FRANKFURT/BENGALURU/LONDON (Reuters) – SSE SSE.L and Innogy IGY.DE scrapped plans to merge their British energy retail operations on Monday after the industry regulator proposed a cap on consumer bills, leaving SSE searching for new options for its struggling business.

This now at least clears the way for German utility E.ON EONGn.DE to consolidate Innogy’s loss-making British Npower division it will receive as part of a bigger breakup deal with Innogy’s parent RWE RWEG.DE.

The SSE-Innogy plan, more than a year in the making, collapsed after the companies failed to agree on new commercial terms in light of the proposed cap on energy bills.

SSE and Innogy had warned last month the deal, which would have created Britain’s second biggest retail power provider behind Centrica’s CNA.L British Gas, would be delayed.

Britain’s “big six” energy suppliers have been squeezed by efforts to cap energy bills following a government promise to tackle “rip-off” prices.

The level of the cap was tighter than expected and the performance of both companies’ retail businesses had changed since the tie-up was first announced, SSE CEO Alistair Phillips-Davies said during a call with journalists.

As a result the deal was not in the best interests of its customers, employees and shareholders, SSE said.

Phillips-Davies said SSE would take time to consider other options for its retail unit, including a standalone demerger and listing, an outright sale or an alternative transaction, but said no specific talks had taken place with any other potential buyers.

A source close to the deal said that for now SSE is more likely to create a standalone retail business.

NPOWER STRUGGLES

Innogy cut its outlook for the current year as it will have to consolidate Npower again, adding this would also hit next year’s adjusted earnings before interest and tax by about 250 million euros (224.59 million pounds).

Npower has struggled among competition from Britain’s near 60 smaller energy suppliers. An October report from regulator Ofgem said the company’s margin for supply energy was minus 5 percent.

E.ON said the collapse of the SSE-Innogy venture had no fundamental impact on a bigger breakup deal, which will result in it taking over all of Innogy’s networks and retail activities, including Npower, and would also not delay it.

E.ON and fellow German utility RWE agreed in March to break up Innogy and share out its assets, a complex transaction that is forecast to be completed by the end of 2019.

Shares in E.ON, Innogy and SSE were all down 0.9 to 1.5 percent at 1220 GMT.

Analysts said abandoning the deal was a positive move for SSE.

“We see the options under consideration … as more optimal for SSE than a merger with a troublesome Npower,” analysts at Jefferies said.

“E.ON would likely have to absorb Npower and would likely spend several painful years to re-structure and integrate it.”

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.

($1 = 0.8831 euros)