Some gas and electricity suppliers offer advance payment plans, allowing you to pay for some or all of your energy before you use it. These offer some of the cheapest deals you’ll find on the market, but how do they work, and do they come with a catch?
In this guide:
Advance payments: how can I pay gas and electric in advance?
What is an advance payment tariff?
Pay electricity bill in advance: advantages and disadvantages
Alternative upfront energy payment options
Are utility bills paid in arrears?
Is it cheaper to pay for energy monthly or quarterly?
Should I pay in advance with a prepayment meter?
Is it risky to make advance payments to smaller suppliers?
One way to pay for your gas and electric in advance is with a prepayment meter. You top up your energy credit key or token in a shop or post office, or via a mobile app if your provider supports it, and then transfer that credit to your meter. Once transferred, the energy is yours to use without putting you into arrears.
This isn’t always a convenient option – plus it can be quite expensive. This is where advance payment tariffs come into play.
Unlike prepayment tariffs, advance payment tariffs don’t require a specialist meter to be installed, although again you’re paying for your energy in advance of using it.
You’ll usually see advance payment tariffs offered by small energy suppliers. Upfront payments help smaller suppliers better manage their cash flow, ensuring they have the money in the bank to pay for the gas or electricity. Some suppliers will call this a deposit, and it helps less-established companies compete with the bigger names by ensuring they can offer cheap tariffs.
Advance payments are usually taken by Direct Debit. You can usually expect to receive the lower end of tariff rates as a reward for paying for your energy upfront.
If you decide to leave the supplier, you should get your advanced payment back. This will typically be a full month’s worth of energy, but the actual amount will vary depending on the terms and conditions of your contract.
The primary advantage of paying your energy bill in advance is the low cost. You’ll see some great energy deals from smaller suppliers to entice you into this type of contract.
However, the supplier reaps most of the rewards with a steady cash flow in advance. You should note that advance payments are taken before the supply start date. Although the precise amount varies, it’s typically a full month’s worth of energy. You’ll need to pay for your second month upfront too – it’s like a rental deposit in that you could be paying double the price in the first month.
It’s also important to run an energy comparison before you switch to a supplier offering advance payment energy tariffs. Although the supplier may be offering you its cheapest tariff, is this simply the supplier’s cheapest price, or does it refer to the market as a whole? Use an independent comparison tool to make sure you’re really getting a good deal.
There are loads of ways to pay your energy bills, including by monthly Direct Debit. Suppliers will often give you a discount if you sign up for paperless billing, as it saves them money on administration and billing costs.
Direct Debits allow the energy supplier to automatically collect its payments from your bank account. On top of this, many suppliers offer an additional discount for paying by Direct Debit.
Another way to garner a discount on your energy bills is to sign up for a dual-fuel tariff, combining gas and electricity. If you opt for advanced dual-fuel tariffs, be aware that you could be paying an even higher deposit upfront, so be sure to budget for this.
In the past, this was always the case. You would receive a quarterly bill for the energy you’d used, then would need to pay off that bill. Nowadays, the emergence of Direct Debit has created an opportunity whereby you can both pay for bills in arrears while also building up credit to cover higher fuel costs in the winter months.
The rationale is this: your energy supplier estimates next year’s bills based on your previous year’s consumption and current tariff. It then divides this cost by 12 to provide you with a monthly estimated figure. Although you’re paying the same amount each month, your actual energy usage will vary according to the time of year – so you’ll use less energy in summer months and more in winter months. It means you’re able to build up credit during the summer that ensures you’re well-placed to cover your increased energy bills in the colder months.
Some suppliers – most notably OVO Energy – encourage customers to build up credit in their accounts by paying up to 5% interest on all credit balances.
As you can see, there are as many different payment methods as there are tariffs. What happens if you’re in debt to a current supplier? You’ll need to pay off the amount that’s in arrears when you switch, which can also add to any upfront costs associated with switching.
The exception is if you’re sent a bill for energy used over 12 months ago. According to the Ofgem Back Billing Principle, an energy supplier cannot bill you for energy used over a year ago, particularly if it’s incorrect or billed using outdated estimated meter readings.
There are many payment methods to choose from, but one of the biggest considerations you should make is whether to pay your energy bill on a monthly or quarterly basis. In either case, you’ll set up a direct debit that automatically pays the amount owed.
Monthly payments are taken out of your account at roughly the same time every month. Quarterly payments work the same way, except they’re taken from your bank every three months instead. Each quarterly payment will be higher than a monthly payment would be – in theory it should equate to the equivalent of three monthly payments. For most people, spreading your payments monthly makes it easier to budget.
Another way to pay your energy bills in advance is with a prepayment meter. However, this also works differently from an advanced energy tariff.
Prepayment tariffs require the use of a special type of meter, which works similarly to a pay-as-you-go mobile phone. You’ll need to top it up with credit to get your gas or electricity. There are plenty of ways to top it up, whether it’s with a smartcard, key fob, or online.
The main advantage of a prepayment tariff is that it can help prevent any large or unexpected bills. You’ll be better able to manage your energy use, particularly if you have existing debts to pay off.
On the other hand, prepayment meters usually come with higher tariffs. You’ll pay more for your energy use per unit in most cases. There’s also the matter of convenience; not only do you need to have a specific type of meter fitted, but in many cases you’ll need to visit a shop or Post Office to top up your credit. Older models of meters are adjusted manually, which can take some time – and in the meantime, you’ll be paying outdated rates.
If you’re interested in this type of tariff, you’ll notice that most are offered by smaller, untested suppliers. There is a higher risk of this type of supplier going out of business, but you don’t need to worry about losing your money or supply.
Industry regulator Ofgem serves as a safety net. When suppliers cease trading, as sometimes happens, Ofgem appoints a new supplier to take over your account in the interim. The new provider will honour any outstanding credit balance you have, including advance payments.
You can then decide whether you want to stay with the new provider or search for a new tariff with a different company.
Last updated: 21 December 2020