Should utility prepay plans be considered energy efficiency programs?

Blog | February 28, 2017 - 1:16 pm
By Ariel Drehobl, Research Analyst, Local Policy

Utility proposals for customer prepayment plans are on the rise. These payment plans require customers to pay in advance for their utility services and, if they run out of prepaid credit, they are remotely disconnected from service until they top up their credit. While utilities can benefit from these plans because of reduced financial risks from overdue payments and other reduced service costs, many consumer advocates are concerned about these plans’ effects on health and safety, particularly for low-income participants.

Some utilities and prepay advocates claim that prepayment influences customers to save energy. If this is true, should prepay plans be considered energy efficiency programs? To answer this question, there are a few key questions that we need to ask. What portion of the observed usage reductions result from energy efficiency improvements such as structural building and equipment upgrades, or from energy waste reduction through positive behavioral changes? And what proportion result from behavioral curtailment that cause discomfort, deprivation, and (or) full shut-offs? And how long do these energy savings last? It’s important to keep in mind that a central tenet of energy efficiency is the notion that customers do not have to sacrifice comfort or level of service to save energy.

In this blog post, we will discuss recent prepay developments and questions we have regarding prepay as energy efficiency, and we will tee up some areas for further research.

Recent trends and key questions about energy savings claims

Currently, electric utilities in at least 34 states offer some version of a prepay payment plan, with the highest number occurring in the Southeast. Cooperatives and municipal utilities offer most of them, and these utilities usually don’t have regulatory oversight by a public commission. This payment option is often targeted to low-income customers to ensure fewer missed bill payments and reduced costs of energy shut-offs. Proponents of prepay plans suggest that this payment option not only reduces costs and financial risks for the utility but also saves customers money on their energy bills. According to E Source, seven utilities have noted energy savings associated with prepay plans of 5% to 14%. However only a few of these savings claims are supported by full evaluation studies. Also, this level of savings is higher than the roughly 2% to 7% energy savings ACEEE has found with most opt-in behavior change programs.

Some evaluations exist, but also key questions remain

At this time, we are aware of only a few evaluation studies that quantify energy savings from prepay plans,, some of which combine education and feedback elements. We know of only two utilities that are allowed by regulators to count savings toward energy efficiency targets: Arizona Public Service (APS) and Salt River Project (SRP), both in Arizona. It’s worth noting some recent prepay developments for both APS and SRP.

APS is undergoing billing system changes that precluded the expansion of the program, which ended in 2016, beyond the pilot phase. The Arizona Corporation Commission has ordered APS to work with stakeholders to enhance the education and communication offerings for potential future prepay plans to increase their effectiveness.

SRP is continuing their M-Power program, which includes a prepay tariff, an in-home display device, and customer education. SRP’s 2016 energy efficiency plan relies on the M-Power program, including the prepay plan, to account for 67% of energy savings in the residential sector and 52% of total portfolio savings. That level of reliance on a single program for energy efficiency savings raises significant questions. To what extent are the energy savings the result of energy efficiency as compared to changes in usage due to disconnection and (or) deprivation? To what extent might energy savings be accounted for by paying in advance as opposed to receiving feedback or education? And how long might these savings last? Some key parties involved in these cases hypothesize that most of the reductions in energy use observed in the SRP M-Power program are due to energy efficiency information and the in-home display unit provided to participants, and do not simply result from the prepay tariff. This uncertainty is one reason that we need more research on prepay plans.

Many groups are concerned about consumer protections

Aside from the question of energy savings, some consumer advocates are concerned about customer deprivation (i.e., being deprived of the necessary amount of energy for a safe living environment) as a consequence of prepay plans and also about health and safety risks, burdensome transaction fees, and increased risk of shut-offs for low-income and vulnerable customers. There has been some research on the number of disconnections under a prepay plan. For example, a 2015 study of the APS prepaid service plan found that 93% of sampled participants experienced at least one disconnection event over a 13-month period. In the same study, analysis of a smaller group of participants demonstrated that over the same period, 30% experienced at least five disconnections, with most occurring during the peak hot weather months.

