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

Perth-based SSE was hit by high wholesale gas prices and a drop in renewable energy output as it moved to complete a merger of its retail business with npower, which the company admitted yesterday may not complete as planned.

SSE is discussing potential changes to the terms of the deal with npower’s owner, Innogy, to take account of the impact of the energy price cap.

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“There is now some uncertainty as to whether this transaction can be completed, as originally contemplated,” said the company yesterday, while underlining its desire to quit the household retail business.

SSE’s problems have been compounded by the loss of 460,000 domestic retail customers since last September amid increased competition in the sector.

Mr Gillingwater insisted that SSE was making progress with a strategy that will see the firm focus on renewable energy and regulated transmission networks.

However, he admitted SSE’s results for the six months to September 30 had fallen well short of what the group hoped to achieve at the start of the year after gas market volatility posed big challenges.

“This is disappointing and regrettable,” he said noting that important changes are being made to the way SSE manages its exposure to energy commodities.

In September chief executive Alistair Phillips-Davies said well-intentioned decisions intended to mitigate commodity price risk through energy portfolio management would have a disappointing impact on this year’s financial results.

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The company achieved an adjusted profit before tax of £246.4m in the first half compared with £416.7m last time.

Wholesale profits fell to £2.3m from £159.9m, with the energy portfolio management unit recording a £86m loss.

SSE said a drop in electricity generation profits, to £72.6m from £151.4m, partly reflected a fall in renewable output following relatively dry, still weather in the summer.

But the group underlined its belief in the potential of the sector, announcing plans to consolidate its hydro and wind power assets in a new division called SSE Renewables.

SSE noted the challenges it faces in the retail market it plans to exit through the deal with npower.

Domestic customer numbers in Great Britain fell to 6.48 million at September 30 from 6.94m at the same point last year.

“The market for energy and related services in Great Britain remains intensely competitive, with over 70 suppliers competing for customers and around 3 million customers switching their electricity provider in the six months to 30 September,” said the company.

On the price cap set recently by Ofgem, it said: “The level at which the cap has been set is disappointing and is not, in SSE’s view, sustainable or cost-reflective.”

The retail business SSE plans to combine with npower lost £68.7m in the first half against £17.8m last time.

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The group expects the division to achieve an adjusted operating profit margin of between 2% and 3% for the current year, against 6.8% last time reflecting competitive pressures and the impact of the cap from January. Margins are expected to be lower in 2019/20.

SSE said talks about the merger of the retail arm with npower are expected to take place over several weeks. An update on progress will be provided by mid-December.

It said its board believes the best future for SSE Energy Services wlll continue to lie outside the SSE group.

SSE upped its interim dividend 3.2% to 29.3p, in what Mr Gillingwater said was the first step in delivering the five-year dividend plan set out in May. Shares in the group closed up 59.5p at £11.91.

The group said its North Sea gas business, which has stakes in big fields off Shetland, was not a core asset and would likely be sold off.