Ofgem to investigate big rise in energy profits

A review has been launched into the prices charged by energy suppliers amid claims they are overcharging households.

The regulator Ofgem announced the move yesterday after revealing that suppliers' annual net margins per customer have risen by 38 per cent from £65 to £95.

Consumer groups welcomed the review, which could lead to regulatory action to bring down bills, which average £1,220. It represents a belated victory for The Independent's campaign against the Great Energy Rip Off, which suggested last October suppliers were making excessive profits.

Ofgem, which has been criticised for not being tough enough on suppliers, found overcharging of £500m in its last major investigation into the energy market in 2008. Following that market report, it gained powers that require suppliers to hand over their retail supply accounts, which have just been received. Ofgem will scrutinise these accounts in its review. Alistair Buchanan, its chief executive, stressed customers needed to be assured firms were not profiteering before bills rise sharply to pay for billions of pounds of investment in new energy generation.

He said: "With Britain facing an investment bill of £200bn over the next 10 years, consumers have the right to expect that the energy retail market is providing them with value for money. Our analysis published today shows an increase in company margins from £65 to £90 at a time of rising energy prices, which causes Ofgem to rightly ask if companies are playing it straight with consumers."

Consumer groups claim that suppliers hold on to falls in wholesale prices, while quickly passing on rises. Power firms raised domestic prices by 51 per cent for gas and 28 per cent for electricity when wholesale costs rose in 2008 but cut them by only 7.5 per cent in 2009 and early 2010 when wholesale costs fell sharply. With wholesale costs on the rise once again, three of the Big Six have put up prices.

Scottish Power put up electricity by 8.9 per cent and gas by 2 per cent on Thursday. Gas prices at Scottish and Southern Energy will rise by 9.4 per cent next week, while British Gas's gas and electricity go up 7 per cent on 10 December.

The consumer group Which? said the review would show whether the the industry required more openness on pricing or "major surgery".

Audrey Gallacher, the head of energy at watchdog Consumer Focus, said an investigation was "very overdue. We have long been concerned that the market is not as competitive as it should be and this review needs to get to the bottom of whether prices are fair or whether consumers are being taken for a ride."

Martin Lewis, personal finance campaigner at Moneysavingexpert.com, urged the public not to be annoyed at energy companies. "They're just doing their job – which is not to keep us warm, but to make money for their shareholders," he said.

"After all, that's who we sold them to when they were privatised. The people we should get angry with are regulators and politicians; they are the ones with the responsibility for ensuring good supply of energy at a fair price. That's why this intervention is very welcome."

Energy UK, which represents suppliers, said firms would be able to explain their pricing. "We have nothing to hide and believe in transparency in this complex marketplace," its director Christine McGourty said. "The review is the latest in a long line of investigations into the market in recent years and no previous investigation has found anything to concern the competition authorities."

Professor Catherine Waddams, director of the Centre for Competition Policy at the University of East Anglia, disagreed that the market was working well. She said: "While energy companies are offering good offers on a limited basis for some consumers, our research suggests mounting evidence the market has become less competitive for most consumers over the past couple of years."