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Electricity suppliers have been threatened with a Competition Commission investigation unless they ease demands for substantial deposits from both big and small customers as part of tougher contracts.

Alistair Buchanan, chief executive of Ofgem, the electricity and gas regulator, has warned British Gas, EDF, npower, SSE and other major suppliers that he is ready to mount an investigation into their business practices if they fail to honour a new voluntary agreement aimed at avoiding a contract crisis.

His intervention follows complaints that the energy market is in turmoil and thousands of companies are facing uncertainties about supplies because they are being asked to make deposits equivalent in some cases to paying for six and, in one case, 12 months of consumption in advance. Guarantees from parent companies about meeting payments for subsidiaries and letters of credit are also among the list of preconditions being tabled by suppliers.

Small and medium-sized businesses say they are being squeezed by suppliers demanding advance payments and credit insurance companies refusing to provide cover for non-payment of bills because of doubts about their credit status.

An estimated 30pc of SMEs (small and medium-sized enterprises) have failed to meet the basic criteria that would give them a credit rating, according to Make it Cheaper, the business energy price comparison service. Jonathan Elliott, managing director, said: "It means they could be faced with making a big down payment to get a new supply contract."

Electricity companies blame the recession, a rising bill for bad debts and their own exposure to credit risks through forward purchases for the more selective approach to signing up customers, at a time when reduced demand has taken some of the heat out of the market. "The issues facing businesses is less about price but whether they are going to be offered a price," says Mr Elliott.

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