Firms are being offered incentives to switch to low-carbon generation
Nearly £4 should be added to a UK household electricity bill in each of the next five years as the network is upgraded, the regulator has said.
Ofgem said that electricity networks' investment plans were being limited to protect consumers from "unnecessary" price rises.
The regulator was setting out price control proposals for the UK's 14 distribution networks.
It said vital upgrades were needed to the system built in the 1950s and 60s.
The companies are responsible for distribution of electricity from the national grid to homes and businesses, and Ofgem can regulate the revenues that they collect.
Ofgem has proposed a £6.5bn investment programme for 2010-2015 to renew the regional networks. This is up from £5.2bn in 2005-2010, but the regulator said it was 17% less than the companies had forecast they needed to spend.
"We have accepted the companies' investment plans but told them to deliver them at much lower cost," said Ofgem chief executive Alistair Buchanan.
"We are demonstrating that our eye is on ensuring customers' needs are met without losing sight of the importance of value for money in difficult times."
Electricity customers pay a total of about £3.6bn a year for electricity distribution. This accounts for about a sixth of a domestic bill, with a household typically paying about £67 a year.
Ofgem said the proposed average annual increase in the distribution element was likely to be about 5.3%, or £3.76 a year for the next five years. This will vary considerably across the country.
The regulator said that when increasing prices, electricity networks would be expected to also raise the quality of how they dealt with customers.
Domestic bills have fluctuated in the last year
"We are looking in particular for better service in new connections where the companies will face penalties should they fail to meet new standards," said Mr Buchanan.
In July, EDF Energy Networks was fined £2m for failing to meet the required timescale of 90 days for ensuring customers, such as owners of newly-built homes, had their properties connected to the electricity network.
Other companies could be forced to pay compensation for poor service.
David Smith, chief executive of Energy Networks Association which represents the companies, said: "The review has to balance complex issues. It must provide the money companies need to replace, modernise and strengthen their networks to maintain the high levels of network reliability that customers enjoy and expect."
He said that the regulator's plans were published after a long process of negotiation between the companies and the regulator.
"It is of some concern that there remain a large number of outstanding issues. Until these are satisfactorily resolved, Ofgem will not be able to say that the process has reached a conclusion that delivers for customers, investors and the low carbon agenda," he said.
Ofgem said it was creating a £500m fund to trial new technology aimed at protecting the environment.
Companies will be given incentives to connect to low-carbon generation over the next five years and to cut the loss of electricity on the network.