Energy bills: Will Ofgem review lead to cheaper bills?

The energy market is dominated by six companies, but could that be about to change?

The energy regulator was unequivocal: The current system is not working.

Ofgem, in a review of the UK gas and electricity market following claims that suppliers were making excessive profits, decided that consumers are being "bamboozled".

The "big six" - British Gas, E.On Energy, EDF Energy, Npower, Scottish and Southern Energy and Scottish Power - have been found to be stifling the market.

The regulator says they must offer less complex tariffs to help consumers compare prices - or face the threat of being referred to the Competition Commission.

But what will the changes actually mean for consumers?

'Not working'

Firstly, Ofgem is recognising that the fault lies with the companies and not the billpayer.

"What Ofgem has acknowledged today is that the market isn't working properly for consumers," says Ann Robinson, director of consumer policy at uSwitch.com.

"The fact is that not enough people are using it. Incredibly, just one in ten households are paying the cheapest energy prices on the market."

Around four in 10 households have never switched energy suppliers, she added.

Ofgem feels that this is because our bills are too complicated, making it impossible to figure out what tariff you are on and compare it to other energy suppliers.

"Because bills are so complicated, people almost ignore them when they come in through the post," says Scott Byrom, energy manager at Moneysupermarket.com.

Terminology

But he cautions that Ofgem is tackling the wording of the bills, rather than the level of prices in them.

Consumers should not expect to see a drop in prices as a result of the review.

What they should see, eventually, are less complex bill statements.

But simpler explanations of the bills should help people to save up to £300 a year from the annual average energy bill of £1,108, according to Moneysupermarket.com simply by choosing other providers at existing prices.

"We're finding that consumers look at the provider they're with, rather than the tariff they're on," Mr Byrom says. "If they are more educated on the tariff, chances are they're going to look around for a better deal."

The regulator is also planning to ban the automatic rolling over of fixed contracts - where people pay a set price each month for their energy over the period of a contract.

That should also force consumers every year to re-evaluate whether they are getting the best deal for them.

Ofgem could force the "big six" to sell up to 20% of the electricity generated

New players?

Ofgem also believes the "big six" are too dominant.

It wants to force these firms to auction off up to 20% of the electricity they generate.

This is an intriguing proposal - one that raises the prospect of the growth of new energy providers such as Ovo Energy, a small player based in Cirencester in Gloucestershire founded in 2009 that has around 40,000 customers.

However, Mr Byrom is worried that it could lead to a situation like the retail insurance industry, where there are many brands but they are owned by a few players.

"Only today we see yet another example of how the smaller energy companies are being squeezed out of the market," says David Hunter, an energy analyst from consultancy M&C Energy Group.

"The official opening of a new gas-fired plant at Langage, Plymouth, is the first major new power station in the UK for five years.

"Yet, it is owned by Centrica and all gas generated will go direct to the company's retail arm, British Gas, under a 'tolling agreement'."

There are many barriers to entry for new players, so most are waiting to see if this measure to try to open up competition will ever become a reality.

In any case, it is difficult to see whether a foreign company will be able to find a niche in the UK - with Germany's E.On and France's EDF already so dominant.

While this Ofgem report has been welcomed by many consumer advocacy groups, it seems that it will only be when consumers read their bills - and understand them - that they could find the savings they are looking for.