RWE plans to combine Eon and Innogy's renewables businesses into what it called a "leading European utility for renewables and security of supply with a broadly diversified portfolio of renewable and conventional generation assets".
Both companies have had to rethink their business models in recent years, with German Chancellor Angela Merkel championing the pursuit of a low-carbon economy through Germany's "Energiewende" policy.
As usual, the deal will need antitrust and regulatory approvals.
The total would still be small in operating terms compared to the giants of southern Europe, who were quicker off the mark in building large-scale global renewables fleets than their German counterparts.
"After successful implementation of the transaction it is meant to fully integrate innogy into the E.ON Group", E.ON said in a statement.
Share in Innogy, RWE, and E.ON all surged this morning as the markets responded positively to the news.
German business daily Handelsblatt said "for decades E.ON and RWE were bitter rivals; now they agreed on a spectacular deal that will shake up the European energy market". "Through this transaction E.ON would become a focused customer-oriented energy company concentrating on energy networks and customer solutions".
"A win-win?" Morgan Stanley suggested in a note, reiterating its "in-line" view of the industry. It has been in turmoil since former Chief Executive Peter Terium resigned in December and on Monday said it would cut 400 million euros in costs through the end of 2020.
The somewhat complex deal involving shares and asset swaps will see RWE take over Eon's renewables business while Eon gets the retail and network businesses of both companies.
Innogy, which reported a 3 percent rise in adjusted operating profit, also said it would propose an unchanged dividend of 1.60 euros per share for 2017, compared with the 1.61 euro average forecast in a Reuters poll.