Energy supplier Utilita will be banned from taking on new customers unless it stops only installing inferior, cheaper first-generation smart meters, the regulator has warned.

Ofgem said the company keeps installing the SMETS1 meters “at volume” despite new rules introduced 17 months ago obligating suppliers to offer the newer second-generation SMETS2 ones.

Older meters are known to stop working properly when customers switch suppliers and Ofgem warned Utilita the failure to supply SMETS2s could undermine the nationwide rollout.

Utilita must now install 15,000 second-generation meters – which will work if a household or business switches to a new supplier – by July 31 next year or a ban will be imposed.

Ofgem is now considering whether a final order compelling the supplier will be required and fines issued for the failures.

Charles Hargreaves, Ofgem’s deputy director of conduct and enforcement, said: “Smart meters are vital for upgrading Great Britain’s energy infrastructure, enabling customers to be better informed and engaged in managing their energy consumption by providing them with real-time information on their energy use.

“Smart meters also help enable the transition to a more flexible energy market and the move to a low-carbon economy.

“Ensuring all energy suppliers take all reasonable steps to install SMETS2 meters for new and replacement meters is critical to the success of the smart meter rollout as it enables smart meters to operate reliably for all consumers regardless of their energy supplier.”

Ofgem also warned that with Utilita continuing to only offer SMETS1 meters, it means more will have to be rolled into the Data Communications Company (DCC) network.

The DCC is responsible for the national infrastructure that enables communications between smart meters, energy suppliers and network companies.

It has regularly missed deadlines and faced heavy scrutiny from MPs over the slow progress of the rollout programme.

But Utilita hit back at Ofgem, saying it was “shocked and disappointed” at the tone of the announcement.

A spokesperson said: “To say we have been ‘failing to act on smart meters’ is grossly unfair… Since 2005, we have installed effective smart meters in 90% of our customers’ homes, giving many vulnerable and low-income households the best energy service they have ever experienced.”

She added: “It has been suggested SMETS2 meters are more advanced than SMETS1 meters – this is simply not true. For PAYG (pay-as-you-go) customers, SMETS1 meters are proven, secure, robust and reliable and provide excellent functionality that has enabled our customers to control their energy and use approximately 20% less than the average household, and to stay on supply during times of financial struggles.

“Serving PAYG energy households effectively is our main objective, and SMETS2 meters do not enable us to do this in the same way that SMETS1 meters do.”

The move against Utilita comes less than a month after the supplier agreed to pay £500,000 in compensation for overcharging 40,000 pre-payment customers.

The payout related to overcharging between May and September 2019 and saw the company apologise for the error.