Ofgem to tackle 'complex and unfair energy bills'
Regulator Ofgem has told energy firms they must offer simpler tariffs to help consumers compare prices.
The regulator said that customers were "bamboozled" by a complex system of tariffs, which have increased from 180 to more than 300 since 2008.
The "big six" suppliers should also face more competition, Ofgem said.
However, industry body Energy UK said that the number of tariffs simply reflects consumer demand and competition within the industry.
Ofgem said it would force energy firms to auction off up to a fifth of the electricity they generate, making room for new companies.
Ofgem said it had also found evidence that the "big six" energy firms "have adjusted prices in response to rising costs more quickly than they reduced them when costs fell".
Competition in the UK energy market is being stifled through complicated tariffs and a lack of transparency, and energy firms had "failed to play it straight with consumers", it said.
Ofgem launched a review of the energy market after claims were made that suppliers were making excessive profits.
Earlier in the year, British Gas said operating profits had risen by 24% in 2010 to £742m.
In November, Ofgem said that energy supplier's net profit margin per typical customer rose from £65 in September to £90 in November, a 38% rise.
Ofgem has concluded that pricing practices are "complex and unfair". But what is the detriment to all of us from that complexity? ”
Energy firms could be referred to the Competition Commission if they do not comply with the new system, Ofgem said.
"Consumers must have confidence that energy companies are playing fair at a time when they are being asked to foot the £200bn bill to pay for the investment Britain needs to ensure secure and sustainable energy supplies," said chief executive Alistair Buchanan in a statement.
One supplier, Scottish Power, will face an investigation into its pricing regime, Ofgem said.
Consumers should not expect to see a drop in prices as a result of the review”
That investigation is in addition to an ongoing Ofgem investigation into British Gas, EDF Energy and Npower into how they handle consumers' complaints.
Ofgem is also still investigating possible mis-selling by EDF Energy, Npower, Scottish Power, and Scottish and Southern Energy.
"In response to customer demand, there is now a wide range of energy products available - such as green tariffs and fixed tariffs - to meet the diverse needs of different customers," said Christine McGourty of the energy industry body Energy UK.
"If energy companies are not setting out these options clearly enough then this is something that should be addressed."
Brian Snow worked for an energy company for his entire career and says that he does not understand his energy bill.
"I do not understand the tariff that I am on and cannot compare the different options and companies.
I do an annual check of my costs but I rely on one of the comparison companies to tell me which company and which tariff is best for me.
However, the 'best' tariff never seems to last for long and my bill always seems to increase.
I pity old or disadvantaged people who do not have a computer or the computer literacy to use the comparison sites.
If I, as an electrical engineer with a degree, cannot understand these tariffs - how can they?"
The regulator also wants to ban automatic rollovers of fixed contracts.
Some customers pay a set price each month for their energy over the period of a contract, irrespective of price changes for other customers.
Ofgem wants to ban suppliers automatically renewing these deals so customers are not repeatedly tied in to long-term deals.
A similar ban on automatic rollover contracts for land line telephone lines was proposed by communications regulator Ofcom earlier this month.
Instead, customers should default back to the standard tariff, unless they actively choose another fixed-term deal, it said.
Watchdog Consumer Focus welcomed Ofgem's review of the energy market.
"Companies are now on a very short leash," said chief executive Mike O'Connor.
"We welcome the explicit statement from Ofgem that the energy market is fundamentally failing consumers and that comprehensive and determined action is necessary to set it on the straight and narrow."
The "big six" energy firms are British Gas, E.On Energy, EDF Energy, Npower, Scottish and Southern Energy and Scottish Power.