While the business and financial operations of Hafslund and E-CO will remain separate, the parent firm will control Norway's second largest power producer with output of 13 Terawatt hours (TWh), and the country's largest grid serving 710,000 consumers.

"The combined group will target a key position in the expected consolidation in the industry... to be well positioned for the expected changes in the energy industry going forward," E-CO Energi said in a statement.

Norway's parliament decided earlier this month to prohibit power producers serving more than 30,000 customers from owning both the electricity generation and its distribution.

Hafslund's and E-CO Energi's joint ownership is in line with this legislation however, as the companies will remain independent, an E-CO Energi spokesman told Reuters.

E-CO's power generation capacity in Norway is fully from hydroelectric plants and comes second only to Nordic giant Statkraft.

The move will mean yet another round of restructuring for Hafslund, which sold its markets business to Finland's Fortum in 2017, with the city of Oslo in turn getting control of the Finnish-owned stake in the firm.

The combined ownership is expected to be completed in the second quarter of 2018, subject to approval by the city council of Oslo.

(Reporting by Lefteris Karagiannopoulos, editing by Terje Solsvik)