Ofgem has ruled that electricity companies must spend £6.5 billion on upgrading the network into a low-carbon Smart Grid. The move will add £4 to household monthly bills over five years.

The energy regulator told the companies that they must deliver service improvements for 17% less than the amount that they had asked to spend. Britain's 14 electricity networks — owned by companies such as E.on, Iberdrola, Scottish & Southern Energy and Warren Buffett's MidAmerican Energy Holdings — will need to cut operating costs by about 10%.

Ofgem said that this will prevent “unnecessary price rises in today's difficult economic environment.” Currently, about £67 per year in household bills is already spent on upkeep of the network.

Part of the price rises will relate to building Smart Grids, enabling consumers to sell electricity generated by solar panels or wind turbines to the national network. The rest of the money will be spent on ensuring that the companies are investing in a low-carbon future. Britain's electricity network was largely built in the 1950s and is now in need of upgrades.

Alistair Buchanan, Ofgem's chief executive, said: “Our electricity network proposals are tough but fair and will deliver for energy consumers today and in the future. We have accepted the companies' investment plans but told them to deliver them at much lower cost.”

Ofgem's proposals come as the Energy Retail Association (ERA) — which represents the major gas and electricity suppliers — called on the government to turn its commitment to smart meters into “firm policy decisions and clear action.”

The ERA's research revealed that almost two-thirds of people had not heard of the devices that measure energy use in the home, despite the government's recent announcement that the meters would be in every home by the end of the next decade.