SSE PLC on Tuesday confirmed it is in talks with German energy company innogy SE, part of RWE AG and owner of rival supplier Npower Ltd, to create a new independent company which would comprise certain businesses of both the companies.
As the cap is aimed at standard variable tariffs and default tariffs, it is expected to threaten the profits of some of the larger suppliers.
Two of the UK's biggest energy companies, SSE and npower, have announced plans to merge their residential supply business.
SSE supplies gas and electricity to around eight million homes across the UK.
Shares in SSE rose 3.28% to 1,419.50p on the news in afternoon trading.
SSE said that discussions were continuing and well-advanced, but added that no final decisions, or binding agreements, had been made.
The combined business would be listed and SSE would demerge its shares to its shareholders.
The move is likely to raise concerns over competition in the United Kingdom residential market, reducing the number of big players - controlling 80% of supply - from six companies to five.
Smaller suppliers account for more than 8% of market share, compared to 1% three years ago, according to Ofgem data.
SSE, formerly known a Scottish and Southern Energy, serves 7.8 million households while npower has 4.8 million.
Npower, one of Britain's big six energy retailers, has become a drag on Innogy since billing issues emerged in 2015, pushing the business into a loss and leading to thousands of jobs being lost.