Prepaid Metering Utilities Industry Transition

 The industry is experiencing an increasing demand for alternative power sources

As more residential and commercial consumers migrate from conventional postpaid metering to prepaid metering in line with the national directive to move all Eskom and Municipal electricity metering to prepaid. The South African prepaid metering market with more than 10 million prepaid meters already in use, is expected to continue its stable growth trajectory, expanding at a minimum compound annual growth rate of 6.5% or more until 2027. Several factors driving this migration include:

With postpaid metering systems, utilities typically bill customers at the end of the billing period based on their actual usage. With prepaid metering systems, customers pay in advance for the energy they consume, which can improve revenue collection rates and reduce bad debt.

A decade and a half of above-inflation tariff increases has made electricity unaffordable for many South Africans. With the latest round of double-digit tariff increases recently announced by NERSA, consumers are placing an ever-increasing emphasis on the management of consumption. Allowing for greater control over their consumption. Prepaid metering systems can promote greater customer engagement and responsibility, as customers can monitor their energy consumption in real-time and adjust their usage accordingly. This can help to promote energy efficiency by reducing energy consumption and resultant pressures on power supply.

Prepaid metering systems can also help to reduce electricity theft, as customers cannot consume electricity without paying in advance. In conjunction with improved revenue collections, this can help to reduce revenue losses for utilities and promote fair and equitable billing practices. Further enhancing service delivery as reductions in billing queries allow for faster responses by utilities to faults.

Characterised by attractive annuity revenue streams in combination with a strong overall growth outlook and low barriers to entry.

The Prepaid Metering industry can be considered fairly fragmented with many players competing regionally and predominantly on price.

Not all plain sailing, utilities in this space will need to contend with the emerging headwinds of the STS TID Rollover and changing consumer preference for Smart Prepaid Metering.

Used by over 500 utilities across the world in over 40 countries. The Standard Transfer Specification (STS) is the global standard for the transfer of electricity and other utility prepayment tokens. To ensure that the appropriate key-management encryption practices are applied to protect the security of the prepaid transactions of utilities. Each token has a unique token identifier (TID) encoded into the 24 digits to prevent token replay at the meter so that the token can only be used once in that meter. Calculated as the number of minutes that have elapsed since a defined base date of 1993 up to the time of creating the token. The TID has a limited range and will run out on 24 November 2024. Resetting back to 0, any 24-digit TID tokens calculated on base date of 1993 and generated after 24 November 2024 will be rejected. Thus, presenting a significant risk to the service levels and the need for proper planning, financing, and structuring to manage this risk.

Estimated to impact approximately 70 million prepaid meters globally. Since 2020, the STS Association has embarked on a communication drive to deliver critical information to users of STS meters. It is therefore expected that most of the market is well prepared for this event, although it is anticipated that some are behind in its successful implementation. The  competitors behind in their implementation will need to take note of the following implications –

Installed Meter Base

Since the inception of the STS, all prepaid meters have had to comply with the TID rollover key change requirement. However, this functionality could only be tested from February 2014 when the required test tools became available. As a result, there is an uncertainty about meters certified before February 2014, so these meters will need to be re-tested for TID rollover key change functionality. For installed meters certified before February 2014, a sample meter needs to be provided to the STS Association test facility for re-certification of the TID rollover key change function. The testing fee will be paid by the STS Association, but the sender must pay for transportation costs. Outdated STS meters that can’t support the TID rollover process, will need to be replaced. The cost of new STS meters depends on the model and the quantity purchased, but this typically ranges from R300 to R2 000 per unit. However, the utility should have recourse to the supplier of the failed meter type on the grounds that the TID rollover key change function has been a requirement since inception of STS. No action is required for meters certified after the February 2014 date.

Secure Module and Vending Systems

The installed meter base is not the only consideration. An upgraded secure module and vending system is also required. As the vending system software needs to be upgraded at the same time as the secure module. Utilities will need to simultaneously negotiate with their vending system supplier to upgrade the software and have it re-certified, as well as with their secure module supplier to upgrade the firmware or to replace the hardware where this may be appropriate. The implication of these system upgrades is considered paramount for the success of the TID rollover. However, the cost implication should be nominal given that vending systems were required to comply before July 2019.

Rolling blackouts are expected to continue and worsen over the short to medium term, in conjunction with the implementation of legislated incentives and rebates for increasing renewable energy power generation in the national energy mix. The industry is experiencing an increasing demand for alternative power sources through rising adoption and installation of solar solutions across South Africa.

This shift away from the reliance on the national grid has expedited the inevitable adoption of smart prepaid meters as consumers incorporate Solar and Inverter solutions.

The push by consumer sentiment is further supported by global precedents introduced by international regulators, such as the Australian Energy Market Commission that proposed a mandatory shift in 2022 for all Australian homes to be fitted with smart meters by 2030. In addition to the ability to integrate with other solutions such as Solar installations, smart prepaid meters offer improved accuracy on usage, remote monitoring by the utility, time of use pricing functionality, tamper detection, outage reporting, and load management.

While the benefits of smart prepaid meter adoption are clear. Smart prepaid meters and supporting infrastructure require significantly more capital investment than the TID Rollover. Not only in terms of expected hardware and software costs, but also in terms of project management and training costs required to execute effectively. Dependent on the complexity, scale of operations, and required functionalities, estimated expenditures for utilities to transition to Smart Metering will be in the millions of rands. To take advantage of the continued growth within the space and ensure the continued monetisation of their installed meter base in response to the changing operating landscape, has seen utilities experience a significant spike in demand for raising of capital. With active buyers offering attractive forward-looking multiples to increase scale at speed. Those utilities unwilling or unable to access capital, are opting to rather consolidate with other competitors through the sale of their installed meter bases. The looming question facing Prepaid Metering competitors, preparing for the changing operating landscape, is should you raise the required capital to remain relevant, or should you consider selling your installed meter base?