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Energy companies are "greedy" and have ripped off consumers by overcharging them and making their bills too complicated to understand, the industry regulator has ruled.

Bills have gone up too quickly when wholesale energy prices have increased, and fallen too slowly when wholesale prices have declined, according to a "damning" report into the big six energy companies.

Also, customers' bills have become bewilderingly complex, making it impossible for many consumers to estimate if they are getting a fair deal or not.

Ofgem, the industry regulator, has ruled that customers have suffered from a "profound loss of confidence and trust" in their suppliers, which too often have been "greedy" about pushing up their bills to boost their profit margins.

It has given the companies a final warning about increasing customers bills and been ordered to undertake two major changes to make the market fairer.

First, bills must be made radically simpler in order for households to work out if makes financial sense for them to switch to a different supplier. Second, the suppliers, which also own power stations, will be forced to sell off 20 per cent of their electricity in order to encourage new entrants into the market.

If they fail to undertake these reforms Ofgem said it would refer the companies to the Competition Commission, a move which could see the companies fined.

Most critics of energy companies, as well as the industry itself, said they welcomed the proposed changes, but queried whether Ofgem's tough-sounding words would actually translate into lower bills for consumers.

Louise Hanson, head of advocacy at Which?, the consumer watchdog, said: “This isn’t the first Ofgem investigation to show that the energy market is failing consumers. Unless the regulator takes decisive steps to clean up the sector, it won’t be the last.

“Confusing bills, a bamboozling array of tariffs and questionable sales and marketing practices are not features of a market that works well for consumers.

“Making tariffs easier to understand and compare is a step in the right direction and should encourage switching and improve competition, but without price guarantees, people could find the price they end up paying isn’t the one they signed up for.”

Currently there are about 300 different gas and electricity packages on offer, up from 180 in 2008. And most bills are structured so that the first portion of energy used is priced differently from the rest of the energy used.

Ofgem wants all companies to price their bills in a simple per-unit way, allowing people to make an easy comparison between different suppliers.

Alistair Buchanan, the chief executive of Ofgem, said the regulator had found evidence as recently as this winter of companies pushing up their bills too quickly when wholesale prices went up, "getting greedy and giving themselves a little bit extra in terms of profit".

Late last year Ofgem said that energy supplier's net profit margin per typical customer rose from £65 in September to £90 in November, a 38 per cent rise.

Christine McGourty, director of Energy UK, which represents the major suppliers, said Britain has one of the most competitive energy markets in the world, with about 100,000 customers switching suppliers every week.

"But some people have never switched, so any appropriate measures to engage those customers better in Britain's competitive energy market will be welcome," she said.

Energy experts said they were hopeful that forcing companies to sell off a portion of the energy they created would help small competitors enter the market, many of whom are now unable to buy wholesale electricity.

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

"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'."
 

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