Consumers ‘will be overcharged by £2bn on energy bills by 2020’

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

In a new report, the left-leaning think tank estimates the true costs to energy companies of supplying gas and electricity, claiming annual efficiency savings of only 2.5 per cent could deliver £1.9bn in savings for consumers in 2020.

But it said the regulator Ofgem’s own evidence gave no indication that the Big Six energy companies had 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 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 per cent and profit margins at four per cent, 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 were paying as much as £330 more than their neighbours to use the same amount of energy from the same company.

It also found costs to suppliers of delivering environmental and social obligations may be £9 per customer per year less than estimated by the regulator.

The IPPR said more than five million people could be overcharged because tariffs do not reflect costs as required by Ofgem and loss-leading tariffs by the Big Six prevented competition as small suppliers could not compete.

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.

“We need more competition among energy companies so that households get a fairer price for their energy.

“Ofgem’s previous attempts to reform the market have not delivered the changes needed. UK consumers cannot afford further delays in bringing down bills.

“Some of the Big Six are failing to offer consumers tariffs that properly reflect the true cost of energy.

“What’s worse is that poorer and older households are the most at risk of being overcharged. Ofgem must act faster, bare its teeth and enforce its policies.”

The think tank said the regulator’s last package of reforms failed to improve conditions and called for Ofgem to act.

It recommended Ofgem address the problem of overcharging and loss leading by enforcing its own policy that energy companies must offer tariffs that are reflective of their costs.

Don Valley MP Caroline Flint, Shadow Energy and Climate Change Secretary, said households were being forced to pick up the bill for an uncompetitive and unfair energy market which did not work in the public interest.

“Under Labour’s plans, the Big Six energy companies would have to sell all of their energy into a pool, allowing new companies to compete to sell it to the public. This would break the stranglehold of the energy giants, increase competition and drive down energy bills for families and businesses,” she said.

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