Pay-and-Pay-and-Pay-as-You-Go

Transcription

1 Pay-and-Pay-and-Pay-as-You-Go An Exploratory Study into Pre-payment Metering Philipp-Bastian Brutscher

2 Outline Pre-payment metering (PPM) in Northern Ireland How people use their PPMs Linking use of PPMs and electricity consumption

3 PPM works like a mobile phone top-up system... Background:2001: NIE Energy introduces current PPM - dissatisfied with old system. Mechanism:Customers purchase a 16-digit code at a vending outlet which they enter into the keypad of their meter to received credit.

4 PPM experiences revival in NI... More than 30% of households use new PPM (ca 240,000) New connections continue at 2,000/month Still PPM customers not representative of population Age Probability of Having a PPM Female HH Head Weekly Income ( 100) Nb of Persons in HH

5 User friendliness main attraction Main attractions of PPMs include: give 2% discount -compared to a 4% discount of DD convenient display to monitor consumption and credit Has a range of credit top-up facilities Paypoint; Payzone; Post-offices; phone; and internet come with friendly credit i.e. Users cannot selfdisconnect at weekends or between 4pm and 8am

6 NIE Energy also benefits... Reduced management cost: No manned meter readings; disconnections or reconnections Call outs only in working hours ( friendly credit ). No need to issue bills Handling debts is much easier.

7 Little is known about the effectiveness of PPM... EFS data could be used to evaluate. EFS asks: How customers pay for electricity and their electricity expenditure. But people paying by conventional methods consistently under-estimate expenditure. Could the perception of cost vary depending on the payment mechanism?

8 Outline Pre-payment metering (PPM) in Northern Ireland How people use their PPMs Linking use of PPMs and electricity consumption

9 First of all though, it s back to you..

10 Theory: Customers balance B&C of top up Baumol Tobin liquidity model balances: Benefits: Credit avoids having to purchase top-up every time they need electricity Cost: Forgone interest on a savings account

11 Baumol-Tobin model Customers minimise: (Y/2N)i + NF where: Y = Annual expenditure on electricity N= Number of top-ups per year F= Cost per top-up trip i = interest rate

12 Baumol-Tobin model Customers minimise: (Y/2N)i+ NF where: Y = Annual expenditure on electricity N= Number of top-ups per year F= Cost per top-up trip i = interest rate

13 Baumol-Tobin model Customers minimise: (Y/2N)i + NF which gives: N*= and: Y 2F Average Top-up Amount* = YF 2i

14 In fact: Customers choose too small top-ups Plug in values for typical PPM customer model suggests 2.3 top-ups per year - worth 230 each In fact customers topup meters 50 times a year -with 13 per top-up Percent Distribution of Mean Top-Up Amounts Mean Top-Up Amounts

15 ...and do not increase top-ups when tariff increases Model suggests customer responds to tariff change by changing N* and Average Top-up Amount* In fact customers only 0.00 increase the number of top-ups (N*) when the tariff increases Change Tariff 1 Response to Change in Tariff Change N Change Amount Change Tariff 2 Change N Change Amount Change Tariff 3 Change N Change Amount

16 Possible explanations Changing the parameters of the model Liquidity Constraints Expectations Loss Aversion Commitment Device

17 Changing parameters: not enough Discrepancy between model s predictions and observed top-up amounts robust to broad set of specifications No changes in parameter values can explain why people adjust to tariff changes by increasing N* Optimal Top-u up Amount Average Income High Income Low Interest Baumol Tobin Model Optimal Top-up Amount Low Income/High Interest Low Income Average Interest High Interest High Income/Low Interest

18 Possible explanations X Changing the parameters of the model Liquidity Constraints Expectations Loss Aversion Commitment Device

19 Liquidity constraints are not the full story... Liquidity constraints probably important But fail to explain why people in highest ACORN groups Top-up small amounts Adjust to tariff changes by only changing top-up frequency Percent Distribution of Mean Top-Up Amounts by ACORN Groups Hard Pressed Moderate Means Comfortably Well-Off Urban Prosperity Wealthy Achievers Unclassified Mean Top-Up Amount Graphs by acorn

20 Possible explanations X Changing the parameters of the model X Liquidity Constraints Expectations Loss Aversion Commitment Device

21 Other explanations fail too Expectations: No evidence of people hording before tariff increases or speculating on decreases Loss Aversion: PPMs reduce risk of loss (e.g. providing re-prints of voucher codes) Commitment Device: Small top-ups as a rule-based commitment device? But cannot explain how people adjust to changes in tariffs

22 Possible explanations X Changing the parameters of the model X Liquidity Constraints X Expectations X Loss Aversion X Commitment Device

23 Outline Pre-payment metering (PPM) in Northern Ireland How people use their PPMs Linking use of PPMs and electricity consumption

24 Do perceptions vary depending on how people pay? One way of explaining our two anomalies is by arguing that people perceive small top-ups differently from large ones Intuitively, spending 10 times 10 may feel less than spending 100 Related literature: Finkelstein, 2009; Gourville, 1998; Morvitz et al, 1998

25 Our experiment suggests: yes. We asked 41 students to make a series of mock payments... A Cost perception: 5.4 Cost estimate: 65 1 Introduction Letter D 2 Sets of Index Cards 1 Survey Cost perception: 4.4 Cost estimate: 45

26 Similar evidence in consumption data Statistically significant fall in consumption after minimum top-up increased by 7% But more research is needed nsumption in KWh Mean Con /07/08 15/09/08 15/11/08 15/01/09 15/03/09 Month 15/05/09 15/07/09 15/09/09 15/11/09 Treatment Group Medium Top-upper

27 Plenty more to do... Next steps will include: Evaluation of the effect of the PPM on electricity consumption (separating information feedback from pre-payment). Field experiment on the effect of different top-up amounts on electricity consumption.