By Nina Chestney
LONDON (Reuters) - British utility SSE (L:SSE) and German rival Innogy (DE:IGY) are in talks about merging their UK retail energy businesses, the companies said on Tuesday.
SSE said the talks were about merging its household energy supply and services business with Innogy's UK supply business Npower.
SSE is Britain's second largest energy supplier with around 8 million energy customer accounts, while Npower has 4.7 million clients.
The discussions are "well-advanced", but no binding agreements have been entered into, the two companies said, declining to comment on the reasons for the talks. Innogy said the combined business would be listed.
SSE and Innogy shares were up 2.7 percent and 1.65 percent respectively after the news.
On Monday, Reuters reported that Innogy could sell Npower, or combine it with a local rival.
Britain's energy market is dominated by the so-called big six including Centrica's (L:CNA) British Gas, SSE (SSE), Iberdrola's (MC:IBE) Scottish Power, Innogy's Npower, E.ON (DE:EONGn) and EDF Energy (PA:EDF), which account for about 85 percent of the retail electricity market.
However, they have all been losing customers to smaller challengers over the past year or so, which has ramped up pressure on the firms which already face the introduction of a price cap on their most common tariffs, standard variable tariffs (SVTs)
Last month, the government asked the energy market regulator to come up with price caps on consumer gas and electricity prices for millions of households which will initially last until 2020.
When introduced, which is not likely until next winter at the earliest, it would be the biggest energy market intervention for 30 years.
Utilities have criticised the energy cap, with some saying it would dampen competition and others saying SVTs should be scrapped altogether.