Consumer advocates have created consumer protection guidelines for state adoption of prepayment plans. For example, the National Consumer Law Center (NCLC), which opposes prepay service, provides several recommendations to states in regards to prepay plan requirements and protections if states decide to move forward with prepay rates. Additionally, the National Association of Utility Consumer Advocates (NASUCA) passed a resolution, “Urging States to Require Consumer Protections as a Condition for Approval of Prepaid Residential Gas and Electric Service,” which advocates for rules on who can participate in prepay plans and how they should be protected once enrolled.

Prepayment plans have clearly raised many serious concerns about consumer protections and access to energy service, with some policymakers and regulators choosing to reject prepay plan proposals. For example, in November 2013, the California Public Utilities Commission (PUC) rejected a proposal from San Diego Gas and Electric for a prepay plan, citing concerns that the proposed plan would induce customers to forgo essential consumer protections and that some would not receive secure notification of impending disconnection. In 2009, Massachusetts dismissed a utility proposal, stating that the plan would have unfairly targeted low-income customers.

So should prepay plans be considered energy efficiency programs?

The short answer is not yet, at least not until more research is conducted. Discussions about the suitability of prepay plans as energy efficiency programs—particularly when targeted to low-income customers—are growing louder and more numerous, and we see a strong need for additional data and rigorous evaluations to help understand the impacts of prepay plans on energy consumption. Stakeholders need high-quality data and evaluations on three key questions to inform regulatory decisions.

  1. If customers on prepay plans reduce their energy consumption, what actions are they taking to do so? What proportion of these savings or changes in usage can we attribute to each of the following: (1) energy efficiency retrofits (i.e., physical measures and upgrades), (2) education and behavior change leading to less wasted energy, (3) curtailment behavior to the point of reduced comfort, and (4) complete energy shut-offs due to missed payments?   
  2. To the extent that prepay plans lead to changes in usage that we would consider beneficial energy savings (i.e., categories (1) and (2) above), what components of the plans drive these savings? Available evaluations also suggest that prepay plans have been effective at reducing energy consumption when they include customer education and near-real-time feedback components such as in-home displays or text messages. Given that we know education and feedback strategies can reduce energy consumption, we are interested in determining if, and in what ways, the fact of paying in advance for electricity influences customer behavior.
  3. How do we best ensure that prepay customers receive quality energy efficiency services? Are prepay plan participants also offered access to weatherization and other energy efficiency services that can lead to long-term improvements in health, comfort, and energy affordability? Utilities should market these energy efficiency programs to customers who enroll in prepay plans to ensure they save the most possible energy.  

Meanwhile, ACEEE believes that any prepayment plans that are included in efficiency portfolios should be combined with energy efficiency components to help customers reduce their bills. These components should include energy efficiency information and behavioral feedback at a minimum, but potentially also targeted energy efficiency materials and services. To date, it is largely unknown whether existing prepayment plans specifically include the provision of these energy efficiency components.

It is important to note that if utilities and regulators are looking for ways to help their customers save energy and help meet long-term energy efficiency targets, there are many other options. For examples, see ACEEE research reports on next-generation utility programs and expanding program participation. Another ACEEE report expands on best practice programs for low-income customers. And see our new research report for behavioral program ideas. Like customers with certain prepayment arrangements, customers enrolled in behavioral programs can receive frequent (e.g., daily or high-usage) feedback through email, text, or phone alerts as a way to motivate energy-saving habits.

ACEEE intends to explore the above questions in greater depth based on robust research into prepay plans and their relationship to energy savings. We are currently seeking other organizations to partner with or to financially support this research. If you are interested in partnering with ACEEE to advance research of prepayment plans, please contact Ariel Drehobl at adrehobl@aceee.org.