On Electricity: Demand Tariffs are Dumb

 So, recently I got forced into replacing my "dumb" meter with a "smart" meter, and sure enough I get an email from my energy retailer that "Surprise! your electricity tariff is changing". Now this retailer send me this amazing news 4 days AFTER the tariff change took effect, but I have already come to a settlement with them about that gem.

Needless to say, with the subject of this post, I got plopped into a Demand tariff. At first glance it didn't look too bad, the daily charge was lower, the per kW charge was slightly lower as well, however it had a Peak Demand daily charge to figure out.  Essentially they get energy usage from your meter every 30 minutes and the highest usage between the hours of 16:00 and 21:00 is the lucky winner for the Peak Demand charge.  Each half hour block has a usage figure in kWh, so to get the Peak Demand you multiply that by 2. {X}kWh/0.5h. 

This can lead to nasty surprises and sure sent my blood pressure when I worked it out, as I was on a quarterly bill cycle and those days since the change I would have had the car plugged in, plus people cooking etc. unaware of the peak demand impacts. This was somewhat mitigated when they automatically switched me to a monthly bill cycle.  Having a spike 1 single day where you might turn on the A/C and be cooking using say, 5kW for half an hour... that'd be 2.5kWh at a rate of ~$0.26 for the electricity, or $0.65, however that one lapse has a daily charge of $0.35 per kW, per day so 5 x .35 x 30 days = $52.50. If your normal peak usage was around 1.5kW that adds $36.75 to your next bill.  You used $0.65 worth of electricity, but it will cost you that plus $36.75. The thing is you may as well run the A/C *every* day because once you take that hit, using an extra $0.65 worth of power to run the A/C won't add any further demand charges so long as your peak doesn't exceed 5kW.

Now where this gets somewhat nasty. I still have an off-peak tariff for my hot water and pool filter which typically cuts off around some time around 17:30-18:30 and doesn't kick back in until 21:00. Though this Peak Demand doesn't just apply to my Demand tariff, but total consumption including the off-peak. Surprise, pool filter running at 16:00? included.  Ok, so I adjusted the pool timer to cut out before 16:00, I also set the electric car to not start charging until after 21:00.  Hot water system? Not a lot I can do, but it shouldn't be kicking in before 21:00 and as far as I have seen when checking the pool equipment (lights up when the off-Peak is online) it hasn't been kicking back in.  From past usage our peak period seems to be the 20:00-21:00 which will be when my main PC is running, plus the daughter's laptop for homework, and the Mrs. watching TV. However while this is pretty consistent around 1.1-1.3kW, I have seen one day where it was 1.8kW which is a bit suspicious where that extra 1/2 kW might have come from. Possibly it was some cooking with induction, or the bigger fear is that the off-peak tariff could be coming back online prior to 21:00 rarely, where the HWS is kicking back in after being off and warming after some dishes and a shower or two happens before 21:00. The power company could be "sneaky" and ensuring that the off-peak tariffs manage to get turned back on early one or two days a month, as this would end up padding peak demand figures for a lot of residents for the entire month.  This isn't helped by the fact that while my energy provider does provide usage figures online, it only provides hourly intervals, not half-hourly intervals so I have no visibility to review or anticipate charges that are based on half-hourly usage. My bill also does not state which day & interval they used for the peak demand charge. 

What is dumb about this tariff is that it can be gamed, and doesn't really accomplish what it claims to accomplish. If you have guests over and want to run the A/C for 30 minutes to cool down a room, then you're going to use 2.5kWh of energy depending for that 5kW system, but if you turn on the AC on the hour/half-hour, it will count entirely to a single interval, hitting you for 5kW peak load. Instead, if you wait for a 15/45 min mark, then the load splits across 2 intervals, adding only 2.5kW to each interval. Same load, different potential billing impact without "spreading out the load." at all.  Ideally you should aim to avoid usage during your typical peak interval, but this trick can help prevent a one-off usage forming a new peak interval which impact will be multiplied across the entire month.

I suspect the power companies really want everyone on a Time of Use tariff where each time interval has a variable price per kW so they can discount prices during quiet times and charge everyone 3x or more during peak hours, but that's an extremely bitter pill for consumers. When it comes to electricity, the consumers end up paying repeatedly for the lack of preparedness of the energy providers.

Overall, with the changes we have made to our scheduling, or electricity costs *should* be lower than what we were paying on the old fixed tariffs, but I have to wait until next month's bill to confirm that since this month's peak usage will be skewed from before I could alter the car charging and pool filter timing. I can't say I'm optimistic though, the break-even peak demand figure I calculated based on previous bills was 2.45kW. We'll save if our peak is 1.3kW or even this unexplained 1.8kW, but not a huge buffer when the last bill reported a peak of 3.67kW, and this next one will likely be over 3kW as well.

The real cost of Afterpay

BNPL services are popular. Beyond fueling instant gratification through consumption, there are many out there that may not really understand the potential cost of using services like Afterpay. If you're able to reliably make your payments then there is little downside to using Afterpay versus a credit card. However, missing a payment, or falling into a pattern where you are missing payments, Afterpay gets considerably more expensive than credit cards.

