LONDON (Reuters) - Britain's competition watchdog said the planned merger of SSE's (L:SSE) retail power and gas business in the UK with Npower, owned by German rival Innogy (DE:IGY), could lead to higher prices for customers and warrants further scrutiny.
The watchdog said the merger would be referred for a longer Phase 2 investigation unless the parties offer acceptable undertakings to address the competition concerns.
"We know that competition in the energy market does not work as well as it might," said Rachel Merelie, senior director at the Competition and Markets Authority (CMA).
"However, competition between energy companies gives them a reason to keep prices down.
"We have found that the proposed merger between SSE Retail and Npower could reduce this competition, and so lead to higher prices for some customers. We therefore believe that this merger warrants further in-depth scrutiny."
SSE said on Thursday it remained confident the proposed merger will benefit customers and the energy market as a whole, and that it will be able to demonstrate this to the CMA.
The utility will take its time to assess CMA's response.
Combined, SSE and Npower have around 11.5 million customers, making the new company second only to Centrica's (L:CNA) British Gas, which has more than 14 million customer accounts.
A tie-up would come at a time when Britain's established energy companies are losing market share to smaller challengers and face the prospect of a government-imposed cap on prices.
Britain’s energy market is dominated by the so-called “big six” of British Gas, SSE, Iberdrola's (MC:IBE) Scottish Power, npower, E.ON (EON.UL) and EDF Energy (PA:EDF), which account for about 85 percent of the retail electricity market.
But they have all been losing customers to smaller rivals 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).