Pay as you go? What the energy sector can learn from telecoms

As the energy sector is pressured by regulation and changing markets, Jason Simpson, co-founder of the Mobile Energy Association, says power companies should look to the lessons and customer-centred business models of the telecoms sector – including more widespread use of Pay As You Go energy.

Every stage of the energy value chain now seems politicised and liable to intervention. Upstream, government commitment to different energy sources fluctuates with debates over both global warming and obedience to the EU. Downstream, the moral case to protect at-risk customers from higher energy prices is presented with increasing force. Power companies are ever more exposed to wholesale prices – which are driven by geopolitical and political circumstances beyond their control – yet regularly obliged to apologise to their customers. With a year until the UK election, energy has become a political football.

Technology is equally a driver of change – in generation, distribution, and for users. Smart meters will allow suppliers to better understand demand and bill more effectively. Yet the broader questions of demand reduction, consumer savings and grid flexibility are still being addressed. Their resolution will be dependent on broader cross-sectoral themes such as big data, ‘the internet of things’ and the connected home. Consumer-focused smart-energy solutions are increasingly being developed outside the energy sector. Some – like AlertMe – are bought by energy utilities. Others, like NEST, are now finding homes outside the sector. Incumbent energy suppliers meanwhile find themselves competing with smaller, more agile firms able to take advantage of new regulatory frameworks.

Increased price sensitivity has meanwhile driven the record numbers of complaints by energy customers, mostly related to charges, tariffs or billing. Allied to deregulation and the growth in smart grids, this sensitivity creates the right conditions for digital energy players to disrupt the market – particularly if they can deliver better value and greater transparency for customers.

Digital disruption is not new – the telecoms sector itself faced just such issues with the arrival of the internet. More recent years have seen the arrival of new participants such as Google, Skype, Spotify and Dropbox. These ‘over the top’ players use existing networks to disintermediate customers from their existing suppliers, while also offering them savings. Similar changes have affected sectors as disparate as financial services, retail and airline travel; all of which have seen radically increased competition as digitally-enabled consumers are able to access the best deals. How should energy companies prepare themselves for similar change? Should they take a defensive stance or embrace new business models? Will first movers be at an advantage – or do they risk losing control of their customers while undermining profitability?

There are positive lessons from the telecoms market as well as warnings. One is the ability to identify solutions that are fit for purpose and transfer them between markets. ‘Pay As You Go’ was introduced in the 1990s to bring mobile telephony to those unable to enter into a contract due to their young age or low credit rating. But the advent of this new model also coincided with the introduction of mobile phones to many developing markets – especially Africa and Asia – and was soon adapted to them. It has since driven explosive growth in mobile phone usage around the world, accounting for 77% of SIM cards globally and 96% in Africa. As a direct result of this type of adaptability, mobile phone coverage now outstrips energy coverage. Of the 1.3bn people globally now estimated to be ‘off grid’, 411m are already ‘on net’. As a result, Accenture Development Partnerships – the not-for-profit arm of the professional services firm – sees prepayment models as a resource to improve access to energy, which is one of its key development aims for the coming period.

‘Mobile payment systems have proved themselves in many developing markets, with the footprint of mobile networks now covering many hard-to-reach customers,’ says Gib Bulloch, global managing director of Accenture Development Partnerships. ‘Given this reach, we see synergies between the energy and mobile telecoms industries, with energy enterprises leveraging mobile telecoms networks to deliver increased energy access.’

These crossover benefits may not be confined to the emerging markets. In developed markets, Pay As You Go telephony has fully outgrown its original market niche of minors and the credit-impaired. Just under half of SIM cards in the UK are now pre-paid, with customers attracted by transparency and ease of budgeting. Yet while Pay As You Go mobile phones have entered the mainstream, prepay energy has remained the preserve of low-income households and the credit-impaired.

Although only 13% of the UK energy market is pre-pay, this figure is growing rapidly. Yet investment in this part of the market is severely lagging such growth. Most systems are still card or key-based – as a legacy of coin-operated systems – and involve trips to a local point of sale to top up. Furthermore, a 2013 Accenture report found that only 3% of the 283 energy tariffs in the UK were available to prepay customers, while prepayment tariffs are also the most expensive. The implication is that savings from increased competition are not reaching this section of the market.

Experience from telecoms suggests that prepay energy could be turned into a mainstream source of competitive advantage, as it combines ease of payment with greater control and transparency. Growing a mobile-enabled prepay market would include developing ancillary benefits such as the availability of more tariffs, real-time access to government supports, and, ultimately, the availability of short-term credit of the sort that is now emerging for mobile-phone prepayment. The utility benefits from better cash flow and lower credit risk, while avoiding the disconnection of post-pay customers who default on payment. And given the maturity of Pay As You Go mobile platforms, it is likely that technology would be available for adaption or white labelling – ensuring the customer relationship remains with the utility.

Pay As You Go energy is one area where the newly-formed Mobile Energy Association (MEA) will be facilitating dialogue between telecoms and energy companies. The MEA has been created in light of the two sectors becoming entwined at numerous other levels. For utilities, demand reduction and grid flexibility depend on real-time connectivity, the harvesting of usage data, and, for the domestic sector, often smart-phone integration. Meanwhile, telecom companies themselves rely on both energy-hungry data centres and getting power to remote mobile base stations. The two sectors also face broadly the same types of challenge, aside from the billing issues outlined above. These include regulation, margin pressure, customer ‘churn’, and the continual advent of new technologies. As Jesse Berst, chairman of the Smart Cities Council, says: ‘I have often wondered why we don’t look to telecommunications for possible solutions. Sure, I understand that the two sectors have big differences. Even so, we have similarities too. Can’t we learn from their mistakes and lessons?’

Expert panellists will be discussing these issues at the launch of the Mobile Energy Association at TMForum Live! in Nice, France on the afternoon of Monday June 2^nd 2014. To attend, please visit www.tmforumlive.org/mobile-energy-association  or email Jason@mobileenergyassociation.com.