Skip to main content

Pre-payment Energy Meters

Volume 464: debated on Monday 8 October 2007

Motion made, and Question proposed, That this House do now adjourn.—[Siobhain McDonagh.]

I wish to address a continuing and worsening issue: the difference between what people who obtain their energy from pre-paid meters pay for their energy and what everybody else pays, especially those who pay by direct debit. The difference is substantial—perhaps 16 per cent., and rising, of the fuel bill of someone who is paying by pre-paid meter—and, by and large, it falls disproportionately on those who are least able to afford their energy supply.

A substantial number of people have pre-pay meters—3.5 million electricity meters in 26 million meters overall and 2.2 million gas pre-pay meters in 20 million overall. People have pre-pay meters for a variety of reasons: some because it helps with budgeting; some because they got into debt under previous arrangements and the meter was installed, among other things, to repay their energy debts; and some because they have inherited the meters from previous tenants or owners. However, what is true for all of them, without exception, is that they pay more for energy using a pre-paid meter than direct debit customers pay. With the exception of customers of Scottish Power, they all pay more than the supplying company’s standard tariff.

Although not all pre-pay meter customers are in fuel poverty, or even among the lower paid, they are disproportionately disadvantaged compared to customers paying other tariffs. Forty per cent. of pre-pay customers are in the two lowest income deciles, which is twice as many as the comparator of all customers. Ten per cent. of pre-pay electricity customers are in fuel poverty compared with only 3.5 per cent. of direct debit customers. In short, those who need affordable energy most pay far more for it than those who do not. What is worse, because of the nature of pre-payment, most of them are not aware of that fact.

The issue is not brand new. The recent energy White Paper stated that the

“cost differential between direct debit and pre-payment meters (used by a relatively high proportion of low income households) is increasing, standing at about £120 for a combined gas and electricity bill compared to £84 in 2005”.

At the time, as I have pointed out, that was a 16 per cent. difference in the average gas and electricity bill.

As the White Paper noted, the differential in 2005-06 was about £70, which was worse than the previous year, and it is even worse now due to the effect of aggressively low-priced online tariffs. The differential may now be about £150 for a combined gas and electricity bill, and it is running out of control.

In January 2007, the matter was raised in the House by several Members during a debate on energy costs initiated by my right hon. Friend the Member for Coatbridge, Chryston and Bellshill (Mr. Clarke). The National Housing Federation constantly raises the issue with Members and Ministers, and I am indebted to the federation for advice and information for this debate. Members have tabled questions and a recent early-day motion on the subject attracted the signatures of 172 right hon. and hon. Members.

I am not drawing the attention of the House to something new, but as matters stand, it seems that the differential is on an inexorably widening path and, as far as I can see, for no good reason other than that it is possible for energy companies to levy differential charges with little comeback from the regulatory authorities. It is stated by some of the energy companies, and indeed recently by Ofgem, that pre-pay meters cost more to administer than direct debits or standard tariffs; there is the meter, the cost of recalibrating when tariffs change and paying post offices and shops to provide top-up points for cards. Ofgem suggested that the overall cost merited a difference of £85 per year between a direct debit customer and a pre-paid meter customer.

Those are raw data and do not include the fact that pre-paid meter income is 100 per cent. secure, unlike direct debits, which can fail through lack of funds, or standard bills, which can go unpaid or need chasing. Indeed, that security of payment is of significant benefit to the energy companies.

Overall, those differentials, however things are cut, do not justify the differences in charge, nor do they explain why the difference keeps widening or why there is such a variation in charges between energy supply companies. Indeed, one company, Scottish Power, runs pre-pay meter tariffs that are lower than the standard tariff. How come, I wonder, it has not gone out of business by doing so? Indeed, the variations are quite considerable and the differential is highest on dual-fuel tariffs.

Customers of British Gas pay £107 more on pre-pay gas meters than the average price for gas on direct debit and £33 more for electricity. Customers of EDF pay 25 per cent. on average more for gas pre-paid than for gas on direct debit and £8 more for electricity—the same as the standard tariff. Customers of npower pay £72 more on pre-pay gas meters than on an average direct debit and £81 more for electricity. Powergen customers pay £91 more for gas and £33 for electricity. Scottish and Southern customers pay £77 more on average for gas on pre-pay meters than on direct debit and £22 more for electricity. Customers of the only company with a lower tariff than the standard tariff—Scottish Power—pay £30 more on a pre-pay meter than on the average direct debit and £49 for electricity.

For dual-fuel customers, the gap is even wider. npower has a gap of £184; British Gas, £152; Powergen, £141; Scottish and Southern, £115; Scottish Power, £93, but the price is cheaper than the standard dual-fuel tariff; and EDF, £68.

