Energy firms SSE and Innogy have agreed to merge their retail businesses to create a new, independent energy supply company in the UK market.

The deal will combine SSE’s household energy and energy services units with Innogy’s British retail business – known as npower – and will create a company to rival the size of British Gas, the country’s largest energy supplier.

The move is thought to be a response to increased pressure on energy retailers in the UK brought on by regulatory efforts to cap household energy bills as well as an increased number of suppliers in the market.

“We have made great progress in restructuring npower over the past two years and have improved our performance considerably,” said Peter Terium, CEO of innogy SE. “However, when we look at the competitive landscape and the uncertain political environment for energy retailers in Great Britain, it is clear that npower would be better placed to offer value to our customers and our shareholders as part of a new company with the ability to succeed in the face of the challenges that lie ahead.”

The merged company will not be controlled by either parent firm, innogy said in a statement. Innogy would hold a 34.4 per cent stake and SSE plans to demerge its stake of 65.6 per cent to its shareholders.

SSE’s business retail business and its Ireland businesses are not included in the deal. The two companies have about 11.5 million customers on the books.

David Elmes of Warwick Business School said: “Being an energy supply company in the UK has become a tough business to be in and so it’s not too surprising that some companies are taking the decision to exit the market.

“npower has certainly struggled in recent years. It lost over £100 million in 2015 and lost over 350 000 customers that year and ended up being fined £26 million by the regulator, Ofgem.

“With that history, it’s not surprising that npower has looked at selling up and leaving the retail market. But it also needs to be a wake-up call on just how much pressure is being put on the sector.”