By Christoph Steitz and Noor Zainab Hussain
FRANKFURT/BENGALURU (Reuters) - SSE (L:SSE) and Innogy (DE:IGY) scrapped plans for a British energy retail joint venture on Monday, saying they could not agree on new commercial terms after Britain's regulator proposed a cap on energy bills.
The collapse of the plan clears the way for German utility E.ON (DE:EONGn) to consolidate Innogy's loss-making British Npower division it will receive as part of a bigger breakup deal with Innogy's parent RWE (DE:RWEG).
SSE and Innogy had warned last month that the deal, which would have created Britain's second biggest retail power provider behind Centrica's (L:CNA) British Gas, would be delayed after the government increased scrutiny of Britain's big power suppliers.
The deal was not in the best interests of its customers, employees and shareholders, SSE said.
SSE said it would consider other options for its retail unit, SSE Energy Services, including a standalone demerger and listing, an outright sale or an alternative transaction.
"Adverse developments in the UK retail market and regulatory interventions such as the price cap have had a significant impact on the outlook for the planned retail company," Innogy board member Martin Herrmann said.
Innogy cut its outlook for the current year as it will have to consolidate Npower again, adding this would negatively impact next year's adjusted earnings before interest and tax by about 250 million euros (225 million pounds).
SSE: Potential value-destructive retail merger with Innogy: https://tmsnrt.rs/2Gz4a0z
DEALS WITHIN DEALS
E.ON said the collapse of the SSE-Innogy venture had no fundamental impact on a bigger breakup deal, which will result in it taking over all of Innogy's networks and retail activities, and would not delay it.
E.ON and fellow German utility RWE agreed in March to break up Innogy and share out its assets.
E.ON, SSE and Npower are three of the "big six" energy suppliers who dominate the UK power market.
SSE said prospects for the deal had been hurt by a number of factors, including the performance of the two businesses, clarity on the final level of Britain's default tariff cap and changing energy market conditions.
Shares in E.ON, Innogy and SSE were all down 1.4 to 2.2 percent at 0900 GMT.
SSE's latest talks with Innogy covered the potential impact of regulatory caps on tariffs, the new company's requirement to post collateral against its credit exposure and its ability to obtain and retain an appropriate credit rating.
"These implications meant the new company would have faced very challenging market conditions, particularly during the period when it would have incurred the bulk of the integration costs," SSE said.