Britain's Big Six energy suppliers will face a full-scale competition investigation after profits quadrupled to more than £1bn in three years.
Regulator Ofgem said soaring household bills and intensifying public distrust highlighted the need for the probe by the Competition and Markets Authority, which will determine whether the companies are making excess profits.
The firms face the threat of being broken and British Gas owner Centrica warned that the probe, expected to last up to two years, could create uncertainty and threaten the billions of pounds worth of investment needed to keep the lights on.
But Ofgem said the investigation would "clear the air" amid concerns that switching between suppliers had fallen and that those who never switched, many of them vulnerable customers, were being ripped off.
It also said it had found evidence of "possible tacit co-ordination" between companies on the timing and size of price announcements but stopped short of accusing them of explicitly colluding in an illegal cartel arrangement.
The investigation would be the first full-scale competition probe into the energy market, but Ofgem has launched a consultation on its proposals which it must complete before making a final decision on referring the sector to the CMA.
The regulator said it had already introduced a series of reforms which come fully into force from next month but had proposed a full CMA probe to reassure consumers and back up its attempts to achieve a "simpler, clearer and fairer energy market".
Ofgem said there were concerns over whether "vertical integration" – energy firms having both energy production and household supply divisions – was in consumers' interests, and the CMA has extensive powers to shake up the sector by removing "long-term structural barriers to competition" which could include separating these divisions.
An assessment carried out with the Office of Fair Trading and the CMA confirmed concerns about barriers preventing smaller suppliers entering the market, and the large market shares held by the Big Six – Centrica, SSE, E.ON, npower, RWE and EDF – which control 95per cent of the gas and electricity market in the UK.
It also found that retail profits – from supplying gas and electricity to homes and businesses – increased from £233m in 2009 to £1.1bn in 2012 and prices have risen by 24 per cent over the period, well ahead of the rate of inflation at 13.8 per cent.
In addition to the CMA referral, Ofgem said it was increasing the level of penalties for rule breaches.
Chief executive Dermot Nolan said: "Ofgem believes a referral offers the opportunity to once and for all clear the air and decide if there are any further barriers which are preventing competition from bearing down as hard as possible on prices.
"The CMA has powers, not available to Ofgem, to address any structural barriers that would undermine competition. Now consumers are protected by our simpler, clearer and fairer reforms, we think a market investigation is in their long-term interests.”
Centrica chief executive Sam Laidlaw said he welcomed the chance to clear the air but claimed competition in the market was already intense and he voiced fears that a lengthy probe could damage confidence at a time when more than £100bn of new investment is needed in new infrastructure.
Laidlaw said: "A prolonged period of uncertainty could damage investment at a time when Britain's energy security is being seriously challenged."
He told the BBC Radio 4 Today programme there was an "increasing risk" when asked if there was a threat of the lights going out.
And union GMB’s national secretary for energy Gary Smith said the probe will not stop bills rising, but will be "bad for jobs in the UK, bad for investment and it will do nothing for consumers apart from maybe delay the relentless rise in energy bills until after an election".
He added: "This is designed to kick the issue down the road until after the next election. The country is in the midst of an energy crisis. Energy bills are going to keep going up. Households will struggle to pay their bills and British industry is losing competitiveness.
"The market is being propped up by huge subsidies. Electricity wholesale prices across Europe are dropping. Desperately needed investment has been slashed. We have energy companies who are losing money. Our energy infrastructure has been fragmented and is dysfunctional, to the point we don't know who owns our electricity cables and gas pipes.”