The duo announced on Tuesday that they were in advanced discussions about a tie-up, and on Wednesday said they were pressing ahead with the plans.
The deal will see SSE and Npower’s parent company, Germany’s Innogy, merge their household energy supply and services business in Britain, turning the Big Six energy suppliers into five.
The new company will be listed on the London Stock Exchange with SSE shareholders holding 65.6 per cent and Innogy 34.4 per cent.
Shareholders in SSE will vote on the deal by July next year, while Innogy has committed to seek the approval of its supervisory board by the end of 2017.
SSE chief executive Alistair Phillips-Davies said: “The scale of change in the energy market means we believe a separation of our household energy and services business and the proposed merger with Npower will enable both entities to focus more acutely on pursuing their own dedicated strategies, and will ultimately better serve customers, employees and other stakeholders.”
The announcement comes as Britain’s Big Six brace for a raft of regulatory changes after the Government announced last month that a price cap will be imposed on poor-value energy tariffs.
SSE said that the merger will help the firms compete in a “competitive and regulatory environment” as well as realise efficiency savings.
SSE, formerly known as Scottish and Southern Energy, is Britain’s second biggest energy supplier and the merged group will serve around 11.5 million customers.
Centrica, Iberdrola (SocttishPower), E.On and EDF make up the remainder of the Big Six.
All have also come under recent pressure from smaller rivals who have been taking customers and market share.
Innogy booked a half-year loss for Npower in August as it grappled with what it called “fierce competition and political pressure”.
The German firm said it would attempt to counter “very tense” trading for the UK retail business by driving down costs, but admitted annual earnings would also be stuck in the red.
Confirmation of the merger came as SSE reported a slump in profits for the first half of the year.
Profit before tax was down 40.4 per cent to £402.2m in the period, with the firm blaming increased capital expenditure.
Adjusted pre-tax profits also fell 13.9 per cent to £409.6m.
SSE’s chairman, Richard Gillingwater, said: “The operating environment continues to present a number of complex challenges to manage, with significant political and regulatory intervention an ongoing feature of the energy sector.”