Energy giant ScottishPower is to pay £8.5 million to customers after an investigation by regulator Ofgem found that the group provided misleading information through its doorstep and telesales agents.
The watchdog said that, between October 2009 and January 2012, ScottishPower provided customers with inaccurate estimations of annual charges and comparisons with their current supplier if they switched to the firm and failed to adequately monitor its sales staff.
ScottishPower has set up a £1 million compensation fund for those affected, while the remaining £7.5 million will be paid to more than 140,000 vulnerable customers, who will automatically receive payments of around £50 each by December.
ScottishPower will write to 336,000 households that may have been mis-sold.
Customers who believe they were affected can also contact the group on 0845 030 3048 or online at www.scottishpower.co.uk/salescompensation.
Ofgem said that, despite the sales practice failures, it found no evidence that ScottishPower deliberately set out to mis-sell to customers.
ScottishPower apologised "unreservedly" to those affected and said it had taken steps to address its failures.
The group stopped doorstep selling in June 2011 and has overhauled training and monitoring procedures for all telesales staff.
Neil Clitheroe, ScottishPower's chief executive of energy retail and generation, said: "We accept Ofgem's findings and we apologise unreservedly to those customers affected.
"This arose as a result of new regulations which were introduced in 2009. I am sorry to say that we didn't implement these properly at that time."
The probe into ScottishPower comes as part of a wider market inquiry into mis-selling across the energy industry, which has already seen three investigations concluded.
SSE was fined £10.5 million in April for "prolonged and extensive'' sales practice failures.
Ofgem is still conducting two ongoing mis-selling investigations into npower, which was launched in 2010, and into E.ON, which was launched last year.
ScottishPower said that, of the households affected by mis-selling, around 50,000 potentially lost out financially and could be due compensation.
It estimates compensation payments will vary from between £5 and £30 for each gas and electricity service provided to households.
Ofgem said it decided not to levy a fine against ScottishPower as the £8.5 million customer payment package agreed by the firm would be "of greater benefit to energy customers than if a substantial penalty was imposed".
It added that breaches of its rules on energy firm sales activities were vital to protect consumers.
Ofgem warned: "Consumers can suffer financial detriment if they do not benefit from savings that they are led to expect - they may switch to a more expensive deal and competition suffers as consumers lose faith with the market and the value of switching energy supplier."
Sarah Harrison, Ofgem's senior partner in charge of enforcement, said: "Ofgem welcomes ScottishPower's recognition of its failure to comply with the energy sales rules which are there to protect the consumer.
"This is an important step forward and demonstrates a commitment by ScottishPower towards re-establishing consumer trust."
Ofgem fined EDF Energy £4.5 million in March last year for misleading sales claims as part of the industry probe.
"ScottishPower is the third energy company to have been caught out misleading the public and two more are still under investigation.
"Yet again Ofgem's response has been weak and David Cameron refuses to stand up to the energy giants. These companies need to know that if they mistreat their customers there will be a heavy price to pay.
"But Ofgem has serious questions to answer about why it allowed this problem to go on for so long and it is not insisting that every customer is compensated for every pound they have lost."
Energy Secretary Ed Davey said: "This is a clear, strong signal that energy companies shouldn't expect to get away with bad practice.
"We're giving Ofgem powers that force energy companies to make direct payments to consumers hurt by these kinds of activities, and backing up Ofgem's reforms so that consumers get a simpler, fairer deal."
Consumer Futures added it was "unfortunate" that mis-selling in the industry has taken so long to resolve.
Audrey Gallacher, director of energy at Consumer Futures, said: " Doorstep sales were halted by virtually all of the big six energy suppliers in 2011, and the intervening years should have been used to focus on introducing fair and transparent consumer friendly sales processes.
"Ofgem and energy suppliers need to move much faster in bringing these issues to a close - long, drawn out, investigations don't help anybody."
Energy firms have already come under fire this month after three of the "big six" providers announced price hikes, with RWE npower yesterday revealing plans to raise its electricity and gas charges by an average of 10.4%.
ScottishPower has yet to increase its prices, but boss Mr Clitheroe told BBC Radio 4's Today programme the group was likely to increase its tariffs at some point this year.
Customers can contact the provider about mis-selling compensation on freephone number 0800 074 0362.
At a regular Westminster briefing, the Prime Minister's official spokesman said: "I think what you have seen from Ofgem is a very strong signal that energy companies will not get away with the kind of bad practice that we saw in this case that Ofgem was looking at."
Asked if the PM was happy with the level of the fine, he replied: "Those must be, of course, decisions for the regulator but I think it does send a strong signal in response to bad practice that was being looked at here."
Pressed on the mixed messages coming out of government on what consumers should do to keep energy bills down, he said : "As I have said, and the Prime Minister has said, I think it is very understandable that customers and consumers will want to look at switching to see whether they can get a better deal.
"I would expect customers to always be seeking whether they can get a better deal."