The government is being urged to take direct action to help pensioners and the unemployed cope with rising energy bills amid concerns about the increase in fuel poverty in Britain.

The Institute for Public Policy Research argues that some 3.5 million people who use pre-pay meters are paying £160m a year more than they would do if they settled their bills using direct debit.

Instead, the IPPR would like to see the government bulk buy gas and electricity for pensioners and the unemployed and then deduct the cost from income support and pension payments.

Ian Kearns, IPPR deputy director, said: "At the moment, the cruel irony is that the poorest people pay the most for gas and electricity. That's not just unfair, it makes no sense for either the energy companies or the taxpayer." Since the beginning of the year Britain's energy utilities have raised prices sharply, in some cases more than 20% - pushing average dual fuel bills, the combination of gas and electricity, towards £1,000 a year. Companies have blamed the rise in the costs of wholesale energy for the price increases.

The increases have meant that the numbers of those facing fuel poverty - usually defined as those spending 10% of their incomes on energy - is rising, reversing the previous trend. The number of consumers facing fuel poverty had fallen from 4 million in 1996 to 1 million in 2003 but, according to some estimates, the figure is now more than three million.

The IPPR says if the government adopted its proposal it could save pensioners and the unemployed £60 a year. It says that a similar pilot scheme in Ohio in the US helped 60,000 low-income customers reduce their monthly gas bills by as much as 18%.

According to the thinktank, pensioners and benefit claimants use pre-pay meters and weekly savings stamps because they are worried about losing control over their household budget and being charged up to £39 for defaulting on direct debits to their energy companies. More than 1 million a year are disconnected or self disconnect. The IPPR believes its plan could reduce the amount of people going without supply because of a lack of cash, while reassuring consumers that they have their costs under control and that their bills are being paid.

"Gas and electricity companies don't want to have to use pre-pay meters or weekly saving stamps because they are expensive to maintain and administer. At the moment they pass the extra cost on to these consumers," Mr Kearns said.

"If the government bought the gas and electricity direct, it could pass on the savings to the poorest and protect them from being ripped off. And it could do it right away because the computerised mechanism already exists to deduct utility payments directly from income support and the pension credit."