November 7, 2017 / 3:27 PM / a year ago

UPDATE 2-SSE and Innogy in talks to merge UK retail energy supply businesses

* Would create a company to challenge market leader British Gas

* UK’s “big six” energy firms losing share, face price cap

* SSE shares rise more than 3 pct, Innogy up 1.6 pct (Adds analyst comment, more detail)

By Nina Chestney and Christoph Steitz

LONDON/FRANKFURT, Nov 7 (Reuters) - British utility SSE and German rival Innogy are in talks about merging their UK retail energy businesses to create a company that would challenge British Gas as the country’s largest power supplier.

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.

SSE said on Tuesday the talks were about merging its household energy supply and services business with Innogy’s UK supply business npower, sending SSE shares more than 3 percent higher and Innogy’s up 1.6 percent.

In the UK retail electricity market, SSE has a 14 percent market share and npower 9 percent. The combined 23 percent would just top Centrica-owned British Gas’s share of 22 percent, data from regulator Ofgem shows.

For the retail gas market, SSE has an 11 percent market share and npower 8 percent, with Centrica on 33 percent.

“SSE probably thinks it can harness the customer base for a bargain price since npower has been struggling for a while now. But the real question is whether regulators would let this one pass, and it’s hard to see it overcoming competition concerns,” said analysts at ETX Capital.

The two firms said discussions were “well-advanced”, but no binding agreements had been entered into, and declined to comment on the reasons for the talks.

Innogy said the combined business would be listed.

“A deal may face some tough questions from the regulator but they must think it’s achievable,” said Peter Atherton, an associate at consultancy Cornwall Insight.

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” of British Gas, SSE, Iberdrola’s Scottish Power, npower, E.ON and EDF Energy, 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).

“This puts the consolidation theme on everyone’s radar. The companies have to think about what to do in Britain and whether going it alone still makes sense. The answer is probably not,” an industry source said, speaking on condition of anonymity.

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 move, with some saying it would hit competition and others saying SVTs should be scrapped altogether. (Additional reporting by Susanna Twidale in London; Maria Sheahan and Tom Kaeckenhoff in Germany; Editing by Greg Mahlich and Mark Potter)

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