Ofgem has recently announced that it intends to run a campaign to persuade pre-pay meter customers to switch. On the basis of those figures, that perhaps looks promising at first sight. Scottish Power should clean up. But there are big problems in relying on switching to get to grips with this problem. It might make some marginal difference, but only a marginal difference, for two reasons. Many pre-pay meter customers are unaware that they are paying more. The bills are not added up and compared in the way that they might be with other forms of tariff. Indeed, an Ipsos MORI prepayment customer workshop in February 2007 for Ofgem stated, after interviewing various participants, that

“only three out of 20 gas pre-pay meter customers and seven out of 28 electricty pre-pay meter customers knew theirs was not the cheapest method of paying.”

In any event, some pre-pay meter holders are in debt because of recalibration—the process of back charging to recover delays in the recalibration of meters following tariff changes. That has gone down: 115,000 or so people are now in that situation. The figure was more than 400,000 before Ofgem took action in December 2006. However, those people will not be switchers, even if they know that their meters are more expensive. Larger numbers of people than that—some 500,000 electricity customers and 300,000 gas customers—are repaying debt incurred by non-prepayment meter arrangements. That represents 13 to 14 per cent. of all meter customers, and those people will not be switchers either. So what might we do?

The White Paper also says:

“We are concerned about these increases, and will look at ways to encourage best practice in protecting the most vulnerable consumers from the large differences in bills because of the payment method they use.”

I recognise that the social tariff arrangements that EDF and British Gas have adopted go some way to assist those who are most vulnerable with their payment of gas and electricity bills. The British Gas tariff matches that for most vulnerable customers to the direct debit tariff. Nevertheless, it does not directly address the pre-pay meter issue.

Switching, as I have mentioned, is often of only dubious or marginal value. Perhaps Ofgem, instead of or in addition to its switching campaign, should introduce maximum tariff differentials. That might reflect the cost of pre-pay meters if all factors are genuinely taken into account, but my view is that it would not hurt energy companies simply to equalise tariffs. If Scottish Energy can do it and EDF can come close to it, so can all energy companies.

In many ways, the long-term solution is the roll-out of real-time, remotely calibratable smart meters. There then will be no arguable or possibly justifiable differentiation between tariff costs, but that is some way away. Meanwhile, literally millions of customers will this winter be paying in inflated energy costs a sum getting on for the amount of the winter fuel allowance simply because they are, for whatever reason, on a pre-paid meter. That is not right; it should be put right.

In the traditional way, I most sincerely congratulate my hon. Friend the Member for Southampton, Test (Dr. Whitehead) on securing this debate on a matter of great concern to many colleagues in the House and to many outside it. I thank him for the very thoughtful way in which he has introduced the subject. He is a great authority on it and has a great track record on energy issues and the social aspects of energy. Indeed, at a meeting today with a non-governmental organisation, I heard about the great work that he is doing with combined heat and power in his constituency in Southampton.

I want to respond to my hon. Friend’s contribution as thoroughly as I can in the time allowed. In doing so, I shall say a little about the size and make-up of the pre-payment meter market, an issue that he has touched on. We are talking about a substantial market. There are 3.5 million electricity pre-payment meters and 2.25 million gas pre-payment meters in this country. More than a tenth of customers use these meters to pay for their gas or electricity supply and one in 50 customers uses such meters to repay debt.

As my hon. Friend emphasised, pre-payment tariffs are not low, but installing and maintaining pre-payment meters is itself not a cheap exercise. An average credit meter costs £10 or less, but a pre-payment meter costs between £50 and £80 and requires a complex payment and support infrastructure involving suppliers, meter owners and thousands of retail outlets. There will inevitably be a tendency to charge less to those customers who make fewer demands on a company’s systems compared with those who make more. Internet tariffs tend to be cheaper than direct debit; direct debit tends to be cheaper than standard credit; and standard credit, in turn, tends to be cheaper than pre-payment. However, there is more to be said about differentials, and I would like to return to that subject later.

It is helpful—indeed, it adds an important nuance or complexity to the debate—to ask who uses pre-payment meters. They are found in a variety of places, including holiday homes, rooms let to students and so on. However, I think that no one would disagree with the view that low-income households constitute the majority of pre-payment customers. Indeed, some will have these meters because, for one reason or another in the more or less recent past, they have fallen into debt to their supplier.

Less well known is the fact that pre-payment meter customers are by no means synonymous with the fuel poor and by the “fuel poor”, I use the standard definition of those who spend or who are required to spend more than 10 per cent. of their income on the energy needed to heat their homes adequately. Although about a quarter of the fuel poor use pre-payment meters and although there is certainly a greater likelihood of fuel poverty if a household uses a pre-payment meter, three quarters of the fuel poor do not use such meters. Indeed, more fuel poor households pay their energy bills by direct debit than by pre-payment meter and only 5 per cent. of elderly people—the pensioners who make up a significant number of the fuel poor—use pre-payment meters.

