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Pay as you go vs. Pay on Demand tariffs

  • 22 March 2023
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In recent Budget the Govt have introduced measures that will require energy suppliers to charge pay-as-you-go (PAYG) meter customers the same energy Tariffs as they charge their DD payment customers.  See following link to Martin Lewis website explaining these changes.

https://www.moneysavingexpert.com/news/2023/03/extra-costs-for-prepayment-meter-households-to-be-cut/

As a DD customer with a smart meter considering cancelling my DD and moving to Pay On Demand (POD) i.e. monthly bill payment in full with no credit bakance, I'm being advised by the OVO collections team that this method of payment comes with a tariff and standing charge premium which will increase my annual bill by ca £250.

Other threads on DD payments in this forum have discussed at length the need for OVO (and other energy suppliers) to recover costs of POD administration.  Whether real or imagined these POD premiums are going to come into focus if PAYG customers are given rights to have their meter tariffs reduced to DD customer levels.

Is it fair that, come July,  the only group of customers that will be paying a tariff premium due to their method of payment will be POD customers?

I don't think it will be, but I'd be interested in others thoughts and your views on how energy suppliers are going to react to this requirement by Govt to treat PAYG customers more reasonably and what this may mean for payments and energy tariffs generally.

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Best answer by Blastoise186 22 March 2023, 09:43

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Updated on 22/11/23 by Abby_OVO

 

It’s quite simple really.

PAYG aka Prepayment means you’ve already paid upfront before using anything. It doesn’t require much debt collection type activity 99% of the time because it can all be managed via the meters.

DD likewise can be fully automated for everything except dealing with failed payments.

POD requires TONS of admin time because of having to chase up late payments and deal with unpaid bills. The extra cost is recovered partially by charging more for this method.

 

For more on Pay as you Go, check out these helpful topics below:

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Hi @Blastoise186,

Yes, I've seen a similar response from you on related threads. 

As others have pointed out the only reason collection teams exist is to chase down defaulters and late payers and to manage debt recovery agencies and PAYG meter installers for those customers who have had court judgments against them.  Who ironically will then have cheaper tariffs on their replacement PAYG meters come July.

Why can't customers who use POD responsibly have the same tariff as those on DD and PAYG?

Also, why should customers who choose POD be penalised for DD customers who default?

In reality isn't this all about cashflow being king for energy supply companies and those pesky POD customers just aren't entitled to free credit for 30 days?

 

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It is important to remember i think that OFGEM and the government rules set the maximum standing charges and unit rates by region for the different payment methods for those on the default standard variable rate.

The suppliers didn't set the differential even before the Energy Price Guarantee. 

Only for other tariff is it completely up to suppliers what they charge by payment method and by region. 

The differential are calculated by OFGEM based on the costs incurred by suppliers for each cohort of customers in each region of the country. 

The premise was customers should pay their proportion of costs. 

Under the new approach any extra costs that fell on pre payment meters on the default tariff will now be spread across all customers. This is as close as we currently have for a social tariff that suppliers and charities have been campaigning for. Cheaper bills for those that are less well off.

Have you asked OFGEM why they set the differential between DD and pay on demand so high? 

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Hi (again) @Jeffus, clearly it is only sensible that the regulator sets a maximum that can be charged by method of payment and inevitably the energy suppliers adopt charges at or near the maximum (given they were consulted on what these charges should be anyway).

It's a consequential monopoly that always occurs when regulatory bodies get involved in markets with low levels of competition.

BTW, I have no problem with the smearing of the PAYG costs across all customers.  I just have a beef that POD customers are unfairly penalised - irrespective of how these tariff adjustments where agreed in the first place.

Presumably OFGEM had to be consulted on the original maximum premiums that would be applied to PAYG meters, so all things are possible.

 

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Hi (again) @Jeffus, clearly it is only sensible that the regulator sets a maximum that can be charged by method of payment and inevitably the energy suppliers adopt charges at or near the maximum (given they were consulted on what these charges should be anyway).

It's a consequential monopoly that always occurs when regulatory bodies get involved in markets with low levels of competition.

BTW, I have no problem with the smearing of the PAYG costs across all customers.  I just have a beef that POD customers are unfairly penalised - irrespective of how these tariff adjustments where agreed in the first place.

Presumably OFGEM had to be consulted on the original maximum premiums that would be applied to PAYG meters, so all things are possible.

 

Yep, in the same way there was lobbying of the government on PAYG, you could lobby the government on the difference between DD and pay on demand if you feel strongly. 

Your local MP or a government petition are amongst the options

https://petition.parliament.uk/

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To my view, this typifies the result of any change in that there will always be a view that the change is unfair. 
From what I’ve seen (I don’t work in the industry), the move away from a credit based payment approach is almost complete. This may have been advanced by the energy crisis, conflict et al but with the variety of financial problems with energy suppliers seen over recent years, this has no doubt prompted the move. 
I was not used to paying in advance at all but I think the days of paying on demand (after supply) are numbered 

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There has been pressure to limit PAYG charges as poorer people are more likely to have a PAYG tariff, or they're installed where customers don't have a choice to swap to a credit meter. It's considered a "tax on being poor" to charge more on a PAYG tariff.

 

The same doesn't apply to pay on demand. That's almost always a customer choice that doesn't relate to their income. So any lobbying is unlikely to get a positive response.

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You can read all about the rationales behind OFGEM’s diktats on their website, including details of what the suppliers thought during the various consultations.

Even before this most recent volte-face about prepayment tariffs, it was in many cases the cheapest way to buy electricity, so you may want to consider this possibility if you feel you’re being unreasonably penalized for buying your energy on tick. 
  

 

The rates vary considerably across the country, and suppliers are at liberty to offer prices below the capped ones. For example, OVO has hitherto been quite generous when setting its off-peak rate for electricity for pre-payment users, so those with electric heating and an E7 tariff were comparatively better off than their DD counterparts.

 

I have also been thinking of paying my bill as I get it, I've been over a £1000 in credit all winter and now they want to increase my DD. They irritate me so much. I think I'd be better off even with the extra money it'll cost, I don't even use what they charge me each month. I keep thinking of the interest they must make on everyone's money they have in credit.

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