SCOTTISH Hydroelectric owner SSE has underlined its determination to quit the market for supplying energy to households after a controversial deal to merge its retail arm with npower fell apart.

Shares in SSE fell three per cent yesterday after the Perth-based giant said it was no longer in the best interests of customers, employees or shareholders to proceed with the deal agreed in November last year.

It cited factors such as the introduction of a cap on energy bills. Due to come into force next month, the measure will limit annual bills for people on variable tariffs to £1137 for typical dual fuel customers paying by direct debit.

SSE said the decision to scrap the proposed deal with German-owned npower also reflected the performance of the respective businesses and changing energy market conditions. The company has highlighted the pressure on profitability it faces in the retail business following the entry of new players to the market.

“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,” it said yesterday.

The decision appears to represent a big climbdown on the part of SSE, which has spent months working on the deal amid concerns about its potential impact on competition and jobs.

The tie-up would have reduced the ranks of the big six energy firms to five.

On November 8 SSE said it was discussing potential changes to the terms of the deal, with npower’s owner innogy, citing the introduction of the price cap.

The following week the company said it had become uncertain whether the transaction could be completed, as originally contemplated, but the board believed the best future for the retail business continued to lie outside the SSE group.

Chief executive Alistair Phillips-Davies said yesterday: “This was a complex transaction with many moving parts. We closely monitored the impact of all developments and continually reviewed whether this remained the right deal to do for our customers, our employees and our shareholders. Ultimately, we have now concluded that it is not.”

However, he said SSE will press on with separation activity in preparation for the retail business having its long-term future outside the group.

“We are now exploring all the available options with a view to delivering this future in the best possible way,” he noted.

The comments leave open the possibility of the sale of the business or a spin-off of the unit.

SSE said the retail arm is expected to be profitable and cash flow positive in the current year and the following period.

However, the group may find it hard to exit the retail business.

In recent weeks the problems suffered by a range of independents have lent weight to claims that conditions in the retail market are challenging.

Late last month, the energy supply subsidiary of Borders-based Spark Energy failed and its parent company was sold to Ovo Energy.

Russ mould, investment director at AJ Bell noted that eight small energy providers have stopped trading this year.

SSE suffered a 41 per cent fall in first half profits that chairman Richard Gillingwater described as “disappointing and regrettable”.

It was hit by high wholesale gas prices and a drop in renewable energy output.

SSE lost 460,000 domestic retail customers in the 12 months to the end of September.

Shares in SSE closed down 34.5p at £10.55.