Prepaid electricity: Better service delivery for the poor?

• Study examined the effects of a policy change in 2014 that switched 4,000 households on the grid in Cape Town, South Africa, to prepaid metering.

• Introducing prepaid meters led to a 13% drop in electricity usage – and the effect persisted throughout the two-year study, suggesting the meters helped customers better understand and take control of their energy usage and expenses.

• The switch to pre-paid electricity brought particularly large cost savings (through reduced energy consumption) for poorer customers and those with a history of delinquent payments.

• There were also net benefits for the electric utility, due to more reliable payments and lower costs of recovery and administration. Overall, the gains are estimated to cover the costs of the prepaid meters after seven years of use.

Prepaid metering – where customers buy electricity upfront – has the potential to improve electricity access and reduce utility costs for lower income customers, while also helping utility companies recover revenue. It offers a promising solution to lumpy and unpredictable bills by allowing customers to choose the timing and quantity of purchases. At the same time, prepayment circumvents debt accumulation, allowing utility companies to serve otherwise high-cost customers.

Researchers collaborated with the municipal utility in Cape Town, South Africa, to evaluate customer responses and revenue recovery for prepaid versus credit electricity metering. The study generated new evidence on the impacts of prepaid meters on energy use and revenue recovery using both a randomised phase-in of new prepaid customers and a retrospective evaluation of historic transitions to prepaid meters in a ten year, household database of all municipal utility customers.

We found that switching customers from postpaid monthly billing to prepaid metering lowers electricity use per month by around 13%. This result persisted over the year following the switch. When combined with information on customer payment behavior and utility costs under each system, we found that the utility company's net revenue improved. The biggest improvements came from the customers that are most costly to serve under a postpaid billing model: those with delinquent payments; and relatively poor customers who use little electricity.

These findings support the trend toward expanding electricity access using prepaid meters. But they also raise important questions about the impacts on consumer welfare, which we plan to investigate in the future.