The Competition and Markets Authority (CMA) said its year-long inquiry into the energy sector found tariffs offered by the big six energy suppliers were around five per cent higher than they should be between 2009 and 2013.
It outlined plans to encourage customers to switch, but stopped short of recommending a break-up of the energy giants, saying competition in wholesale markets was working well.
The CMA said it uncovered “widespread consumer disengagement”, with around 70 per cent of customers on default standard variable rate tariffs despite better deals available.
More than 34 per cent of 7,000 people polled for an extensive survey have never considered switching, according to the CMA.
It found dual fuel customers could save an average of £160 a year by switching to a cheaper tariff but often failed to do so because of a lack of awareness of which deals are available, “confusing and inaccurate” bills and worries over the difficulty of changing supplier.
The CMA said it plans to scrap recently introduced rules restricting suppliers to offering just four tariffs, saying they have in fact ended up reducing competition.
Instead, in its provisional findings, the CMA said it would look at measures to prompt customers to shop around, such as by using smart meters.
It will also look at introducing a price cap on the most expensive tariffs until competition is working as it should be in the market.
Roger Witcomb, chairman of the energy market investigation, said: “There are millions of customers paying too much for their energy bills - but they don’t have to.
“Whilst competition is delivering benefits to increasing numbers of customers, mainly through the growth of smaller suppliers with cheaper fixed-price deals, the majority of us are still on more expensive default tariffs.”
He added: “The confusing way energy is measured and billed can make comparing deals understandably daunting.
“The result is that some energy suppliers know they don’t have to work hard to keep these customers.”
Its proposed “safeguard” price cap would provide “direct protection” to so-called sticky customers who fail to switch, some of whom are on low incomes or vulnerable, according to the CMA.
But it said there could be risks associated with introducing price controls in the energy market.
In its report, it said: “We will need to be sufficiently confident that such a remedy would not unnecessarily cut across the beneficial effects that competition has the potential to bring to customers.”
The report has not recommended that the so-called big six - British Gas, SSE, EDF Energy, RWE npower, E.ON and Scottish Power - should be dismantled to separate power generation and supply.
There were fears that the firms were colluding to increase profits by using their so-called vertical integration benefits - where they own both power generation and supply businesses.
But the CMA said: “Competition in the wholesale gas and electricity generation markets works well, and the presence of vertically integrated firms does not have a detrimental impact on competition.”
It added there was no strong case for returning to the old “pool” system for the wholesale electricity market.
British Gas parent Centrica said it had some “questions and concerns” over some of the CMA’s proposals.
Iain Conn, chief executive of Centrica, said: “This looks to be a comprehensive and thorough assessment.
“We welcome the possibility that this review will have a constructive and positive influence on competition in the energy market.
“While we have questions and concerns about some of the proposals we look forward to engaging with the CMA in the next phase of this process.”