By John-Paul Ford Rojas, Business Reporter
Two of Britain's "big six" energy suppliers are in advanced talks about a merger that would alter the landscape of the under-fire sector.
SSE and Innogy – the German owner of npower – said they had been in discussions about combining their gas and electricity supply businesses in the UK.
Any such move would be likely to face a competition probe and consumer Which? said authorities "must take a hard look before allowing any venture to go ahead".
If cleared, a deal would see the big six potentially turned into a big five, by consolidating the operations of two of the companies that currently dominate the sector.
SSE, which is currently Britain's second largest energy supplier, said: "The discussions between SSE and Innogy are continuing and are well advanced but no final decisions have been taken."
The announcement comes as energy companies face continuing political pressure over household bills and the threat of a price cap being imposed by the Government.
They have also come under pressure from smaller rivals who have been taking customers and market share.
:: Tie-up talks as firms face customer exodus
SSE, formerly known as Scottish and Southern Energy, serves 7.8 million households while npower has 4.8 million.
British Gas, owned by FTSE 100-listed Centrica – together with Spanish-owned Scottish Power, German-owned E.On and France's EDF – currently make up the rest of the Big Six.
Industry data suggests the new combined company would have a 23% share of the electricity market, just ahead of British Gas, but its 19% chunk of the gas market would be behind British Gas's 33%.
Shares in SSE climbed nearly 3% on the announcement while Centrica was down 0.6%.
SSE said the tie-up talks were part of its commitment to embrace change in its operations "adapting them to the political, economic, social and technological requirements of customers and society as a whole".
It said any deal would need to be approved by shareholders and regulators.
SSE said the proposed transaction, involving a demerger of its UK supply business from its production and distribution operations, would create a new stock market listed company.
Npower booked a loss of €109m last year and this summer reported a half-year loss of €12m, as owner Innogy warned that a "sword of Damocles" was hanging over the sector due to the threat of government intervention.
Separately on Tuesday, rival Scottish Power reported a 61% fall in third-quarter earnings from its retail supply business to £59m.
It blamed mild weather weighing on demand as well as the increasing cost of measures such as installing smart meters in customers' homes.
The company also stressed its opposition to the Government's price cap plan, arguing that it would be bad for consumers as well as energy companies big and small, and investor confidence.
Large energy suppliers argue that the threat they face from smaller rivals show that competition is already working.
Neil Wilson, market analyst at ETX Capital, said it was hard to see how regulators would clear an npower-SSE tie-up.
"Cutting the big six down to a big five would hardly help competition, which is exactly what the Government wants," he added.
Former npower boss Paul Massara also sounded a sceptical note, tweeting that "bigger doesn't make better".
Alex Neill, Which? managing director of home products and services, said: "Mergers of such big players in essential markets, such as energy, are rarely a good thing for consumers, especially given the low levels of competition."
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