Controversy over rising power prices took a fresh twist yesterday when Ofgem, the energy industry regulator, launched a formal investigation into Britain's energy supply market.

News of the inquiry came as Centrica, the owner of British Gas, reported record annual profits of £1.9 billion just a month after it had raised prices by 15 per cent, prompting accusations of profiteering by consumer groups such as Energywatch. Richard Lambert, the CBI Director-General, took the unprecedented step of issuing a public statement in defence of Centrica's profits.

Ofgem's decision to start an inquiry comes after rising concern from customers and more than 70 MPs who have signed an early day motion claiming that the liberalised UK market is not competitive enough and is unhealthily dominated by six suppliers.

British Gas and four of the other five suppliers have already raised their energy prices this year, blaming surging wholesale gas prices and the need to invest in new infrastructure and low-carbon power generation to meet tough new targets set by the EU. Ofgem said that it had “no strong evidence of failure of the market” but had decided to investigate because of growing customer concerns.

Malcolm Wicks, the Energy Minister, told The Times that he was in talks with Ofgem about fuel poverty and the way in which cheap internet-based tariffs could discriminate against vulnerable parts of the community.

Ofgem will also consider whether barriers to entry for suppliers trying to enter the market are too high. Ofgem's inquiry will be carried out under the Enterprise Act, which gives it power to demand detailed information from supplier companies. The European Commission has pledged to collaborate. Shortly before news of Ofgem's move emerged, Mr Lambert, waded into the debate over Centrica's profits. He said that it was not normally the CBI's job to comment on individual companies but, in response to consumer groups' anger, argued that “massive investment in power will be necessary over the next 25 years if the UK is to shift to a low-carbon economy and achieve its goals of energy security”. He added: “Companies need to make profits in order to invest.”

Mr Lambert said that volatile gas prices had led to a swing in Centrica's reported profits last year. “The first half of 2007 shows a £676 million shift from loss to profit in British Gas Residential's operating results,” he said. “In the second half ... as gas prices rose, profits fell to just £38 million.”

He argued that British Gas's operating profits of £571 million for the year needed to be put in the context of sales of £6.45 billion.

Sam Laidlaw, Centrica's chief executive, defended its profits by saying the group had pledged to invest £1 billion a year in new plants and renewable energy in coming years. Centrica also plans to build 1.5 gigawatts of wind generation, at a total cost of £3 billion.

He said Centrica's British Gas Residential business had been loss-making at the end of 2007, forcing the group to act to lift profits to guarantee investment in new sources of power, including nuclear and renewables.

Jeremy Nicholson, of the Energy Intensive Users Group, said there had been consolidation of energy suppliers and “the longer that process goes on, the more it will damage competition”.

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