The UK government announced in March 2023 that it would work to equalise the cost of prepayment and Direct Debit tariffs, according to Energy UK, the industry body1. The commitment concerns the two payment methods most used by domestic customers, and the difference in price between them.
Energy UK sets out how the retail market works. Suppliers buy electricity and gas in the wholesale market and sell it on to customers, and they also pay for balancing services, network use, social and environmental policies, including delivery of the Government energy efficiency scheme ECO and the Warm Home Discount Scheme to eligible customers1. They operate under strict licence conditions from the energy regulator, Ofgem1.
On payment methods, Energy UK states that paying by direct debit means regular, usually monthly payments taken from an account by a supplier, with costs calculated by estimating yearly usage and spreading this over 12 equal monthly payments1. Prepayment, by contrast, means paying upfront for gas and electricity, by topping up online with a smart prepayment meter or topping up a key or card at a Post Office, PayZone or Paypoint1.
Energy UK describes the current price relationship between the methods directly:
"PPM tariffs are cheaper than tariffs for customer paying on receipt of bills but often more expensive than Direct Debit. This is because it costs suppliers more to provide energy to this type of meter."
The same page records the government's stated intention:
"The UK government announced in March 2023 that it would work to equalise the cost of prepayment and Direct Debit tariffs."
The domestic price cap, set by Ofgem, limits the amount suppliers can charge domestic customers on variable tariffs, and does not apply to fixed tariffs1. Ofgem is responsible for regulating the industry and sets the rules companies must follow, from licence conditions to setting the price cap1. Energy UK notes that the retail market is competitive, that profit margins are small and less than those in most other industries such as supermarkets, and that many suppliers in recent years have been loss-making1.
| Payment method | How it works | Cost position as described |
|---|---|---|
| Direct Debit | Regular, usually monthly payments; yearly usage estimated and spread over 12 equal payments | Often cheapest; suppliers can provide discounts because the method involves less admin1 |
| Prepayment meter | Pay upfront by topping up online (smart) or by key or card | Cheaper than paying on receipt of bills, often more expensive than Direct Debit1 |
| Payment on receipt of bill | Pay after use, by phone, cash, cheque or online | No supplier discounts, so bills are higher than Direct Debit or prepayment1 |
Why it matters for households
For a household, the payment method is one of the few parts of an energy bill it directly controls, alongside usage and tariff choice. A prepayment meter means money goes onto the account before energy is used, which allows closer management of spending and budgeting than waiting for quarterly or monthly bills1. Direct debit smooths cost across the year rather than concentrating it in higher-use winter months, and suppliers can return funds if a customer is overpaying and review the direct debit through the year to ensure it covers usage1.
The gap between the two methods therefore falls on households using prepayment, who Energy UK says face a higher price than direct debit customers for the same energy because serving that meter type costs suppliers more1. Equalising the two would remove that difference in unit cost, though it would not by itself change how or when money leaves a household's account. Paying on receipt of a bill sits outside both: suppliers do not offer discounts for it, so those bills are higher than direct debit or prepayment1.
What happens next
No timetable, mechanism or legislation for equalising prepayment and Direct Debit costs has been reported. Energy UK records only that the government said in March 2023 that it would work to equalise the cost of the two tariffs1.
Sources1 cited
- How the retail market works - Energy UK, energy-uk.org.uk