Regulators have recommended a full-scale inquiry into the industry amid fears over profits and concerns about the dominance of the Big Six, with figures showing their market share has hardly changed in the past few years.
The UK's six biggest energy suppliers now face the possibility they could be broken up as a result of the investigation, which is expected to take at least two years.
Ofgem said an inquiry was necessary amid a backdrop of rising household bills and increasing public distrust.
It will look at whether firms are making too much money - after profits quadrupled to more than £1 billion in three years.
However, Scottish Gas owner Centrica warned the probe could create uncertainty and threaten the billions of pounds of investment needed to keep the lights on.
Centrica chief executive Sam Laidlaw said that there would be an increasing risk of blackouts.
He added: "A prolonged period of uncertainty could damage investment at a time when Britain's energy security is being seriously challenged."
He added that competition in the market was already fierce.
Liberal Democrat Business Secretary Vince Cable denounced the warning as "overdramatic".
LibDem Energy Secretary Ed Davey said: "This is not a quick fix but it is the right way to restore people's trust that the energy markets are working for their benefit."
He insisted that the move would not increase the risk of blackouts. He said: "The lights are going to stay on ... we're seeing record levels of investment in energy."
Labour called for all energy prices to be frozen between now and 2016 while regulators carry out the investigation.
The party's Shadow Energy Secretary Caroline Flint said firms should be forced to follow the lead set by SSE this week and cap costs.
Ms Flint said the announcement showed the market was broken.
She said: "If I was standing where the Secretary of State is stood I would be taking action to impose a price freeze for all consumers. Instead of defending the Big Six and asking for their cooperation, why doesn't he just enforce a price freeze right now?"
Labour has previously said it would introduce an almost two-year price freeze if it returns to power in 2015.
Ofgem also said it was increasing the level of penalties for breaches in its rules. Its boss Dermot Nolan said a probe was the "right thing" to address concerns.
He added: "We have found competition is not working as well for consumers as it should be."
Scottish Energy Minister Fergus Ewing welcomed the probe but said it must look at the implication on bills of the plans for a nuclear power station at Hinkley Point.
Tom Greatrex, Scottish Labour's shadow energy minister, accused the SNP of standing "shoulder to shoulder with David Cameron in saying that you can't freeze prices".