Ofgem's investigation into the Big Six energy firms should help "rebuild consumer trust and confidence" in the energy market, the watchdog said.
Ofgem says soaring household bills and intensifying public distrust highlighted the need for an investigation, which will determine whether the companies were making excess profits, after they quadrupled to more than £1 billion in three years.
The Competition and Markets Authority (CMA) probe comes after latest figures show that household electricity by prices in the first three months of 2014 were almost 6% higher than last year.
The investigation, expected to take around 18 months, will look at the relationship between the supply businesses and generation arms of the Big Six energy firms.
Ofgem's investigation into the Big Six energy companies comes after customer complaints relating to energy firms reached the highest number in a single quarter since records began.
The energy suppliers received a total of 1.7 million complaints, with Npower receiving the highest number of 83 complaints for every 1,000 customers.
SSE, British Gas and E.On all received around 30 complaints, with SSE's figures doubling from 13 to 27 on the same time last year, while Scottish Power received the fewest at 13.
"Yet again millions of customers are being let down by poor service from the Big Six energy companies. This has to change," Which? executive director Richard Lloyd said.
Consumer rights group Which? has welcomed the investigation announced by Ofgem into the UK's energy market.
"a watershed moment for the broken energy market and millions of people struggling to cope with spiralling bills" says Which?.
The investigation must leave no stone unturned in establishing the truth behind energy prices - says Which? @whichcampaigns
Ofgem is referring the energy market to the Competition and Markets Authority for a full investigation, it announced today.
The energy regulator Ofgem has written an open letter to the Big Six energy companies asking them to explain to customers why their bills have not fallen despite a drop in wholesale energy prices.
But the firms are saying it is more complicated than it would seem because much more than wholesale pricing goes into making up the cost of our bills.
The government said the companies would do well to listen to the letter or face action - the toughest of which would be a full competition inquiry.
The energy regulator Ofgem has called on the Big Six to explain to customers why - with wholesale prices falling - they have not cut bills.
The energy firms are saying that it is much more complicated than the regulator is making out.
Ofgem quotes the wholesale price, but much more than just that goes into making up the cost of our bills. The prices Ofgem is quoting, the firms say, are overnight prices.
But many of these energy companies are buying up to three years into the future where the price falls have been much more modest.
When it comes to passing on savings the companies say 'we're doing that' adding that they have to make money, and that their profits are 'pretty modest'.
The issue here is about how politicians, the general public, and now the regulator seem to have lost trust in energy companies.
A full competition inquiry now looks inevitable.
British Gas as responded to comments about wholesale energy saying that "when our costs fall, our prices do too".
The wholesale cost of energy is now less than half the bill which partly explains why the wholesale price can fall, but overall prices don’t.
Most suppliers buy their energy in advance, up to three years in some cases, to ensure security of supply and smooth out price volatility.
When our costs fall, our prices do too.
In December, the government’s restructure of the energy efficiency scheme ECO, resulted in British Gas being the first supplier to introduce a £42 price cut for all our customers, including those on fixed deals - the only supplier to do so.
The Big Six energy companies need to rebuild consumer trust by explaining their pricing policies to customers, the energy regulator Ofgem has said.
Dermot Nolan, the regulator's chief executive officer said: "Given the need to re-build consumer trust in the market it is important that suppliers explain to their customers these changes in the wholesale market and what impact they will have on their pricing policies."
Energy regulator Ofgem has proposed that the Big Six energy firms should be investigated by the Competition and Markets Authority.
In an open letter to Britain's main energy suppliers, the regulator's chief executive officer Dermot Nolan said they were concerned that companies were "not passing on savings to customers".
He said: "A concern that savings were not being passed on to customers was one of the reasons why we have proposed a referral of the energy market to the Competition and Markets Authority for investigation."
Energy companies should justify their prices to customers, a government spokesman has said.
Energy suppliers are responsible for their prices and must justify those prices to their customers.
The best way to keep prices down is to introduce more competition, and our reforms have led to the number of suppliers trebling since 2010.
We also support Ofgem's proposal for a full investigation into competition in the energy market."