The Competition and Markets Authority (CMA) said the deal would now face a so-called stage two in-depth inquiry after its initial probe found the tie-up could reduce competition, potentially leading to higher prices for households.
It said Innogy’s Npower and SSE had failed to offer measures to address its competition fears, having earlier set a deadline of May 3 for the pair to put forward proposals.
A decision on the merger will now be made by a group of independent panel members, with a deadline for their final report of October 22.
The two energy giants announced in November that their British household energy supply and services businesses would join forces, reducing the Big Six energy suppliers to five.
The CMA said late last month its initial inquiry found the reduction in the number of large players in the UK energy market caused by the merger could impact competition and leave some customers worse off.