Call for 'fairer' energy pricing

The gap between the "true cost" of energy and what consumers are actually paying in their bills will have swelled to nearly £2 billion by 2020 unless there is tougher regulation of the market, a think tank has warned.

The Institute for Public Policy Research (IPPR) said unless tougher regulation is put in place by Ofgem to improve competition and make sure pricing is fairer, in 2020 customers will be missing out on £1.9 billion of possible savings.

In a new report, True Cost of Energy, the think tank estimates the true costs to energy companies of supplying households with gas and electricity.

It said IPPR analysis showed that annual efficiency savings of just 2.5% could deliver £1.9 billion in savings for consumers in 2020.

But it said Ofgem's own evidence gave no indication that the 'Big Six' energy companies have made efficiency savings and passed them onto consumers through lower bills, and were continuing to overcharge customers to subsidise cheap offers.

The IPPR investigated the costs to energy companies of supplying electricity and gas for the financial year 2011/12. It modelled a number of scenarios to see how different levels of competition in the supply market could affect energy bills in 2020.

With annual efficiency savings of 2.5% and profit margins at 4%, suppliers could knock £70 from the average annual bill - creating a saving of around £1.9bn across all consumers, the think tank said.

Its report found some families are paying as much as £330 more than their neighbours to use the same amount of energy from the same company.

IPPR associate director Will Straw said: "Our research adds to the growing body of evidence that competition is not working in the energy market.

"We are calling on the Big Six and Ofgem to demonstrate whether efficiency savings are being achieved in the energy market and whether consumers are benefiting from lower bills as a result, as we would expect if competition was working."