Shell did not disclose any financial details of a deal which takes it into a new sector of the retail market. First Utility and Shell's joint German subsidiary is also included in the agreement.
The retail energy market in Britain is still dominated by the "Big Six" -- Centrica's (>> Centrica) British Gas, Iberdrola's (>> Iberdrola) Scottish Power, E.ON (>> E.ON), EDF Energy (>> Electricité de France), SSE (>> Scottish and Southern Energy) and Innogy's (>> innogy SE) npower.
However, they have been losing market share to smaller suppliers, including First Utility which serves around 825,000 homes in Britain.
"The supply and demand of residential energy is rapidly changing, driven by new technologies that enable householders to better manage their energy use, and the need for a low-carbon energy system," Mark Gainsborough, Shell's Executive Vice President of New Energies, said in a statement.
"This combination will enable Shell to enter a new part of the energy market in the UK and to improve choice for customers by delivering innovative services at competitive prices."
Shell expects the deal to complete early next year, subject to regulatory and other approvals.
First Utility said the deal would allow it grow quicker and develop new customer products and services, taking advantage of Shell's broad range of investments, from renewables to electric vehicle charging.
Shell wants 20 percent of sales from its fuel stations worldwide to come from recharging electric vehicles and low-carbon fuels by 2025.
Shell Energy Europe Limited, Shell's European gas and power marketing and trading business, will continue to supply wholesale gas and electricity to energy retailers in the UK and Europe, including First Utility, the firm said.
In 2015, Shell Energy Europe and First Utility partnered to launch a new household energy supplier in Germany.
The smaller players now control 20 percent of the UK market compared to less than 1 percent a decade ago. First Utility has a 3 percent share of that market.
Sweden's Vattenfall [VATN.UL] and France's Engie (>> Engie) also entered the UK home energy market this year.
Many of the big six have lost huge numbers of customers over the past couple of years as consumers switched suppliers.
They also face regulatory pressure from the government to curb high energy bills, which have more than doubled over the last decade. Retail margins are already extremely thin and not expected to improve anytime soon.
Last month, Innogy and SSE agreed to merge their retail power businesses, paving the way for more industry consolidation as pressures mount on the big suppliers in an increasingly crowded market.
However, some of the smaller energy suppliers have fallen foul of the competitive UK energy retail market. Last year, GB Energy went bankrupt after being caught out by rising market prices.
(Reporting by Nina Chestney; editing by Keith Weir)
By Nina Chestney