Ofgem is calling on the big six energy suppliers to explain what impact falling wholesale prices will have on customers' bills, following a "significant" drop in both gas and electricity costs in recent months.

In a letter to the suppliers, the energy regulator said their failure to engage with consumers on wholesale prices risked undermining public confidence. (Join our free Cheap Energy Club to see if you can switch and save.)

Ofgem says that last week, gas prices for next day delivery reached their lowest level since September 2010, and are now about 38% below this time last year.

Prices for electricity also reached their lowest level since April 2010, and are currently about 23% lower than this time last year.

It adds that forward prices for gas and electricity – where suppliers pay in advance for their fuel – have fallen, and are around 16% and 9% lower respectively for the coming winter than last year. With the mild temperatures across the UK and the rest of Europe last winter, gas storage is also at record levels.

The regulator says that while there are upward pressures on energy costs from Government environmental and modernisation schemes, the costs of wholesale power and gas "dwarfed" these and made up just under half the total household bill.

Ofgem is also proposing to refer the retail energy market to the Competition and Markets Authority after a joint report with it confirmed that competition is not working as well as it could be (see the Big six energy firms face competition probe MSE News story).

'Take action to reduce bills now'

Despite Ofgem's announcement there are ways to save on your gas and electricity bill now. Join our free Cheap Energy Club to see if you can switch and save.

Archna Luthra, MoneySavingExpert.com's energy analyst says: "It's about time Ofgem took the big six energy companies to task.

"With the drop in wholesale prices and a mild winter, households need to know why their bills haven't dropped at the same rate.

"The energy companies can't ignore this issue or fudge around the subject. A huge chunk of people's energy bills are determined by wholesale prices. If these are tumbling, suppliers should pass this cost back or justify why they aren't. They need to come clean quickly as most people have lost complete faith with them.

"Regardless, people should take action now to reduce bills, so they can reap the benefits this winter. Check if you're on the cheapest tariff for you and look at free insulation measures so your home stays toasty."

What does Ofgem say?

Ofgem chief executive Dermot Nolan says: "The big six suppliers tell us that they think the market is competitive, but our research shows that consumer trust is low.

"Therefore if suppliers are going to start rebuilding that relationship, they need to take the initiative and explain clearly what impact falling wholesale energy costs will have on their pricing policies.

"If any of the companies fail to do this, consumers can vote with their feet. Independent suppliers are currently offering some of the cheapest tariffs on the market."