SSE said it has held talks with Innogy to create “a new independent energy supply company” – a move that would transform Britain’s Big Six providers into a Big Five.
The move comes amid heightened government intervention in the energy retail sector, with Prime Minister Theresa May determined to introduce price caps.
SSE shares jumped nearly three per cent yesterday as investors mulled the possibility of the creation of the UK’s largest energy supplier.
However, analysts warned such a tie-up would be the subject of intense scrutiny from competition authorities.
SSE said negotiations are continuing and "well advanced" but no final agreement has been made and no binding deal agreed. Investors will today be keeping an eye out for further details contained within the FTSE 100 firm’s half-year results.
In a separate statement Innogy, which was spun off from German energy behemoth RWE in 2016, said the pair were in “advanced exclusive discussions”. The combined business would be listed in London with SSE de-merging its shares into the newly created UK group.
Hargreaves Lansdown equity analyst George Salmon said the deal was a possible “win-win” enabling the duo to cut costs and better deal with political pressure on the energy sector.
He said: “Calls for reform have centred on the use of standard variable tariffs and SSE has the highest percentage of customers on such contracts, while in 2015 Npower owner Innogy was on the receiving end of a £26m Ofgem fine.”
The combined entity would have a market share of 24 per cent, meaning it would be larger than British Gas, according to ETX senior market analyst Neil Wilson.
Salmon and Wilson warned the size of the tie-up would need to jump over regulatory hurdles.
Wilson said: “At first glance it’s hard to see how the regulator would let this one through. Cutting the Big Six down to a Big Five would hardly help competition, which is exactly what the government wants.”
The deal would first attract the attention of European authorities. However, if waved through by Brussels, Britain’s Competition and Markets Authority (CMA) could launch its own investigation.
Whitehall sources said a CMA investigation was not something that could be “ruled out”, but the key consideration would be whether it would be European or UK authorities that would conduct a probe into the merger.
Sam Bowman of the Adam Smith Institute said the government’s proposals are counterproductive: “Energy price controls will lead to more and more consolidation of the energy market – if you think the big six are uncompetitive, every step the government is taking removes the scope for differentiation in the market.”
And Mark Littlewood from the Institute of Economic Affairs, another market-liberal Westminster think tank, added: "Endless regulation, price-fixing and policy pronouncements may give the illusion of assisting the consumer, but are removing better options from the table. We need to get back to making energy provision a matter of cut throat competition among providers, not a semi-nationalised political football."
However, one consumer group said a merger between SSE and Npower could benefit customers.
“SSE currently have lower prices than Npower as well as better service levels. Therefore, if Npower customers end up getting SSE prices and quality of service they will be the winners,” said Energyhelpline co-founder Mark Todd.