(Reuters) - SSE Plc <SSE.L> has walked away from a deal with Innogy SE <IGY.DE> to create the UK's second biggest retail power provider after the companies failed to agree on revised terms, the British energy supplier said on Monday.
SSE said it would consider other options for its retail unit, SSE Energy Services, including a standalone demerger and listing, an outright sale or an alternative transaction.
SSE, which had already warned that the deal with Innogy's Npower would be delayed, said the companies could not agree on new commercial terms after Britain's regulator proposed a cap on energy bills. The deal was not in the best interests of its customers, employees and shareholders, it added.
The planned merger, which would have shaken up the UK power market by cutting the dominant big six firms to five, was announced in November last year after the government increased scrutiny of Britain's big energy suppliers, which it has accused of ripping off customers.
SSE said prospects for the deal had been hurt by a number of factors, including the performance of the two businesses, clarity on the final level of Britain's default tariff cap and changing energy market conditions.
Innogy had no immediate comment when contacted by Reuters.
SSE's latest talks with Innogy covered the potential impact of regulatory caps on tariffs, the new company's requirement to post collateral against its credit exposure and its ability to obtain and retain an appropriate credit rating.
"These implications meant the new company would have faced very challenging market conditions, particularly during the period when it would have incurred the bulk of the integration costs," SSE said.
The company, which issued a profit warning in September after being hit by lower output from its wind farms and high gas prices, said SSE Energy Services was expected to be profitable and cash flow positive in 2018/19 and 2019/20.
(Reporting by Noor Zainab Hussain in Bengaluru and additional reporting by Christoph Steitz in Frankfurt; Editing by Sai Sachin Ravikumar)