Mr Marchant has held the post for the past decade and the company said he was "driving the bus" when it came to the decision.
He has ruled out taking another senior executive post.
"I need a change," he said. "The company needs a change."
He added: "I really do not want another big executive job. I have had the best job in the world. Why would I want another?"
SSE chairman Lord Smith of Kelvin, who also chairs Glasgow-based engineering company Weir Group, said that Mr Marchant is "the best chief executive I have ever worked with".
The timing of the move took the City by surprise although it was expected that Mr Phillips-Davies would take over eventually having been appointed deputy chief executive last year.
Shares in SSE, which also runs Southern Electric in England and SWALEC of Wales, closed down 53p or 3.7% at 1382p.
Angelos Anastasiou, analyst at Seymour Pierce, said: "The market has taken this move slightly negatively.
"We believe this is an unnecessary reaction: much though Ian Marchant has generally performed well as chief executive over the past decade, the remaining team is solid, and the progression is orderly."
Mr Marchant had amassed a pension pot worth £388,000 a year as of March last year.
Perth-based SSE said he will not receive a termination payment nor pay in lieu of notice when he leaves.
However, SSE's remuneration committee could decide he is entitled to payouts from existing long-term incentive schemes.
He holds around 240,000 SSE shares according to Reuters data, with a market worth of some £3.3m. SSE's annual report for 2012 showed he also had 350,000 share options, with a paper worth of £4.8m.
Mr Phillips-Davies has been on the SSE board for 11 years and will become chief executive on July 1.
SSE did not disclose how much he will be paid although Mr Marchant received a basic salary of £840,000 last year and his bonus took his pay to more than £1m.
In previous years his pay packet has topped £1.2m.
Mr Marchant said he would continue serving on the board of Aberdeen oil services company John Wood Group "as long as they want me".
Mr Marchant started his career as an accountant with Coopers & Lybrand after gaining a degree in economics at Durham University.
During his time with the accountancy firm he was seconded to the Department of Energy where he worked on electricity privatisation.
In 1992 he joined the newly privatised Southern Electric as head of corporate financial planning, then became finance director.
When Scottish Hydro-Electric merged with Southern Electric in 1998 he became finance director of the combined companies.
He was appointed chief executive in 2002.
Mr Marchant's straightforward and occasionally robust approach went down well in the City as did his delivery of above-inflation increases in the company's dividend every year he was in charge.
Fraser McLaren, analyst at Bank of America Merrill Lynch, wrote in a note for clients: "I will miss Ian's honest, earthy and occasionally truculent approach to presentations and commentary."
Mr Phillips-Davies, who was born in Wiltshire in 1967, was appointed to the board of SSE in 2002.
He is based at SSE's Perth headquarters where he will remain.