PARIS (Reuters) - French oil major Total (>> Total) said it would undercut EDF (>> Electricité de France) and Engie (>> Engie) in the French power retail sector with a 10 percent price discount, setting the scene for a possible price war.

Launching Total's entry into a retail market dominated by former state monopolies EDF and Engie, CEO Patrick Pouyanne said he wanted to win a 10 percent market share - or 3 million customers - within five years before expanding deeper into Europe.

"Although the residential market was deregulated 10 years ago, French consumers haven't really seen the effect on their bills. We want to enter as a challenger," Pouyanne said, setting the goal of becoming France's No. 1 alternative gas and electricity provider.

The new retail unit, which is called Total Spring and employs about 300 people, went live on Thursday.

"We will offer tariffs that are cheaper, and advantageous, 10 percent less than regulated prices," Pouyanne said.

That, he said, could enable the average French household to save up to 200 euros (178.34 pounds) a year on their gas and electricity bills.

Energy regulator CRE fixes the regulated prices based on proposals from the government. Regulated prices are charged only by EDF and Engie.

Total planned to increase its electricity production capacity in France, said Pouyanne who did not exclude Total buying or building its own gas-fired power plants and bidding for French hydropower concessions.

Total told investors in September that it targeted 5 gigawatts in power capacity in five years' time.

Alternative energy suppliers are gradually clawing market share from EDF, but the state-controlled company still retains a stranglehold on the electricity market with an 84 percent share nearly a decade after the French market was opened up.

Engie has a 75 percent share of France's gas market.

Regulator CRE said in September that the number of residential clients who moved to market-based electricity tariffs had risen by 6.7 percent in the second quarter of the year.

Other alternative energy providers in France include Direct Energie (>> Direct Energie) and Italy's Eni (>> Eni). ($1 = 0.8515 euros)

(Reporting by Bate Felix; Editing by Richard Lough and Susan Fenton)

By Bate Felix

Stocks treated in this article : Total, Engie, Electricité de France, Eni, Direct Energie