Why pay a deposit when you don't need to? For some people, that's an option when it comes to choosing an electricity plan. 

If you live in a state with a deregulated energy or electricity market -- where you can choose a home energy supplier and energy plan that suits your needs -- no-deposit energy plans may be one of the options available to you. That may be welcome news to people who may have poor credit, no credit or who have recently moved and are in a cash crunch.

While the no-deposit option, also known as prepaid electricity, helps you avoid the upfront cost to activate your electricity, experts say this option has greater costs down the road. 

We'll help you find the best electricity rates in your area

"Prepaid or no-deposit electric plans can be a good option in very specific situations such as getting your power turned on in a pinch," said Katie Collins, a CNET managing editor covering deregulated energy and personal finance. "I've worked for dozens of different retail electric providers. The cash and prepay option may be convenient, but you will pay more for your electricity on a prepaid plan." 

The goal, Collins says, is to avoid these plans. But if you need it, work toward graduating from it. 

We'll help you find the best electricity rates in your area

What is a no-deposit energy plan?

A no-deposit electricity plan is one that does not require an upfront payment before a supplier flips the switch and starts supplying energy to your home. They're only available in certain markets and to a subset of homeowners and different suppliers offer different energy plans -- similar to mobile phone plans or cable TV packages.

They're often called prepaid plans when they work on a "pay-as-you-go" model, where homeowners pay upfront for their power and reload their account when their balance gets low. If you exhaust your balance, your power could be shut off.

"They're 99% a Texas-only phenomenon," said Frank Caliva, a spokesperson for the Retail Energy Supply Association. "That's because Texas has a unique electric market in that the utility does not provide the energy supply. Everyone is served by a retail supplier in the market." (Prepaid plans might be found in other US states, too, such as Illinois, Massachusetts, Delaware and Connecticut, and in other countries.)

There is another type of no-deposit energy plan where you may get a deposit waived. "This could mean a veteran benefit or domestic violence situation," said Collins. The specific qualifying criteria will depend on the individual supplier -- such as payment history or time enrolled with the company -- and there will be extra paperwork involved. "It can't hurt to ask for the company's waiver options."

Why do power companies typically require a deposit?

The reason that power suppliers or utilities require deposits is similar to any business. "A bank, for example, may approve a loan, but that loan comes at a risk to the bank if it's not paid. That's why a bank may charge interest or a mortgage lender requires a down payment," Collins said. "A utility or light company risks supplying homes with power and not receiving payment." 

As such, required deposits are used to mitigate risk for energy suppliers, to ensure that customers aren't able to rack up significant charges without paying. 

"Customers have different credit risks," Caliva said, "and for suppliers doing the billing and collecting, there's a risk that needs to be addressed." 

No-deposit or prepaid energy plans: Consumer pros and cons

The pros and cons of no-deposit or prepaid energy plans come down to lower upfront costs versus potentially higher ones down the road.

The biggest benefit is that there's no upfront payment from the consumer to the power supplier, so they're able to save a bit of money at first, which might help those on a tight budget. They may be able to avoid a credit check (depending on the supplier) and, if they use a prepaid plan, have some control over when they reload their account.

Perhaps the biggest drawback to no-deposit plans is that the rates consumers end up paying may be higher, though this will depend on your location and specific supplier. Consumers may be limited in how they can pay the energy supplier and face increased risks of disconnection. If you don't pay, "your power could get shut off," says Caliva. 

The biggest pro in favor of paying a deposit versus going with a prepaid option is you can earn your deposit back. "Most retail electric providers have some kind of deposit refund policy if you pay your bills on time," Collins said.

Pros

• Lower upfront cost to turn power on
• May be able to avoid a credit check
• Option for those without credit history or have poor credit
• Can reload prepaid account as needed
• Most accept cash payment

Cons

• Likely higher rates
• Limited on plan choices (i.e. fixed versus variable rate plan)
• Limited on provider choices 
• Nontraditional billing structure
• Disconnection risk may be higher
• You can earn your deposit back with a traditional plan

Who should look for no-deposit energy plans?

Caliva says no-deposit or prepaid plans may be helpful in certain situations, such as low-income households without the funds for a large deposit. 

"Prepaid electricity can be a good solution if you are bankless and use cash to pay your bills," Collins said. While this may be true, experts warn these types of plans come with great consumer risk and are not good long-term options. 

"Usually, the rates are higher compared to a traditional electric plan. In the long run, you pay more for your electricity," she said. "Prepaid electric plans may work as a temporary solution to get your power turned on quickly until you figure out your next move, such as your next paycheck."

Long term, Collins says, you're better off finding a way to pay a deposit for a fixed-rate plan and avoiding a prepaid one. "That may mean borrowing it, putting it on a credit card (and paying it off quickly), asking for an installment option or adding to your next bill."

There are other resources out there, too, for those struggling to pay their utility bills. It may be worth checking out which government programs are available such as the Low Income Home Energy Assistance Program or the Weatherization Assistance Program. 

"If you're facing disconnection or at risk of disconnection, always check with your retail electric provider to see what billing options you have," said Collins. Retail electric providers, at least in Texas, are held to Public Utility Commission rules and regulations that favor the consumer, Collins said.

How to find a no-deposit plan

Perhaps the easiest way to see if a no-deposit plan is available in your area is to use an electric plan comparison site, of which there are many. States with deregulated energy markets tend to have websites dedicated to helping consumers find and choose plans -- New York's NYS Power To Choose or Texas' Power to Choose comparison sites, for example. 

You can also use third-party websites to look at options, which can include Choose Energy, a site owned by the same parent company as CNET.

If all else fails, you can try calling around to local suppliers or utilities to ask about the availability of no-deposit or prepaid plans. They may not be available at all where you live, but making a few phone calls may turn up some guidance. Just be on the lookout for scams, like unwarranted threats to shut off power without immediate payment or imposters posing as service technicians. Do your due diligence, and you should be fine.

Frequently asked questions