SSE, formerly known as Scottish and Southern Energy, supplies energy to 7.77 million households while Npower serves 4.8 million.
Any merger – if allowed – would see the new company nipping at the heels of the market leader British Gas, which currently supplies 27% of the market for electricity and gas supply, according to energy consultancy Cornwall Insight.
A combined SSE-Npower company would have a market share of 22.5%, with Germany’s E.On trailing on 12%.
The other members of the “big six” UK suppliers are Scottish Power – which is owned by Spain’s Iberdrola – and France’s EDF.
Price cap pressure
The merger talks take place against an intensifying debate about how well the big six companies are serving UK customers.
Despite years of competition, many households do not switch supplier freely, leaving a large chunk on the most expensive Standard Variable Tariffs (SVTs).
About 12 million households are on some form of default tariff, which can cost hundreds of pounds a year more than the cheapest deals.
Business Secretary Greg Clark has said Ofgem should use its powers to impose a wider cap on energy bills more quickly.
But the watchdog has warned it could be sued by gas and electricity firms if it capped SVTs without the backing of new legislation.
Set against this, the established providers are losing market share to a growing band of small suppliers, with even local councils starting to sell their own energy packages.
Neil Wilson, analyst at ETX Capital, said: “The problem – and arguably the rationale – is that the big six are losing customers at a record pace to smaller suppliers. Smaller suppliers now account for more than 8% of market share, up from 1% just three years ago, according to Ofgem data.”
Any merger deal between SSE and Innogy’s Npower would need approval from competition authorities and shareholders.
In a statement, SSE said: “In discussions, SSE is mindful of the requirements of customers and the concerns of employees. It will disclose the outcome of the discussions as soon as they are concluded.”
Innogy confirmed the two were in “advanced exclusive discussions”.