Prepayment system in Utilities: how it works, international experiences, advantages and critical issues

This article analyses in detail how prepayment works, its prevalence in different international contexts, its advantages and critical issues, as well as the technological, regulatory and social challenges associated with this model.

What is prepayment in utilities?

The prepayment system (also known as pay-as-you-go or advance metering) in utilities requires customers to pay in advance for the service they intend to consume. In practice, users load credit onto an electronic system associated with their supply, and consumption is progressively deducted based on actual usage.

The main components of the system are:

• a prepaid meter: a smart meter capable of measuring consumption in real time and automatically suspending supply when the credit runs out;
• a recharge system: this can be physical (counters, ticket offices, terminals) or digital (app, website, SMS);
• the management platform: software that connects users, suppliers and billing systems, ensuring consumption recording, notifications and technical support. An example of a management platform is our Terranova Prepayment System, which supports distribution companies on the prepaid consumption system.
• auxiliary functions: some systems provide “emergency credit” (free emergency credit for extreme cases), automatic alerts for low thresholds, and the possibility of programming consumption.
  

How does prepayment work in practice?

Prepayment in utilities works in several stages. First, after signing the contract, a suitable meter is installed or the existing one is reconfigured so that the service can be activated. From this point onwards, users can top up their credit independently, choosing flexible amounts. The credit is automatically deducted as it is used, and the user can access the data via the meter display, mobile app or web portal. Finally, when the credit runs out, the supply is interrupted until a new top-up is made. In some countries, however, deactivation only occurs during daytime hours or with prior notice.

To give a practical example, a user recharges 20 euros of electricity via the app. The meter consumes credit based on the kWh used. The app sends a warning when the credit falls below 5 euros. If the credit reaches zero, the meter blocks the supply but allows emergency reactivation up to a pre-set limit (e.g. 2 kWh).

International diffusion and adoption models

United Kingdom

The prepayment system is very widespread in the UK, with over 4 million users (approximately 15% of households). It is often adopted by:

• Households experiencing financial difficulties
• Students or temporary tenants
• Citizens who prefer direct control over their spending

Major suppliers such as British Gas, EDF and E.ON offer Smart Prepay Meters with intuitive apps. The UK government monitors the social impact of the system through bodies such as Ofgem, which impose limits on automatic disconnection and promote the protection of vulnerable customers.

South Africa

One of the first countries to introduce prepaid meters on a large scale, since the 1990s. Over 70% of urban and peri-urban households use the system, mainly for electricity. It has been instrumental in:

• Expanding access to energy
• Improving the sustainability of local municipalities
• Reducing energy theft (a structural problem)

Nigeria

In the context of an unstable energy infrastructure with high non-technical losses (theft, evasion), the government has promoted the roll-out of smart prepaid meters. However, distribution is still partial and there are problems related to:

• Availability of meters
• Complex recharging methods
• Cultural and political resistance

India

Expanding: municipalities in cities such as Delhi, Mumbai and Ahmedabad are testing prepaid systems for water and electricity. The Indian government has promoted the ‘Smart Meter National Programme’ initiative, which includes a prepaid function to combat arrears and encourage virtuous consumption behaviour.

Latin America and other contexts

In countries such as Mexico, Brazil, Kenya and the Philippines, prepayment is also used to extend supplies to rural or peripheral areas that are difficult to serve in a conventional manner.

Advantages for users and distributors

Prepayment offers several advantages for users and DSOs. Specifically, for users, the advantages are:

• financial control: expenses under control, without unexpected bills or adjustments.
• no late payment penalties: no interest for late payments, as credit is advanced.
• convenience and autonomy: simple and immediate top-ups via mobile devices.
• consumer education: users learn to recognise their consumption and can reduce waste.

For operators, on the other hand, the advantages translate into:

• elimination of credit risk: no need for debt collection.
• operational efficiency: automation of billing processes and remote meter control.
• prevention of non-technical losses: in many areas, it reduces theft and tampering.
• real-time data: the ability to manage demand more dynamically, which is useful for the transition to flexible energy systems (e.g. smart grids).
  

Regulation and consumer protection

In Europe and other OECD countries, regulators (such as Ofgem in the United Kingdom, ARERA in Italy, ACER at European level) impose strict constraints on the indiscriminate use of prepayment, requiring, for example, early warning mechanisms (text messages, emails, notifications), periods of “minimum protection” during adverse weather conditions, mandatory emergency credit, facilitated access to top-ups and guarantees for vulnerable consumers (disabled, elderly, chronically ill). This increases the social sustainability of the service, ensuring transparency and ease of access for all.

Future prospects

The future of prepayment is closely linked to the energy transition. With the increase in renewable energy, price variability and the need for demand flexibility, prepayment models integrate well with tools such as demand response, dynamic pricing, storage and local microgrids.

The use of apps, QR codes, blockchain and AI makes the user experience increasingly fluid and personalised, while from a social inclusion perspective, hybrid prepaid models could be used in programmes to combat energy poverty, ensuring secure access, cost control and incentives to save.

The prepayment system in utilities is a valid and potentially advantageous option, but it must be implemented with care. While it can bring efficiency and sustainability, it can also generate new forms of exclusion if not accompanied by adequate safeguards and accessible technologies.

International experience shows that, with a solid regulatory framework and well-designed infrastructure, prepayment can become a strategic lever for both suppliers and consumers, particularly in terms of sustainability, innovation and individual empowerment.