Late Fees

The way Afterpay markets late fees seems reasonable on the surface. $10 fee when a payment is late to a maximum of 25% the purchase price or $69, whichever is less. People will compare that to an interest rate on a credit card of anywhere from 24% to 30% and it looks "reasonable".  However, there are a few significant differences. Lets use a basic example spending $600 with Afterpay vs $600 with a credit card.

With an Afterpay purchase you pay 4 payments of 25%, the first at purchase and the remainder every 2 weeks. So on day one Afterpay will attempt to deduct $150, leaving you owing $450. After 2 weeks, another $150, and two more $150 at 4 weeks, and 6 weeks. Simple. Now, what happens when we miss a payment? For this example let's assume we miss the last payment at 6 weeks. Aside from possible dishonour fees from our nominated payment account, we are charged $10 from Afterpay. Afterpay will charge us $10 up to a maximum of $69 or 25% of the purchase price, whichever is less. In this case a maximum penalty of $69 as the purchase price was $600. Note that the 25% cap is on the purchase price, not the outstanding balance. We have paid back $450 so we only owe $150 at that point. Say we notice the mistake early, have the remaining $150 available and pay the balance off. The total cost was $160 with the late fee. If we took longer to get the balance, $10 would be charged each week until the cap of $69 was reached.

Now if we look at the same scenario with a credit card, the entire purchase price would be taken on credit with an interest free period of typically up to 44 days. Each month there is a cut-off date for the due payment, so the "up to" 44 days applies from the date of purchase to the next payment cut-off date. From there a statement for the current balance is calculated and you have around 14-20 days to pay before you are charged interest. Of course you can make payments against a credit card at any time. So, if we assume you missed your credit card payment and had a 25% p.a. interest rate on the card, how much would it cost you paying it one day late? Worst case, at 45 days from purchase:

25% / 365 * 45 * $600 = $18.49.

Now that looks worse, but it's not a fair comparison. In the Afterpay case we paid off $450 of the balance and missed the last payment, so let's assume we could pay off $450 of the balance by the CC due date:

25% / 365 * 45 * $150 = $4.62

Afterpay charged us $10, on a credit card in similar circumstances it would have been less than half as expensive of a penalty.

Penalties are applied per purchase

The above example was for a single $600 purchase. Afterpay's target audience is for people making multiple impulse purchases. If we change the scenario into 6 purchases of $100 each, failure to make payments for the one or more of the 6 final payments would end up costing $10 for *each* purchase that was not paid for. Chances are with the smaller payments of $25 at least one or two might have been paid off, but each purchase of $100 would potentially attract a cap of $25 in late fees and it would just take 3 weeks to reach that cap at $10/week. If it was all 6 purchases that is $150 in late fees. The $69 cap applies to individual purchases, not the balance of purchases.

Again, for a credit card the penalty for not paying off the balance at the end of the month is based on the outstanding balance at the end of the month, not the purchase price. It is worth noting that credit cards used to be far less fair where not paying the balance off at the end of the month they applied the full interest of the starting balance, not the balance remaining,

Capped percentage late fees vs. p.a. interest rates

Afterpay is structured in a way that penalty fees are capped out quite quickly, in most cases within 3-4 weeks after a payment is missed.  While the cap is around 25% of the purchase price, this is in no way comparable to a 25% p.a. (per annum) interest rate. When you have a 25% penalty being reached in 4 weeks, that is equivalent to a 325% p.a. interest rate.  When the rate is charged at $10/week even on smaller, individual purchases, that comparison interest rate is even higher. 

The threat of pay it or lose it

One of the strongest incentives that BNPL providers like Afterpay use on consumers is the threat of cutting off your access to their credit if you miss payments. While this might seem like a good thing to keep you from overspending, this leads to consumers prioritizing the Afterpay payments over other debts or bills to keep that purchasing power lifeline open. Afterpay can downplay the amount of "debt" and arrears (people behind on payment) with their shareholders because the platform is leveraged to get borrowers to extend their outstanding balances on credit cards, bills, tuition, etc. before missing Afterpay payments.

No benefits offered compared to credit card purchases

Many credit cards offer rewards points or cash-back offers when making purchases with them. You are also free to negotiate with vendors for a good deal on goods. The entire point of BNPL is to lessen the sticker shock of a purchase. Many vendors will not haggle on price when accepting a purchase on BNPL given the fees they pay to the platform are considerably higher than credit card gateway fees.

Takeaway

Ultimately the tool isn't evil, but it can be used and abused, plus as a business it is expected to grow and make money. Many emerging "disruptors" aim to gain popularity rapidly by burning through investment money without a lot of thought or transparency into how such businesses can transition into profitability. The worst thing that a consumer considering using BNPL is to ever get into a situation where they become dependent on it. This belongs right alongside services like MyPayNow & WageTap which will release daily amounts based on your pay cheque so you don't have to wait until pay day. Of course the sum of your daily pay outs won't come close to your normal fortnightly pay, and you can bet there are penalties and fees if it turns out you had unpaid leave while on their platform. The real scary thing is that even Australian Banks are getting in on this such as Commonwealth Bank AdvancePay... I mean seriously, regulators? Hello??

Forms of "pay day lending" have been offered in the past and continually get reinvented and re-imaged as a means of "helping" less fortunate people that don't have access to traditional credit or sufficient cashflow to cover legitimate one-off costs. Unfortunately, these businesses almost always devolve into something that exploits the most vulnerable.