Ofgem says the inquiry will go forward because of questions from consumer watchdog groups and outrage from customers.
"The decision to conduct the probe is in response to public concern about whether the market is working effectively," Ofgem chief executive Alistair Buchanan said.
"We are concerned about the increased volatility of wholesale prices and we want to investigate how European and other global energy market developments are affecting energy bills in Britain," he added.
Centrica, the parent company of British Gas reported an operating profit last year of £571 million compared with £95 million in 2006.
Despite the earnings in 2007, British Gas raised residential prices last month by 15%.
Ofgem’s investigation will determine whether prices in the market are competitive. The report, set to be completed by September, should also discover if wholesale energy prices are driving up retail prices as companies claim.
Chris Eagle, Commercial Manager for EnergyChoices.co.uk says the profit numbers from British Gas may lead to customers switching providers out of disgust.
“Ofgem should look into the price increases as a whole far more closely. The headline figures don’t look good but most of the profit is made in other areas. Because they made a profit last year British Gas could have absorbed the cost a bit more but instead chose to raise prices. This has really angered consumers.”
British Gas said in a press release that price rises were due to wholesale energy prices going up and if the company did not rise prices they would suffer a loss in 2008.
