The deal, which had been flagged last month, is expected to complete later this year or early next year, the two parties confirmed.
SSE – one of Britain’s so-called Big Six energy suppliers – has millions of household customers and 8,000 staff within the energy services division being sold. All of those employees will transfer to Ovo.
Ovo is already a major independent energy supplier, with about 1.5 million customers and some 2,000 staff.
The deal comes after SSE was forced to abandon its merger with Big Six rival Npower last December after the UK government’s energy price cap sent shockwaves through the industry.
Major gas and electricity suppliers have come under intense pressure following this year’s introduction of the cap on standard variable tariffs, as well as increasing competition from a raft of smaller operators.
In May, SSE announced plans to offload its energy services business after more than half a million households switched to a new supplier in the year ending March 2019. The Big Six player vowed to sell or float its energy services arm by the second half of 2020.
Alistair Phillips-Davies, chief executive of SSE, said: “We have long believed that a dedicated, focused and independent retailer will ultimately best serve customers, employees and other stakeholders – and this is an excellent opportunity to make that happen.
“Ovo shares our relentless focus on customer service and has a bold vision for how technology can reshape the future of the industry. I’m confident that this is the best outcome for the SSE Energy Services business.”
He added: “Following the transaction, SSE will be able to give an even greater focus to delivering the low carbon infrastructure needed to help the UK reach net zero emissions.”
Stephen Fitzpatrick, the chief executive and founder of Ovo, added: “This transaction marks a significant moment for the energy industry.
“Advances in technology, the falling cost of renewable energy and battery storage, the explosion of data and the urgent need to decarbonise are completely transforming the global energy system.
“For the past three years Ovo has been investing heavily in scalable operating platforms, smart data capabilities and connected home services, ensuring we’re well positioned to grow and take advantage of new opportunities in a changing market.
“SSE and Ovo are a great fit. They share our values on sustainability and serving customers. They’ve built an excellent team that I’m really looking forward to working with.”
The £500m deal comprises £400m in cash and £100m in loan notes. The cash proceeds will be used to reduce SSE’s net debt.
Fiona Cincotta, senior market analyst at www.cityindex.co.uk, said: "SSE’s announcement that it is selling its Energy Services business comes as no surprise as the UK electricity provider had already said it was considering a sale in May. It named Ovo as a potential buyer last month. It is a great acquisition for Ovo and brings the firm to the front rank of the UK energy supply market.
"More players in the market and more transparency in pricing has made it tougher for the larger, more established firms to hang onto customers, especially in the delivery and customer facing segment. There are still wide swings in pricing between providers, but the old days when the Big Six power giants dominated the market are clearly ending.
"SSE seems to have taken the decision to let other, newer companies look after this side of the business.
"Ovo, which only began trading domestic energy in 2009 and was not one of the Big Six suppliers, is obviously gaining momentum and is the UK’s largest independent energy supplier."