Big Six energy provider SSE has agreed to sell its struggling household supply arm to smaller rival Ovo Group in a £500 million deal.

Ovo’s offer to take over SSE’s energy services business comprises £400 million in cash and £100 million in loan notes and is expected to complete later this year or early next year.

It will turn Ovo into one of the UK’s largest energy suppliers overnight, having been founded just 10 years ago.

SSE is the third largest supplier in the UK energy market, with around 3.5 million household customers and 8,000 staff.

Independent provider Ovo has around 1.5 million customers and about 2,000 employees.

The deal comes after SSE was forced to scrap its merger with Big Six rival npower last December after the Government’s energy price cap sent shockwaves through the industry.

Gas and electricity suppliers have come under intense pressure in the UK following this year’s introduction of the cap on standard variable tariffs, as well as increasing competition from a swathe of smaller players.

In May, SSE announced plans to offload its energy services segment after more than half a million households switched to a new supplier in the year ending March 2019.

The Big Six company vowed to sell or float its energy services arm by the second half of 2020.

SSE chief executive Alistair Phillips-Davies said: “We have long believed that a dedicated, focused and independent retailer will ultimately best serve customers, employees and other stakeholders – and this is an excellent opportunity to make that happen.

“Ovo shares our relentless focus on customer service and has a bold vision for how technology can reshape the future of the industry.

“I’m confident that this is the best outcome for the SSE Energy Services business.”

SSE said that, should the deal with Ovo go through, it will do “all it can to ensure a smooth transition for customers and employees”.

Ovo will also retain the SSE brand under licence for a period and will ensure a phased and “carefully-managed” transfer.

Stephen Fitzpatrick, founder and chief executive of Ovo, hailed the deal as a “significant moment for the energy industry”.

He said: “For the past three years Ovo has been investing heavily in scalable operating platforms, smart data capabilities and connected home services, ensuring we’re well positioned to grow and take advantage of new opportunities in a changing market.

“SSE and OVO are a great fit. They share our values on sustainability and serving customers. They’ve built an excellent team that I’m really looking forward to working with.”

But it comes after a difficult 12 months for SSE, which admitted on reporting its annual results recently that its wider business “fell well short” of its hopes in 2018-19 and warned that 2019-20 earnings would also be hit.

The group’s annual underlying pre-tax profits fell 38% to £725.7 million.

The figures came on the back of a tough year for SSE following the collapse of its npower merger.

It was also fined £700,000 by industry watchdog Ofgem in April for missing last year’s target to install gas smart meters for customers.

Holly Williams is PA Deputy City Editor.