Under the agreement in principle, E.ON will acquire RWE's 76.7% stake in innogy in a complex transaction including asset swaps, it said.
Furthermore, E.ON would transfer to RWE most of E.ON's renewables business and also the minority interests now held by E.ON's subsidiary PreussenElektra in the RWE-operated nuclear power plants Emsland and Gundremmingen. Germany as a whole has one of the greener economies in Europe and RWE already moved in the low-carbon direction by working with port officials to create infrastructure to fuel vessels with cleaner-burning liquefied natural gas.
Uwe Tigges, chief executive officer of German ecological power supplier Innogy SE arrives for the company's annual news conference in Essen, Germany March 12, 2018.
"The transaction further provides for a cash payment from RWE to E.ON of $1.8 billion", the announcement read.
RWE would, in turn, gain an effective participation of 16.67 per cent in EON.
Germany's energy landscape has been rapidly transformed since Chancellor Angela Merkel announced the complete phaseout of nuclear energy after Japan's 2011 Fukushima disaster.
Innogy listed in 2016 as the renewables, grids and retail operations unit of RWE. In addition, RWE would get the minority stakes held at present by E.on subsidiary PreussenElektra in the RWE-operated nuclear power plants Gundremmingen and Emsland.
While an agreement has been reached, closure of the transactions still require board approval on both sides and would also need to clear antitrust and regulatory approvals.
The source said that E.ON had been in a better bargaining position after RWE shopped Innogy to other European rivals, including France's Engie, Italy's Enel and Spain's Iberdrola, without striking a deal.