Prepaid meters promise profits for African utilities but success hinges on consumer response

Prepaid meters are sweeping the African continent as a life raft for utilities drowning in financial losses. Correcting the lack of financial viability of African power sectors is vital to improve grid reliability and finance grid expansions on a continent where 600 million lack electricity access. While prepaid meters will enhance cost recovery for power companies, they are not a panacea, and successful implementation depends on utility dedication to reducing theft and marketing new meters to customers. Forcing payment via prepayment also affects consumers, who react by changing their consumption behavior. These changes may pose risks to the energy security of low-income users and highlight the need for parallel programs to reinforce commitments to SDG 7.

A new approach to cost recovery

A 2016 World Bank report reveals that only two of 39 Sub-Saharan African countries examined have financially viable utilities able to recoup the cost of generating power through rates. Many African governments shoulder electricity sector financial deficits through subsidies, which make up a growing share of public spending.

Prepaid metering is an increasingly popular tool used by African utility companies under pressure to improve cost recovery. Since 2010, UMEME, Uganda’s main electricity distribution company, has installed prepaid meters for 95% of its 1.5 million customer base. The state-owned Ethiopian Electric Utility has already equipped a quarter of its 2 million customers with prepaid meters.

High replacement costs may deter utilities already struggling to raise capital, but successful implementation yields improved cash flows for electricity providers and reductions in theft and bill nonpayment from prepaid customers. In South Africa, improved revenue from prepaid meters could cover their higher fixed costs within a year. Energy losses dropped from 26% in 2004 to 18% in 2009 in Rwanda, largely due to reduced power theft, since prepaid meters allowed utilities to more easily identify tampering and discourage theft by charging culprits with heavy fines.

Utilities also reduced costs by rendering meter reading and billing obsolete, effectively transferring transaction costs to customers. It is estimated that these cost savings could generate 23% higher revenues per customer in South Africa. Meters were also easy to install and not prone to discrepancies from meter readers, though maintenance costs persisted.

Prepaid meters are not immune to fraud, however, and increasing or unabated power theft threatens their cost-saving potential. Public dissatisfaction and distrust of prepaid meters were partly to blame for protests in Ghana, and this technology had no effect on rising theft. Customers may tamper with meters to restore connection when electricity credit runs out and when they cannot immediately purchase more units if vending centers are not accessible. Payoffs may therefore fall short of expectation when utilities do not implement parallel measures to mitigate theft and engage with communities prior to rollout to build public trust, understand customer needs, and socialize new meters.

Consumer response to prepayment

Understanding how consumers will respond to prepayment is critical. Real-time feedback on electricity use promotes energy conservation and use of energy-efficient appliances among consumers, which may be an important objective for utilities that are supply constrained or seeking to discourage inefficient use. In one study in Nigeria, 100% of prepaid users turned off their lights in the morning compared to 41% of postpaid users. Such response is favorable in countries like Nigeria, where estimated demand is 12,800 MW but most days there is only 4,500 MW of supply, leading to widespread load shedding among those connected to the grid. In Nigeria and South Africa, prepaid users reduced consumption by as much as 50%, compared to postpaid users.

When forced to prepay, customers may choose not to spend money on electricity. This can facilitate misleading reporting of energy access statistics if households with prepaid meters do not use electricity. This was the case in Kenya, where 1 million grid-connected customers had not loaded their meter for months after installation. Regular consumption is a particular challenge for households with low or irregular incomes, and use is further dampened as prepayment represents a fundamental change in the way consumers access and pay for electricity.

From the consumer perspective, prepaid meters can also have benefits. Prepayment eliminates the risk of debt accrual and allows for greater flexibility in when and how much electricity is consumed. There is also evidence to suggest that prepayment may facilitate intra-household equity in control over electricity use. Where women have access to resources to purchase electricity, prepaid meters may provide women with more agency over their consumption. Studies from Mozambique and South Africa report greater customer satisfaction with service delivery via prepayment, though payment forcing is not always viewed favorably.

Ensuring energy security and meeting SDG 7

Postpaid billing more easily enables nonpayment than a prepaid regime, a key benefit for utilities but also a constraint for consumers. Nonpayment may be especially prevalent among those who perceive power as a public good and those with a lower ability to pay. Since disconnection does not always occur after the first missed payment, low-income users especially may prefer the safety net offered by a postpaid, debt repayment system. However, a majority of higher-income consumers from a sample of Tanzanian households preferred forgoing access than risking debt accrual from postpaid billing.

This finding reemphasizes concern over how prepaid meters may affect low-income households in particular. Income uncertainty may prevent continuous access if customers are temporarily unable to top up prepaid meters once their credit runs out. Where credits must be purchased via vendors, access becomes less convenient especially when credits are purchased more frequently. Intermittent access can likewise hinder electricity use and encourage reliance on suboptimal fuels, like biomass or kerosene.

While prepaid meters generate key financial benefits for utilities, payment forcing poses risks to the energy insecurity of low-income consumers. To reduce cost barriers and risks of intermittency that could undermine the aims of SDG 7, programs to ensure affordability or universal basic access should be a co-priority for policymakers. Such measures may include subsidies for lifeline tariffs or means-tested discounts to ensure affordable and continuous access for all consumers in the transition to prepaid metering.