HOUSEHOLDS will lose out on an estimated £1.9 billion in savings on their energy bills by 2020 unless there is tougher market regulation, a think-tank has claimed in a new study.

The Institute for Public Policy Research (IPPR) estimated the cost unless tougher rules are set by regulator Ofgem to improve competition and pricing.

It analysed the disparity between market prices and billing costs and found the "Big Six" energy companies – ScottishPower, SSE, British Gas, E.on, EDF and npower – were "not working" in helping consumers make savings to their bills.

The IPPR's report, The True Cost of Energy, estimates the real costs to energy companies of supplying households with gas and electricity. It found annual efficiency savings of just 2.5% could deliver £1.9bn in savings for consumers in 2020.

The think-tank said Ofgem's evidence gave no indication the six energy companies have made efficiency savings and passed them on to consumers through lower bills, and it said they were continuing to overcharge customers to subsidise cheap offers.

It found poorer and older households to be particularly badly hit by overcharging.

IPPR associate director Will Straw said: "Our research adds to the growing body of evidence that competition is not working.

"We are calling on the Big Six and Ofgem to demonstrate whether efficiency savings are being achieved in the energy market and whether consumers are benefiting from lower bills as a result, as we would expect if competition was working.

"We need more competition among energy companies so that households get a fairer price. Ofgem's previous attempts to reform the market have not delivered the changes needed.

"Some of the Big Six are failing to offer consumers tariffs that properly reflect the true cost of energy. Some households are paying £330 more than their neighbours while millions are being overcharged."

The IPPR investigated the costs to energy companies of supplying electricity and gas for 2011/12. It modelled a number of scenarios to see how different levels of competition in the supply market could affect energy bills in 2020.

With annual efficiency savings of 2.5% and profit margins at 4%, suppliers could knock £70 from the average annual bill –creating a saving of around £1.9bn across all consumers.

The IPPR said more than five million people could be overcharged because tariffs are not cost reflective as required by Ofgem, and so-called loss-leading tariffs from the Big Six also prevent competition as smaller suppliers cannot compete.

Graeme Brown, director of Shelter Scotland, said: "Households across Scotland are struggling with everyday living costs, and high fuel bills play a big part in that struggle. Anything that can be done to force utility companies to pass on savings to hard-pressed customers would be welcome news."

The IPPR said Ofgem had proposed new reforms but must go further. The think-tank recommended that Ofgem address the problem of overcharging and loss leading by enforcing its own policy that companies must offer tariffs that are reflective of their costs. It also recommends reconsidering its proposals for tariff reform.