Universal Prepayment – In the National Interest

Universal Prepayment – in the National Interest

This proposal recommends a radical redesign of the GB retail gas and power market.  The redesign has a number of material affects that are in the public interest and should be considered by Government;

  • Consumer engagement would be enhanced
  • Margins in retail energy could fall from 5% to 3% making energy cheaper
  • Consumers are able to purchase energy at any time from any licenced supplier
  • Consumers can make payment in any way they wish
  • there would be no differential price for the payment method chosen
  • Instantaneously the number of retail suppliers could increase in a material way

The redesign is actually a relatively minor change in the current smart meter roll out plans and does not require the existing legacy systems to be altered in fact the entire technical functionality could probably be delivered by the Data and Communications Company. The proposal would be rolled out with smart meters. The Big 6 may not be unsupportive of this proposal and this would need to be tested in the evaluation.

Proposal in detail

The current smart meter roll out envisages meters operating in prepayment and credit mode.  The specification should be modified to only operate in prepayment mode (“Universal Prepayment”) and each prepayment converted at a single price to a number of kWh of fuel delivered by any licenced supplier. The first point is straight forward the second two points are a radical departure from current market design.  All three parts are required for the operation of a Universal Prepayment system.

Each prepayment made by a consumer can be considered as a bag of sugar on a supermarket shelf this Energy Delivery can be supplied by any licenced supplier; independently of which supplier is responsible for the meter point within settlement. The Energy Delivery can have clearly defined characteristics of time of use and renewable, local, nuclear supply etc.  There would be no confusion and billing would be trivial, no different to a bag of sugar in a supermarket and indeed we would expect Energy Deliveries to be sold by many retail outlets including supermarkets.

The stock of energy would be visible on the In Home Display and smart meters as a residual store of kWh of energy as currently planned.  A web and mobile platform would be made available by Energy Delivery suppliers to show purchase history and any auto top ups etc.; not dissimilar to the Oyster Card system.

There is no public interest benefit in allowing the release of energy at the point of sale for free; credit deliveries should be eliminated in any case. Meters that were designed in an age of energy being ‘practically too cheap to meter’ are not suitable for an age where 4.5 million households (and rising) are in fuel poverty; energy is cash.  Operating in credit mode where energy is effectively freely released at the point of use, energy debts rise causing a natural tension between industry and the consumer. Short lettings, student accommodation, even at the extreme cannabis growers, all demonstrate how the supplier model is at a major disadvantage from the requirement to ‘find’ a customer after the product has been delivered.  Universal Prepayment would reduce supplier costs through eliminating bad debt, simpler supplier back office; a single Universal Prepayment process.

Energy Deliveries will enable consumers to purchase energy in a fixed quantity in advance, these Energy Deliveries can be purchased from a fully liquid market where a switching process is unnecessary; vastly increasing the competitive market in itself.  Each Energy Delivery would be bar coded with the supplier identity. Like petrol, suppliers will attract customers to take deliveries from them on a variety of offers around a fully transparent and RMR compliant price offer. Unit Rate energy would be in Energy Deliveries and the meter point supplier would bill for Standing Charges. Wholesale liquidity will be transformed as no supplier would own a customer and volumes will be fluid causing active and inclusive trading in the wholesale market; a very useful backdrop to the setting of CfD strike prices.

Universal Prepayment does not affect the payment method of choice in a smart world.  Receiving energy supplies form a Universal Prepayment smart meter would not preclude customers from paying by monthly Direct Debit or quarterly by cash and cheque but it would require such payment to be in advance of delivery.  Customers would need to manage their energy purchasing as they do with sugar and petrol; unlike sugar but as with petrol, technology can feed back to them when their stocks are low. Failure to purchase energy in advance, as for a motorist, results in service failure. Rather than a bad thing this is seen as a good discipline; typically motorists do not run out of fuel and we should expect the same in energy supply. By requiring a consumer to pay for energy in advance the energy efficiency behaviour changes in an obvious and meaningful way. The consumer has yet to consume the prepaid energy and so is in a position to become more efficient with its use.  A credit mode customer has consumed the energy and simply has the pain of paying for it. In a tightly constrained market where demand response is needed a Universal Prepayment system would be very handy.

The energy settlement systems operated by XOserve and Elexon would operate in the same way as they do now.  The new design would create an intra-supplier market where aggregated Energy Deliveries would be matched with supplier offers for delivery of the same volume of energy to the same meter points.  This clearing system would require suppliers that wished to balance (say half hourly electricity demand) to bid for groups of meter points that would be ‘switched’ to them to balance.  They would bid for these aggregated meter points in a quantity that matched their generation or PPA abilities alongside their strength in balancing and trading, no different to today.  This bidding process would enable a market to develop in Energy Deliveries. New entrants may or may not choose to participate in the Energy Deliveries clearing system.

Another way to consider the redesign of the market is that in effect it is a universal collective switching initiative where consumers exercise their right to purchase all the time.

Some £1-4 bn of cash (depending on consumer choice and season etc.) would be paid in advance by consumers and this needs to be put to good use.  The Green Investment Bank (or repalcememt) would be able to take ownership of this (or some other regulated body) and consumers would get an interest rate benefit from the aggregated sums.  There is a rationale for new suppliers having access to this credit source as they all have to purchase energy in advance of delivery and currently this is the most significant barrier to new entrants. Under a regulated system new entrants could be incubated into the market and allowed access to the consumer credit to meet their initial wholesale Mark-to-Market and credit support terms offered by the energy wholesale markets.   Careful structuring around the Supplier of Last Resort mechanism would protect consumers from any loss far better than the current systems do.

A Universal Prepayment world can operate in confidence for a consumer, they buy in advance and it’s up to them when they consume the delivery; if they want total anonymity in this they can have it.  Experience with prepayment customers is that they like their prepayment meters; in Northern Ireland they even write poetry about them. There is time for this design to be assessed within the smart meter programme and this proposal can only work alongside the roll out of smart meters. A Universal Prepayment can only be delivered by Government (not by new entrants) and would transform our industry.  Recent events show again that we have to be more innovative and ambitious if we are to reverse the cycle of mis-trust generated by displays of misunderstanding between legislators, companies and consumers, held in a public forum.

Consumers will benefit from lower costs, a transformation in competition with energy being fought over Energy Delivery by Energy Delivery (as with petrol and food) as well as the original objective of the 1998 laws to stimulate an active and diverse set of energy suppliers of all sizes.

I propose that a think tank session is established to review the pros and cons of this proposal ASAP and I am happy to do what I can to support that exercise.

 

 

David Casale

CEO and Founder, Open4Energy Limited

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