Energy companies should make a profit margin of just 1.25pc on household bills, a fifth of the level made by the two biggest suppliers last year, the Competition and Markets Authority has said.

Roger Witcomb, who led the watchdog's two-year investigation into the sector, said it was "appropriate" for suppliers to make only £12.50 pre-tax profit on a £1,000 gas and electricity bill, since "they don't make the stuff".

Major energy companies have long argued that a profit margin of about 5pc is fair.

While actual profitability varies between suppliers and over time, British Gas and SSE, the two biggest, both made in excess of this level last year, with pre-tax margins of 7pc and 6.2pc respectively.

The CMA inquiry concluded last month that UK households had collectively been paying an average of £1.4bn year too much for their energy, rising to £2bn last year, due to a combination of inefficiency and "excess profits" by the Big Six suppliers on their standard tariffs.

In an interview with the Telegraph, Mr Witcomb for the first time set out a clear benchmark by which to judge profits, based on the CMA's conclusions of a fair return on capital.

"We are looking at an EBIT [earnings before interest and tax] margin in the retail market of around 1.25pc as appropriate,” he said. "Remember, all they are actually doing – and I shall get into trouble for this - is metering and billing. They are not making the stuff.”