The proposed merger between Innogy’s Npower and the retail arm of SSE may reduce competition in the energy market and raise bills for consumers, the Competition and Markets Authority (CMA) has concluded.

The competition watchdog believes the deal “warrants further in-depth scrutiny”. Following an initial probe, the CMA has threatened to launch a full investigation into the merger if the two companies fail to address its concerns.

In a statement, the CMA said the phase 1 investigation found the rivalry between the large energy companies is “an important factor in how they set tariffs”. The removal of any competition could “therefore lead to higher prices for some customers.”

“We know that competition in the energy market does not work as well as it might. However, competition between energy companies gives them a reason to keep prices down,” said CMA senior director Rachel Merelie.

“We have found that the proposed merger between SSE Retail and Npower could reduce this competition, and so lead to higher prices for some customers. We therefore believe that this merger warrants further in-depth scrutiny.”

SSE and Npower have been given until 3 May to propose actions to assure the CMA the deal will not undermine competition. If they do not provide such “undertakings”, the CMA will refer the merger for a phase 2 investigation.

SSE said it will take time to assess the CMA’s statement. Chief executive Alistair Phillips-Davies added: “We remain confident that the proposed merger will deliver benefits for customers and for the energy market as a whole and that we will be able to demonstrate this to the CMA in due course.

“We look forward to continuing to work constructively with the CMA and other interested parties.”

Innogy chief operating officer for retail Martin Herrmann said: “We are convinced that with the merger of npower and the UK retail business and energy services activities of SSE we are creating an independent customer-focused British energy company that can offer our customers a more efficient and even better service and bring benefits to the wider market as well.”

Rachel Reeves, chair of the Business, Energy and Industrial Strategy Committee, commented: “The energy market isn’t working for consumers. The proposed merger between SSE and Npower risks damaging the development of a more competitive energy market, reducing consumer choice, and threatening to be a bad deal for energy consumers.

“The CMA needs to look at the potential impacts of this merger and launch a full investigation if there is any risk to competition within the energy market”.

Earlier this month, Katie Bickerstaffe was appointed as chief executive designate of the proposed merged retail company.

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