20,000 customers are said to have been hit

The penalty comes after a 10-month investigation by energy regulator Ofgem which consumer watchdog Energywatch has said was the biggest such fine.

Powergen was found to have prevented direct debit customers with arrears from switching energy supplier.

Ofgem said Powergen had now revised its customer switching procedures.

Unfair obstacles

Direct debit and pre-payment customers were not allowed to switch to another supplier while their account was in arrears.

The penalty imposed by Ofgem demonstrates the seriousness of its offence and gives a strong message to other supply companies Allan Asher, Energywatch

Powergen told customers that they must clear their arrears or else they would not be allowed to switch.

However, under Ofgem rules Powergen should have allowed consumers to switch providers and then clear their account arrears.

"These customers entered into agreements under which they were making regular payments for their energy supplies. They were then unfairly stopped from switching to a new supplier," John Mogg, Ofgem chairman, said.

New procedures

Powergen, which has six million customers, said the mistake had been caused by an error in a part of its credit management operations.

"This was a genuine error. As soon as we became aware of the problem, we temporarily suspended all debt objections and have since overhauled our training and operational procedures, implementing more rigorous controls," said Nick Horler, managing director of Powergen Retail.

Powergen said it was unlikely that it would appeal against the ruling and that it had written to all customers involved.

The firm said that a small number of customers had been paid compensation, averaging around �20.

Consumer watchdog Energywatch said that the Ofgem fine was more than three times greater than any other levied for a similar offence.

"The penalty imposed by Ofgem demonstrates the seriousness of its offence and gives a strong message to other supply companies that this wilful blocking of consumer choice will not be tolerated," said Energywatch chief executive Allan Asher.