Energy prepayment meters are a national disgrace

Why does the UK lock poorer people out of cheaper energy deals?

Illustration by Otto Dettmer/Ikon Images

While most energy bill payers will receive the government’s new £400 rebate automatically, about two million people across the UK will have to go through a much more fiddly and time-consuming process of collecting vouchers they receive in the post, then redeeming them in person over six months. Many won’t benefit from the rebate at all.

This is yet another example of the way in which the UK punishes people on lower incomes who are most exposed to the cost of energy, using prepayment meters. Four and a half million people in the UK are forced to pay higher rates, with little opportunity to change supplier and a much greater risk of being disconnected. And that number may be about to rise steeply.

When the energy price cap rose by £693 a year for typical households in April, it rose by £708 for the average prepayment customer. Many “typical” households wouldn’t actually have begun paying more, if they were still on a cheaper tariff, but for most prepay customers the effect was immediate. Even customers who had topped up early in the hope of buying some cheaper energy before the hike found that their “smart” meters had helpfully switched to the new rate.

The same will happen when the new price cap, to be announced on 26 August, is imposed in October, only the prices will be higher still. Some analysts expect the cap to rise to more than £3,300 a year.

Even when energy is cheap prepayment meters are inexcusable, because they lock customers out of the cheap deals offered to every other customer. Their main purpose is to allow energy companies to cut off their customers if they can’t afford their bill, but the system is also self-policing: with a small amount of cash to spend on energy or food, customers make these decisions themselves, absolving their supplier of both the economic and moral cost of doing so. In 2019 the charity Christians Against Poverty found that prepayment customers “frequently self-disconnect, topping up a small amount at the beginning of the week and consistently running out after three or four days”. Almost one in five of the customers in the charity’s report had gone without basic energy-dependent activities, such as cooking or washing, for at least two months.

Even when a prepayment customer self-disconnects they are charged a standing fee – currently 87p per day – and this is applied as a debt even if the customer has deliberately avoided using energy. Peter Smith, director of policy at the fuel poverty charity National Energy Action, says it’s likely there will be many people who have stopped paying for gas during the spring and summer, who will face a hefty bill just to resume service when the weather gets colder later in the year. “You’ve got to pay all of those standing charges that have accrued before you can even reset it and start consuming energy again.”

There is no question that these households are the ones least able to afford it. “About 50 per cent of all prepayment households have incomes below £18,000 a year,” Smith explains. Yet these people are being asked to subsidise the energy bills of others to the tune of hundreds of millions of pounds. “We estimate that prepayment meter customers are paying around £200m more, in aggregate, compared to direct debit or standard credit customers over the course of a year,” he says. National Energy Action estimates the cumulative extra payment by the energy industry’s least wealthy customers at “six to eight billion pounds”.

Energy companies have always claimed that it’s necessary to charge prepayment customers more because of the extra administrative cost of the payment systems. Even if this was true it isn’t any more, because we’ve all paid, and are still paying, for the enormous cost (£11bn at last official estimate) of introducing smart meters across the UK. Smart meters can work in standard credit or prepayment mode, meaning they represent the same admin cost to the supplier. There’s also no financial risk to an energy company from a prepayment customer because they pay in advance.

“In other services,” says Smith, “you’d expect that if you pay in advance for something, you’d probably get it cheaper, or at least at the same price, as somebody that pays for it afterwards.”

There is one group of people that benefits from prepayment meters: it’s yet another win for landlords, who often opt to have prepayment meters installed because they remove the need to chase former tenants for payment of their bills.

People on standard tariffs should not console themselves that this situation does not affect them. Helpfully for energy companies, smart meters can be switched to prepayment mode remotely, so there’s an admin-free route to force people into paying even more if they get behind on their bills, as may happen for millions of families this winter when the price cap rises.

While smart meters may have been backed by sound environmental aims (although their efficacy is debatable), the one really concrete outcome of their implementation has been to ensure that anyone who doesn’t pay will be more easily disconnected during the most expensive winter on record. No wonder the energy companies are so keen on them.

The £400 rebate is welcome, but it will be of little comfort to the millions of people who will be forced to do extra work to claim it, if they can at all, and who will continue paying extra to companies whose profits have never been higher.