Energy bills: the £1.7bn annual rip-off

Energy companies are over-charging customers by failing to pass on £1.66 billion of savings they have made on falling wholesale gas and electricity prices.

Gas prices should be 7.4 per cent cheaper and electricity bills 3.1 per cent cheaper, saving an average household £74 a year, research obtained by The Independent suggests.

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Consumer Focus, the publicly funded watchdog which calculated the figures using the energy regulator's own model, described them as "conservative". It suggested that further predicted falls in wholesale prices should reduce gas bills by a further 8 per cent and electricity by 4 per cent by the end of 2009. This would knock a total of £157 off average bills.

The research will increase calls for an inquiry into the £25bn-a year-energy sector, which is dominated by six firms: British Gas, E.ON, EDF, npower, ScottishPower and Scottish & Southern.

Last year, they raised bills by 42 per cent to household average of £1,293 for the year as the oil price soared to $140 a barrel. Oil then fell to $40 (before hitting $70 this week) but standard tariffs have fallen by only 3.2 per cent, or £41, to an average of £1,252 a year.

The Department for Energy and Climate Change said it wanted to discuss the findings but it was surprised they did not match research by Ofgem, the regulator, which cleared companies of failing to pass on falls in wholesale prices.

Philip Cullum, the Consumer Focus deputy chief executive, said: "Consumers have feared for months that the big six suppliers might not have passed on the full cuts in wholesale prices, but the companies claimed to have acted fairly.

"Our new research for the first time shows the reality. The companies are pocketing £1.6bn extra while millions of households struggle to make ends meet.

"Energy firms should take immediate action to put things right. A failure to act, and to ensure that people pay a fair price for energy, could have serious consequences for the sector," he said. After a slew of price rises at the start of last year, Ofgem refused to launch an investigation into the energy market. On 21 February, when British Gas's parent company, Centrica, reported a 500 per cent rise in profits, it announced a full-scale market inquiry. In October, the inquiry found that companies had been overcharging pre-payment and electricity-only customers by more than £500m.

Garry Felgate, the chief executive of the Energy Retail Association which represents the industry, accused Consumer Focus of making basic mistakes in its analysis. "The amount of gas and electricity a customer uses can form as little as half their annual bill," he said.

"The remainder includes other costs, such as transporting gas and power and meeting the Government's carbon emissions reduction targets – all these costs have risen sharply in recent years."

Consumer Focus said it had used hedging strategies outlined by Ofgem – which had "shown a clear gap between wholesale and retail costs over recent months". Mr Cullum said: "The fact that wholesale costs do not make up the whole of consumers' bills and the additional costs passed on by suppliers, such as for energy efficiency investment, have also been factored into our calculations."

Ofgem, often criticised for being too soft on the industry, said the research was inadequate and accused its fellow public body of "misleading consumers".

"We are entirely confident in our analysis of wholesale and retail energy prices. Although Consumer Focus has borrowed some of our methodology for calculating wholesale costs they appear to have made assumptions that are simply wrong. And we are concerned that they are misleading consumers," it said.

The shadow Energy and Climate Change secretary, Greg Clark, demanded an investigation by the Competition Commission. "This report confirms what Conservatives have been saying for months," he said.

50%

The fall in oil prices since last year – while energy bills have fallen by just 3.2%.