The Finnish government's economic policy committee has approved a plan promoted by the Ministry of Trade and Industry (MTI) to merge the electricity utility Imatran Voima Oy (IVO) with the state-owned oil and chemicals company Neste Oy.
The government indicated that the state's holding in the two companies could then be reduced to 51 per cent.
Studies carried out by the ministry suggested that the two companies could develop a number of joint projects, valued at between $1.5 billion and $2 billion.
The bulk of these projects would involve building gas fired power plants, and the extension of the existing natural gas grid.
Neste is the sole Finnish importer of gas from Russia. Around 25 per cent of its oil also comes from the same source. Part of IVO's generating capacity is fired by Russian gas.
The two companies will not merge immediately but their ownership will be transferred to a new holding company. The deal is expected to create the second biggest Nordic energy group after Norway's Statoil. The merger is intended to improve the two companies' competitiveness in the European market. The European Union competition authorities have been consulted during the negotiations to merge the two Finnish energy companies.
MTI is due to make proposals in a few week's time to change the competition rules for electricity distribution in Finland. These are rules which currently restrict the proportion that can be controlled by power producers.
Detailed plans for the merger of IVO and Neste are likely to be announced early this year. The government will seek a stock market listing for the new group in order to provide it with a broader ownership.