It works by separating the cost of the device you get, from the cost of the airtime.  So if you want a HTC One on O2 Refresh, you can choose to pay £17 a month for airtime (unlimited minutes & texts, 1GB of data), and £20 a month for the device itself with £49.99 upfront.  Then if you want to change to another phone a few months down the line, just pay off the remaining cost of the phone (HTC One £529.99 at time of writing).
O2 Refresh will launch with the Samsung Galaxy S III, S3 Mini, Note 2 and Ativ S, Blackberry Bold 9900 and Z10, HTC 8X and One, Sony Xperia T and Z, iPhone 4, 4S and 5, Nokia 820 and LG Nexus 4.  It will also be available for the Blackberry Q10 and Samsung Galaxy S4 when they release, and other smartphones.  So it seems mostly to be for the high end smartphones, but those are the ones everybody wants!
This is the first time UK network has accepted the fact that customers want the latest and greatest devices, without being locked in to 2 year contracts, or making the process overly complicated (I’m looking at you Phones4U!) Â Hopefully this kind of tariff will be picked up by other networks.
Source: O2 UK