If we want to help the low-income customers who use pre-payment meters, the conclusion that we can draw is that we can take one of two broad approaches, although some might argue for a blend of the two. The first is to focus on customers in terms of the type of meter that they use and the second is to focus on low-income customers irrespective of their payment method. Many of those who want to help, including, I think, my hon. Friend, are attracted to the first approach, but I am not saying that he is not also attracted to a blend with the second as well. There is nothing wrong in that, but inevitably the focus of those attracted to the first approach makes them impatient for the Government or the regulator to take specific measures of some sort.

What sort of measures are we talking about? The model we hear most about involves forcing gas and electricity suppliers to reduce pre-payment tariffs to levels similar to those paid by direct debit customers. Much of that was the force of my colleague’s analysis.

The difficulty is that the cost of any reduction in pre-payment meter prices forced on suppliers by the Government or the regulator might not simply be borne with a smile by companies and their shareholders. Like other costs, it would probably be passed on to the customer, and therefore not only better-off customers, but the poorest customers who are not on pre-payment meters, would pay more. The worry is that the poor would be subsidised by some of the very poor, and so on. That is the nuance, or complexity, that I wanted to introduce into the discussion.

There is a sense in which, as my hon. Friend said, there is statistical support for the fact that differentials have risen far enough to give rise to concern, and to call for an explanation. I refer not just to direct debit and pre-payment meter differentials, but to differentials between direct debit and standard credit. All suppliers have been considering their tariff structures. I may have more up-to-date information than my hon. Friend, because this is fairly quickly moving territory. EDF and Scottish and Southern Energy have equalised their standard credit and pre-payment prices for electricity, while Scottish Power offers pre-payment customers a lower price for both fuels than that paid by standard credit customers. Other suppliers have also acted in this area by introducing social tariffs for vulnerable households that either remove the differential or, in some cases, offer customers prices that are below even direct debit levels. I am in the midst of a series of discussions with the chief executives of our major supply companies on this and related social policy matters. Without prejudging the issue, I should report to the House that I will soon be meeting Sir John Mogg, the Chairman of Ofgem, to discuss the matter with him.

I would like to talk about what we are doing, and what more we will be doing, to get at what I see as the real heart of the problem. That is how—rather than focusing narrowly on the pre-payment tariff—we improve the lot of low-income customers as a whole. We need to redouble our efforts to increase understanding of the market and how customers can use it to cut their energy bills. There are two simple messages. First, there are still big gains to be had from switching supplier, and half of us have not taken that most basic step. I do not think that, even under freedom of information legislation, I will say what half I fall into, although things have been busy recently. There are big gains to be had from switching payment method. Why not use the differential as a trigger to look at paying in other ways? Almost all of the population have bank accounts or can open basic accounts with direct debit facilities. We should encourage people to use them. I fully appreciate that some customers are using a pre-payment meter to pay off debt, but the overwhelming majority are not and that majority could save £200 a year by switching supplier and payment method. That is a message that the Government, Ofgem and bodies such as Energywatch have pushed hard, and continue to push.

There are additional benefits. Just as suppliers like direct debit because accounts are much easier to administer, so customers using direct debit avoid the nuisance of recharging keys or buying tokens. Although pre-payment meters, Fuel Direct and weekly payments all have their place in the market—I am glad they are available—they can also signal self-imposed exclusion from the financial mainstream, which is in turn closely linked to wider social exclusion. If people want to keep their pre-payment meter, of course that is fine. If they want to stay with their incumbent supplier, fine. But let us do all that we can to ensure that these are positive decisions, not simply the product of inertia, because the very best interventions in markets are those that customers make for themselves.

I hope that what I have said underlines the Government’s commitment to addressing the problems faced by energy customers on low incomes. I am bound to say that I am very aware of the theme that often the poor pay more, not just for energy, but in many other fields. I am sensitive to that.

I hope that I have explained why our preferred approach is not to treat pre-payment meter customers in quarantine, but to help them, as we help all low-income customers, irrespective of the payment method that they use. We encounter the same challenges in reaching and helping pre-payment customers as we do with other customers, and the same range of measures helps them as helps other customers. That does not mean that we will not keep a close watch on the treatment of pre-payment meter customers; I am keeping a close watch on it, as well as on the progress on recalibrating token meters and replacing them with more efficient key meters. Nor does it mean that we will not keep a close watch on tariffs and how they compare with other payment methods. I do see movement from supply companies on that, and I expect further movement in the months to come.

Those are essential elements of the work of a Government concerned with customer protection and social justice, but that close watch will continue to form part of our larger strategy of helping low-income customers to reduce energy bills, improve their thermal comfort, and maximise their household income.

Question put and agreed to.

Adjourned accordingly at ten minutes to Eleven o’clock.