will be balance equity and efficiency?

In some cases, a rule or practice may be rooted in an ideological difference, such as supporting or opposing the role of competition in energy markets. A more rigorous analytical framework may allow us to identify an underlying motivation, and thus advance the discussion and possibly narrow differences.

Energy efficient lights and appliances

In March 2010, our EcoPinion survey report focused on the Energy Star program for consumer appliances. One recommendation related to a need for different levels of efficiency, so that consumer could select exceptionally efficient appliances if they suited their needs. In October 2010, the the Environmental Protection Agency (EPA) released a proposal to pilot a new Energy Star program to identify and advance highly-efficient products. This “top tier” approach would accelerate adoption of advanced products in the marketplace. In a May 5, 2011 letter, EPA explained the pilot program and changes as a result of extensive stakeholder comments on the draft criteria.

EPA’s pilot program is completely consistent with the EcoPinion recommendations with respect to evolution of the Energy Star brand. Consumer Reports explains the changes in a May 19, 2011 article “Energy Star shines a light on its ‘most efficient’ superstars.

It is certainly a good thing if a consumer–armed with better information and a rating system–makes a choice to purchase a more efficient device today in order to lower energy costs tomorrow. It is always a good thing when a consumer exercises informed choices. But are we moving fast enough?

In March 2011, EcoPinion No. 10 focused on consumer attitudes regarding efficient lights. Consumers are more ready that we expected to adopt new LED lights in their homes. They also want government leadership. Consumers want good information from a trusted source.

Last September, I asked whether the flows of energy in the US economy told even one-half the picture. Discouraging as they seem, I stated that the diagrams were overly optimistic in their portrayal of energy waste.

Our utilization of the energy commodity is tremendously inefficient.  For example, when you buy one unit — a kilowatt-hour – of so-called ”usable electricity,” it may power a light bulb which converts only 20% of the electrical energy into visible light! (I assume a new, efficient light.) The other 80% of the energy labeled as “usable electricity” becomes heat.  Did you intend to “use” 80% of the electric commodity as heat? (Do you intentionally heat your home with lights?) Or is that a measure of waste not shown in the diagrams above?  It sure is.

If people better understood how inefficient they are, they might demand better information and leadership from a trusted source. Until then, anyone can claim “efficiency,” “protecting the environment,” or “green.” These terms are overused. Without a tiered Energy Star program, consumers cannot easily compare claims and then act as they prefer. Today, very reasonable people make inefficient purchases because the market does not make good information available at a reasonable cost.

Regulatory Challenges Presented by Smart Grid-Enabled Prepay Offerings

The development of customer-facing applications of smart grid invites the question: How do existing regulatory constructs comport with technological innovation? At first glance, prepaying for energy may appear to be just another payment channel for consumers, where energy is purchased now for consumption later. When supported by smart technologies, prepay may be linked with a two-way communication channel between the supplier and consumer. Energy consumption data is made available to suppliers in regular intervals (fifteen-minute, hourly, daily, etc.), which allows for different types of pricing structures. Consumers may also opt to receive communications regarding payment and account updates, price signals (potentially using dynamic pricing), and energy management options. Prepay enabled by smart grid is thus a billing option with a consistent feedback loop delivered via SMS, email, web-based portal, in-home display, or perhaps a combination of these options. The information flow allows consumers to monitor their usage, creating opportunities to reduce energy consumption and costs. With prepay, moreover, the usage data is tied to the payment transaction in real time, so consumers can directly relate energy consumption with dollars.

Thus begins the newest paper in DEFG’s Series of Regulatory Choices titled, “Regulatory Challenges Presented by Smart Grid-Enabled Prepay Offerings.”  The paper sets forth many issues that regulators must address as they consider the balance between new customer service choices and customer protection.

DEFG believes that all regulatory agencies make a “series of choices” as they go about the business of administering the laws that govern the behavior of players in network industries. DEFG’s Series of Regulatory Choices explores the federal, state and local regulatory decisions that expand the choices available to energy consumers as they construct and inhabit buildings, purchase and maintain energy-consuming devices, purchase energy, or manage their consumption of energy. Greater choice increases efficiency.

It has been stated that prepay electric service is a “killer app” for smart grid — the first customer-facing application of smart grid that will have far-reaching consequences. Read more about our work on prepay or contact us to participate in our prepay working group in 2011.