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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.

Alberta Retail Market Review Committee

I am pleased to announce that I have been selected to serve as a panelist on the “Retail Market Review Committee” ( for the Province of Alberta, Canada. The March 22, 2012 announcement indicated that the RMRC will examine the volatility and costs of the “regulated rate option” (RRO, the name given to Alberta’s “default service”). Other jurisdictions refer to “basic service,” “standard offer service” or “price to beat” for the default or transitional service. Default service is a service defined in a regulated electric tariff. The tariff sets forth a price for for consumers who have not yet selected a retail energy provider (competitive supplier). A typical consumer may not take action right away, waiting to see what friends and family do in the new retail energy marketplace. Default service allows a transition period from fully regulated utility service to competitive retail energy service. (Nearly 20 states and provinces in North America take this approach for electricity.) With competitive energy service options, consumers have choice, control and convenience.

The Retail Market Review Committee will submit a report with recommendations by late June 2012. (Note: This was extended to September 2012.)

(This entry was updated on March 19, 2013. The Minister of Energy issued a press release on January 29, 2013 to announce its decisions regarding the report. DEFG issued a press release on Alberta’s decisions.)

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.

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.

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.

Prepay for Energy and Utility Service

I pay for gasoline before I drive. Shouldn’t I pay for electricity before I use an appliance?

Some electric industry observers argue that “prepay” could be one of the first real fruits of the smart grid. The value of investments in advanced meters and smart grid is not readily apparent to us. A twenty-first century grid will allow the transmission and distribution utility to monitor bottlenecks, anticipate problems, and resolve outages more quickly. But that value may be hard to see — or at least it will not be visible until the next major storm. But we pay a power bill every month, so a change in that transaction is readily visible.

Today, there is no timely linkage between consumption and the size of the bill. We hear about the electric rate, but our understanding of the drivers of consumption is limited. Prepaying for energy — much like filling the gas tank — allows us to directly associate cost with usage. As we monitor usage, we can consider energy management (is it time for a tune up?) or investments (should my next car get more miles per gallon?). Prepayment of electricity or natural gas should leverage the real-time information coming from advanced meters, and that information should allow consumers to change consumption patterns to fit within a monthly budget. 

Last month, DEFG released the results of an online survey of industry professionals. The respondents considered questions on the application of prepay to the energy industry. Read the press release.

Now the results of an EcoPinion survey are available. We surveyed 1,000 Americans nationwide in mid-November 2010. The report examines customer perceptions and expectations regarding a prepay transaction offered voluntarily to consumers by the local utility. The report is available on our website.

Stories about the EcoPinion survey report:

What are your experiences with prepay?