The energy regulator’s plan to cap household tariffs threatens to strangle the retail market by slashing profit margins and limiting competition to within a range of just £29 a year on an average bill, say critics.

The regulator laid out its plans to extend the so-called “safeguard tariff” from four million homes which use pre-pay meters to include another one million vulnerable customers who qualify for government help with their bills.

But its calculations have reignited criticism of the plan which Government hopes to roll across all standard tariffs by the end of the year.

Under the plans, Ofgem will allow the safeguard tariff to cover supply costs but allow an average profit margin of just 1.25pc, less than a third of the regulator’s latest annual estimates, which averaged 4.5pc in 2016.

To ensure that suppliers can remain competitive Ofgem will also add “headroom” of £29 a year which it expects suppliers to use to offer tariffs below the cap.

The Government hopes to roll out the safeguard tariff across 11m more households which use standard tariffs before the end of the year. Critics of the plan claim that policymakers’ most severe intervention in the energy market since privatisation will stifle competition, drive away investors, and offer very little benefit for consumers in the long run.