More than 15 million households are overpaying for their gas and electricity in an “unfair” market that requires urgent reform, according to Ofgem, the energy market regulator.

In a long-awaited investigation into competition, Ofgem said that it had uncovered no evidence of collusion over prices or that suppliers were quick to raise prices and slow to cut them, but it did highlight a number of areas where it felt that many of Britain's 26.7 million households were being treated unreasonably.

Alistair Buchanan, the chief executive, expressed particular concern that 4.3 million mainly rural customers were unable to benefit from the cheapest dual-fuel tariffs because they were not connected to the national gas network. Ofgem said that they were paying an average of 10-15 per cent extra for electricity — about £55 each a year.

Mr Buchanan said that the disparity was unjustified, that customers were being short-changed and that the policy had an unfair impact in remote areas of Scotland and Wales. He said that the high prices were being compounded by the fact that these customers were forced to rely on expensive alternatives to gas, such as heating oil or liquid petroleum gas.

Ofgem said that it was considering rules that would force power companies to scrap such “unfair” price differences, which also included discriminating against customers who paid by cheque or pre-payment meter, rather than by direct debit.

The regulator pointed out that only 8.5 million, or 38 per cent, of the 22.4 million UK households with access to mains gas and electricity were benefiting from the most competitive tariffs available — dual fuel paid by direct debit. The remaining households - including 6 million mainly poorer customers, who use pre-payment meters and others who preferred to pay by cheque - were being punished to the tune of about £1.4 billion a year.

“A substantial proportion of the premium cannot be justified by differences in cost,” the report said. “This was recognised by some companies in our interviews, one of whom described the premium as an 'incentive' to encourage greater take-up of direct debit.”

Gordon Lishman, director-general of Age Concern, said: “This probe adds further weight to the already overwhelming evidence that the energy market is not working for the poorest customers. With around one in three pensioner households in fuel poverty and half planning to cut back on their heating this winter, the Government and energy companies must take urgent action to help the poorest pensioners afford to heat their homes.”

In a move that may alarm EDF as it finalises its £12.4 billion takeover of British Energy, Ofgem also said that it was exploring the possibility of taking on powers allowing it to police the wholesale electricity and gas markets more effectively. Mr Buchanan declined to comment on the implications of the British Energy takeover.

The report also criticised the way in which the big power companies appeared to be overcharging customers in their old regional monopoly areas for electricity, compared with new customers they were seeking

to attract elsewhere. It said that companies such as EDF Energy and RWE npower, which have dominant positions in London and Yorkshire respectively, were earning 75 per cent of their profits from 48 per cent of their accounts by charging 6-10 per cent more for electricity than for comparable “out-of-area” customers. “We can find no cost basis for this premium, nor are similar premiums found in gas,” the report said.

Ofgem also called for tougher rules on doorstep selling and more transparency in billing and financial reporting, but insisted that the retail energy supply market was, at its core, sound.

“The fundamental structures of a competitive market are in place and the transition to effective competitive markets is well advanced and continuing,” it said.

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