Big six energy suppliers could be broken up after Ofgem triggers full investigation

Protesters at a meeting of shareholders in Centrica, which owns British Gas. Photograph: Sean Smith for the Guardian

Britain has been warned that it faces an energy investment freeze and a heightened risk of blackouts after the industry watchdog called for the deepest ever investigation into the big six power suppliers.

Sam Laidlaw, chief executive of British Gas parent group Centrica, said the building of new power plants would be set back by the climate of uncertainty, increasing the threat of power shortages.

Centrica was backed by investors as one City firm argued that the UK now "tops the political risk table". A second City firm, Liberum Capital, argued: "It is likely in our view that the hiatus in power generation investment we have seen in recent years will continue and probably deepen."

But the warnings were dismissed by energy regulator Ofgem which said it wanted to "clear the air" after confirming evidence of soaring corporate profits and plunging consumer confidence.

The inquiry to be undertaken by the newly created Competition and Markets Authority (CMA) could lead to the break-up of the big six power companies such as British Gas and RWE npower by separating their supply arms, which sell power to households, and the generation units that own power stations.

The review could take up to two years to complete but Ofgem warned of much higher fines amounting to "tens of millions of pounds" against power companies if they break rules in the meantime.

The inquiry follows a mounting outcry from consumers groups and politicians about rising bills and soaring fuel poverty which now afflicts 4.5 million Britons. Ofgem said dual fuel prices, where a customer takes gas and electricity from the same supplier, had risen by 24% between 2009 and 2013. Nolan said an initial look at the market over recent months by Ofgem, the Office of Fair Trading and the CMA had not been driven by political pressure but by increasing evidence of market dysfunction.

Dermot Nolan, the newly installed chief executive of Ofgem, insisted the probe would "enhance confidence in the investment climate".

He added: "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," he said.

"I want to make sure that consumers are put at the heart of this market, so we will continue to take action to help consumers. This includes from today putting the industry on notice that any new serious breach of the rules which comes to light will be likely to attract a higher penalty from Ofgem."

Ofgem said it found that 43% of customers did not trust energy companies to be clear and honest about prices, and that suppliers' retail profits - from selling energy to households and businesses - had risen to £1.1bn in 2012 from £233m in 2009. Suppliers consistently set higher prices for existing consumers compared with those who have switched.

The suppliers – Centrica, SSE, RWE npower, E.ON, Scottish Power and EDF Energy – control 95% of the market for retail supply.

The regulator said its own review had found that consumer trust had fallen and there was no clear evidence that companies had tried to cut their costs while retail bills had more than quadrupled in three years.

Some suppliers such as E.ON and Scottish Power welcomed the probe but Centrica's Laidlaw said a long inquiry could damage investment when Britain's energy security was in question because of a lack of new power stations being built.

When questioned on the BBC Radio 4's Today programme about whether it would mean power outages, he said: "There is an increasing risk. A lot can be done in terms of demand management, but actually building a new gas power station does take four years. So that's the kind of time pressure we are up against, by adding another two years that makes it six years."

The Labour Party dismissed this argument as "special pleading" by British Gas while Davey said: "He [Laidlaw] is absolutely, totally wrong and I can prove it. We have 14 contracts for power generation [in the pipeline] over the next 15 years ... What we are seeing in Britain is a big investment in energy. It is true that companies like Centrica are not investing as much as we might like them to but we are seeing independent energy generation firms like Siemens coming in in their place."

But a research note released by Liberum Capital said the CMA probe would freeze additional expenditure by the large power companies and "dampen investment from those corporates not directly involved in the inquiry."

And fellow City firm Exane Paribas said last week that Britain had moved over the last year from having one of the lowest political risks to the highest "and now ranks above Spain for the first time."

British Gas and other members of the big six have repeatedly warned that the lights could go out – most vociferously when Ed Miliband told the party annual conference last autumn that an incoming Labour government would force companies to freeze prices, break up the big six and dismantle the regulator.

This stance was undermined on Wednesday when SSE, Britain's second-biggest provider, said it would not increase prices for its five million customers until 2016 and has already split off its wholesale arm, which includes energy production and storage, from the retail business, which sells to homes and businesses.

Ofgem said there were "continuing uncertainties" about whether having retail and wholesale businesses under one roof was in customers' best interests.

Richard Lloyd, executive director of the consumer group Which?, which had led the way in pushing for a full inquiry, said: "This investigation must work quickly to expose what is really happening in the energy market and confirm where competition is lacking. It is make-or-break time for the energy suppliers, who should not wait to be forced into action but instead start now to put customers first, keep costs as low as possible and trade transparently."

Ofgem's request to the CMA is subject to a two-month consultation period to let the industry and interested groups have their say. The City had long-anticipated an inquiry and shares in Centrica rose marginally yesterday, although SSE saw its shares decline 2%. Centrica also released its annual report yesterday, revealing that Laidlaw had handed the £851,000 bonus in his £2.2m pay packet to charity.