In response to your query, in the situation that the Oyster reader is not
working, generally the bus driver will wave you on. In that situation
they
should log that their reader is faulty, so if a Revenue Inspector gets on
they will understand the situation. Revenue Inspectors also carry hand
held
Oyster readers so if they do scan your Oyster card and see that it is Pre
Pay they will be able to deduct the appropriate fare from your card.

If you are in a situation where the driver does make you pay,
unfortunately
you will be required to pay the cash fare in order to travel. If you do
encounter this situation and have to pay the £1, we can refund the thirty
pence to you if you fill in a Refund of Fares form and send us the proof
of
payment.

I also used "Ask Oyster" to ask what happens when buses or trams are taken
out of service when you have used Pre-Pay. My concern being that you are
required to touch-in on a tramstop or on the bus for every journey which
would result in a charge, even if you wouldn't have been charged with paper
tickets. The reply...

As of yet there is no procedure in place to deal with buses or trams that
are taken out of service prematurely. You will still need to scan your card
when boarding a new tram or bus. To get a refund for the extra charges you
will need to either ring in or write to our refund department. They can be
contacted from 8am to 6pm, on 0845 330 9881 or alternatively you can write
into : Oyster card refunds, 55 Broadway SW1H 0BD.

....which doesn't sound ideal. I rather suspect that sooner or later the
charging model for Pre-Pay on buses and trams will have to change to allow
unlimited journeys within a certain time period.