Britain's second-largest energy company could be created from a merger between EDF Energy and Scottish Power - a move that would spark competition fears in the UK and outrage from consumer groups which are already warning about soaring electricity and gas prices.

It has emerged that EDF, the giant French energy monopoly that is London's main electricity provider, could be poised to launch a takeover bid for Iberdrola, the Spanish group that bought Scottish Power 15 months ago.

That would create the UK's second-largest household energy provider after British Gas and cut the number of major market suppliers to five. A tie-up in Britain between EDF Energy and Scottish Power would create a company with more than 10 million gas and electricity customer accounts - over a fifth of the residential market.

It would overtake Southern Electric group Scottish and Southern Energy, which has about eight million customers.

German groups E.On (which used to trade as Powergen) and RWE, the owner of npower, share the remaining 25% of the UK market. Consumer watchdog Energywatch is already warning the Government that competition between the existing six major suppliers is not operating properly.

"It is obvious that this market is not delivering good value to consumers," said chief executive Allan Asher, who has called on the Government to launch an investigation into the household energy market.

In Madrid, shares of Iberdrola, Spain's largest utility, have soared by a fifth in a week on speculation that a €46 billion (£34 billion) joint bid could come from EDF and Spanish construction giant ACS.

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