Energy customers 'paying too much'

Millions of energy customers have been "paying too much for their energy bills", a year-long investigation by the Competition and Markets Authority (CMA) has found.

Between 2009 and 2013, British Gas, E-On, Npower, EDF Energy, Scottish Power and SSE collectively charged households £1.2bn a year more than they would have in a competitive market, the CMA said.

It found dual fuel customers could save £160 a year on average by switching.

The CMA has suggested several remedies.

One measure it is considering is a transitional price cap while reforms are made to the energy market.

"There are millions of customers paying too much for their energy bills - but they don't have to," said Roger Witcomb, chairman of the energy market investigation.

This idea seemed to have been dismissed by the government.

A 10 Downing Street spokeswoman said: "The prime minister does not think that price regulation is the right approach."

Price 'exploitation'

The average household spent about £1,200 on energy each year. For the poorest 10% of households, energy bills now account for about 10% of total expenditure, the CMA said.

Those on low incomes, with low qualifications, who live in rented accommodation or are aged over 65 are most likely to remain on the more expensive variable rate, having failed to switch.

Domestic customers paid about £1.2bn more and small business customers paid about £500m more a year than would have been the case had competition functioned more effectively between 2009 and 2013.

The big suppliers, aware of these inactive customers, were able "to exploit such a position through their pricing policies", the CMA said.

Roger Witcomb, of the CMA, says that a transitional price cap should be considered

Energy UK, which represents the major suppliers, argued that this was not an accusation that customers had been ripped off.

"Customers have not been overcharged but money may still be saved when people shop around for deals that suit their individual circumstances," said Lawrence Slade, chief executive of Energy UK.

"There is greater choice for customers. It is easy to switch and a few minutes online could save households money and get them the deal that is right for them."

The share prices of London-listed Centrica and SSE were little changed on the publication of the report, falling by less than 1%.

Some of the smaller energy firms were less content with the findings.

"We think the remedies proposed simply don't go far enough; [the CMA has] been studying this for more than a year and they still have many open questions," said Darren Braham, founder of First Utility.

How might a price cap work?

People who do not switch suppliers or tariffs at the end of their current contract would automatically move to a default tariff.

The maximum price of this so-called "safeguard" tariff would be set by regulator Ofgem - which at present has no power over prices - or the CMA.

This backstop price could change over time and would be more expensive than other tariffs so not to stifle competition elsewhere.

No other tariffs for those who fail to switch would be permitted.

A similar system is in operation in New South Wales, Australia.

However, the idea has been rebuffed by Downing Street.

Reforms ineffective

Gas and electricity prices have risen by 125% and 75% respectively in the past 10 years, but much of the increase in recent years has been down to environmental and network costs, according to the CMA.

The CMA said that recent reforms by the energy regulator Ofgem to encourage switching - by reducing the number of tariffs on offer - had not had the desired effect.

To help vulnerable customers, the CMA has proposed that those on pre-payment meters, who are often charged the highest tariffs, should be the first to receive smart meters when the national roll-out gets underway.

Citizens Advice recently found customers on pre-payment meters have been paying an average of £226 a year more than they would have done on the cheapest direct debit tariff and that the gap was growing. Ofgem found that these customers were also being charged to have meters installed or removed.

The CMA has also suggested measures to help businesses get a fairer deal for energy, including prohibiting energy contracts being automatically rolled over.

The CMA will consult on its proposals and publish final recommendations before the end of the year.

The major energy companies are facing competition from smaller suppliers

"This is a damning indictment of how the energy market is failing consumers, with the biggest suppliers taking advantage of millions of households who have also been hit with the costs of government energy policy," said Richard Lloyd, the executive director of consumer group Which?.

The Secretary of State for Energy and Climate Change, Amber Rudd, said her department would "respond soon" to the report.

"We won't hesitate to take further action where the market is not delivering a fair deal for consumers - including doing more to support switching, ensure the swift roll-out of smart meters and increase competition in energy markets," she added.

The CMA has been investigating the energy market since last July.

The year-long investigation involved around a dozen site visits, 30 hearings and more than 100 submissions.