E.ON said on Monday the deal would speed up profit growth in a market hit by stiff competition and a regulatory price cap.
The German group acquired large parts of Innogy, including the loss-making Npower brand in Britain, as part of a landmark asset swap with German peer RWE.
Both E.ON and Npower were among the so-called Big Six energy supplies in Britain that have been losing customers to new challenges, such as renewables energy specialist Octopus.
In a partnership deal with Octopus's unit Kraken Technologies, E.ON said it would pool its own residential and commercial customers and those of Npower in a new subsidiary, called E.ONnext.
It forecast E.ONnext would make earnings before interest and tax (EBIT) of at least 250 million pounds beyond 2023.
"In November we announced that we would successfully reposition our business in the UK and counter the difficult market conditions," E.ON board member Karsten Wildberger said in a statement.
"The formation of E.ONnext is the key step in achieving this goal quickly and to the benefit of our customers in the UK."
E.ONnext will rely on Kraken's customer platform and be home to Npower's and E.ON UK's residential and commercial clients, who will be migrated in spring 2020 and 2021, respectively.
Innogy said earlier on Monday that Npower lost 143,000 customers in the fourth quarter, bringing total customer losses in 2019 to 590,000.
Other parts of Npower will be shut down or sold as part of the plan announced in November.
Innogy's adjusted net income fell by 39% to 427 million euros ($458 million) last year, while adjusted EBIT fell by 23%, due in part to asset sales.
In January, Octopus struck a deal to take on Engie 70,000 British residential customers as the French power group quit that market.
(Editing by Edward Taylor and Mark Potter)
By Christoph Steitz