The major suppliers “failed to play it straight” with consumers, according to regulator Ofgem, and have eight weeks to comply with a series of radical proposals to overhaul the industry or face a referral to the Competition Commission.
The reforms include reducing the number of tariffs suppliers offer to avoid confusion over price and improving transparency by appointing an independent accounting firm to investigate the suppliers’ books.
An additional investigation into Scottish Power’s standard credit prices has also been launched.
Ofgem launched its review in November after it emerged that price hikes had seen suppliers’ profit margins soar by 38 per cent.
Ofgem said that, for the first time, it had evidence that the big six - British Gas, E.ON Energy, EDF Energy, Scottish Power, npower and Scottish & Southern Energy - had pushed up prices in response to rising costs more quickly than they reduced them when costs fell.
The regulator found that average industry margins on a standard dual fuel tariff rose to £90 in November, from £65 in September.
The watchdog said it would look into the “facts behind the numbers” as companies claimed that rising prices in the wholesale market - where suppliers buy their energy - left them with no choice but to hike bills.
Following publication of the findings, Ofgem chief executive Alistair Buchanan said: “Consumers must have confidence that energy companies are playing fair at a time when they are being asked to foot the £200 billion bill to pay for the investment Britain needs to ensure secure and sustainable energy supplies.”
The review found that competition was being “stifled” by complex tariffs, poor supplier behaviour and a lack of transparency.
The number of tariffs available has risen by 180 to more than 300 since 2008, leaving customers “bamboozled”, Ofgem said.