Merger of SSE and npower is hanging in the balance

The merger of two of the UK’s biggest energy firms is hanging in the balance after npower and SSE said they would have to reconsider the terms of the deal because of the government’s price cap and tough market conditions.

Late on Thursday the companies admitted the merger was unlikely to complete at the start of 2019 as planned, due to the new considerations.

Innogy SE, the German owner of npower, said the parent companies may have to inject more cash into the planned new merged energy giant, which would be almost as big as market leader British Gas if it goes ahead.

UK-listed SSE blamed the impact of the government’s price cap on default tariffs and the challenge of securing an “appropriate credit rating” for the new energy supplier.

The UK’s competition watchdog cleared the creation of a new energy giant in August, but it now appears the business rationale for the merger may be its biggest threat.

The Guardian understands the deal is in serious trouble but could still be salvaged if new terms can be agreed.

SSE cited recent market developments, including: “The potential impact of the level of the default tariff cap on … the new company’s requirements to post collateral against its credit exposure and its ability to obtain and retain an appropriate credit rating.”

This week Ofgem set the final level of the price cap at £1,137 for a household with typical consumption, which the energy regulator expects to knock 5% off the profits of large suppliers.

Innogy SE said the price cap would have a significant impact and cited adverse market conditions, but said both companies still saw the benefits of a merger.

Martin Herrmann, of Innogy SE, said the new negotiations would include “potential additional direct or indirect financial contributions by each party”.

If the mega merger still goes ahead, it will amount to one of the biggest shake-ups of the UK energy market for years, reducing the big six to five and creating a firm with similar scale to British Gas for the first time.

The companies appear to have given themselves a month to fix the crisis – SSE said it would provide an update on the merger in mid-December.