When it was ushered in at the high watermark of Thatcherism, UK energy market deregulation promised a new era of competition to gas and electricity prices. Get rid of the state-run monopolies, the theory ran, and the marketplace would naturally bring down bills.

Two decades on, the vision of the free marketeers has hardly been realised. The seven-month inquiry into energy supply published yesterday by Ofgem, the market regulator, has coincided with a period of unprecedented price rises which have put a huge strain on household finances and led to a clamour for political action, with a windfall tax on energy companies and a cap on energy prices among the remedies being called for by unions and back benchers.

Last week, government figures showed that the number of households in fuel poverty in the UK had risen to 3.5 million in 2006, a million more than in 2005. The rise in gas and electricity prices this year has left average yearly power bills at more than £1200 - double the typical bill less than four years ago. In Scotland, about 650,000 people were estimated to be in fuel poverty last year.

So has the marketplace worked?

Ofgem's central finding is that, on the whole, the marketplace has been good for consumers - perhaps not surprising given the regulator's role in establishing it 10 years ago. The ability to switch suppliers - and research suggests that 75% of consumers have done so at least once - has helped to encourage competition and drive down prices; it is described as the "engine" of competitive energy supply markets by Ofgem.

On the most serious charge facing the UK's "big six" energy companies - that they have effectively run a cartel by hiking prices at the same time - Ofgem found decisively in their favour. While prices have risen in conjunction and the suppliers have reacted to each other's pricing regimes, this is a natural feature of a well-functioning marketplace, Ofgem concluded. And, as between 50% and 70% of energy bills are accounted for by wholesale costs, it is natural that they should go up in line with soaring global oil prices; there was no evidence that companies were delaying bringing down charges as oil prices fell.

Rather than scale back deregulation, Ofgem yesterday pushed for reforms to ensure that the transition from monopoly providers to a competitive marketplace was accelerated. It called for clearer billing information and a range of measures to help consumers make well-informed choices when switching, to ensure they get a good deal.

The energy companies were told to end "unfair" price differentials, with the threat of a referral to the Competition Commission if they do not act, while Ofgem said it would seek views on whether it needed greater powers to guard against potentially uncompetitive practices.

But the caveats in the 210-page report gave plenty of ammunition yesterday for those calling for more radical action.

Among those who have not benefited from energy competition as much as they might are customers using pre-payment meters and those who settle their bills with standard quarterly payments, who have been denied the competitive deals offered to people paying by direct debit.

Rural customers were found to have received a particularly harsh deal, because about 4.3 million people in the UK are not connected to the gas network and therefore cannot take advantage of "dual fuel" price discounts, where customers pay for electricity and gas together. This left them paying an average of £55 more and electricity companies were thought to have made an additional £240m last year from this discrepancy, Ofgem found. The problem is particularly acute in Wales and Scotland - about 30% of customers who are not on the gas grid live north of the border.

The Ofgem report also highlighted concerns about the 224,000 Scottish electricity customers - some 8% of the total - who have electric radiators that are switched on automatically by companies. As well as paying more for their electricity, these customers are often unable to switch supplier.

And, despite the benefits of switching supplier, Ofgem found that only a small proportion of customers, 17%, got the best deals by switching. Customers who changed companies after being approached by sales staff were less likely to get a good deal, and one-third of those switching ended up paying more rather than less with their new supplier. For gas customers, nearly half ended up with a worse deal after switching.

Moreover, there was evidence that companies took account of these trends when setting prices, pitching their most competitive offers at the few who were prepared to research and switch their supplier and leaving the bulk of consumers to pay higher tariff. More than 70% of the UK's households are still with their former monopoly gas supplier, Ofgem found.

Customers who displayed the greatest "brand loyalty" by staying with the five former incumbent electricity suppliers got the worst deals. On average, companies charged, until recently, 10% more to customers in their former electricity board area than to "out-of-area" customers, a discrepancy for which Ofgem said it could find no justification and which added up to £240m profit last year. Recent price changes have reduced the figure to 6%, Ofgem noted.

Among those less likely to switch supplier are older people who, as well as being at far greater risk of being in fuel poverty, are generally less "active" as consumers and less likely to have access to the internet and price comparison websites. Low-income households also struggled to find the best deals as they were less likely to have internet access and current accounts at a bank from which to pay a direct debit.

And while it was enthusiastic about competition, Ofgem raised concerns that there is no "competitive fringe" offering an alternative to the big six energy companies that make up 99.7% of the British supply market.

Paul Kenny, general secretary of the GMB union, was among those calling for greater regulation of the market yesterday, arguing that neither Ofgem nor the government had the power to curtail unfair pricing by energy companies. "We need to get back to the position where the regulator can cap prices and stop them ripping off consumers," he said.

However, Ann Robinson, director of consumer policy at price comparison company USwitch, expressed optimism about the potential for the marketplace to help bring down prices.

"The measures Ofgem has recommended - greater clarity from energy companies and more information for consumers to help them make the best choices - are what we have been calling for over a considerable time," she said.