When Infrastructure Starts at Home
Viewed one way, decarbonization is a large-scale endeavor. Trillions of dollars of investment, vast networks of electric vehicle charging stations, fields of solar panels, gigantic windmills. But there’s another way to think about decarbonization — one that’s as small as the meters measuring the use of electricity and gas in your home.
Smart meters provide specific, near real-time energy usage data to both homeowners and utilities. Replacing traditional meters with smart meters can help optimize energy usage and reduce carbon emissions. The U.K. government recognized the technology’s potential over a decade ago when it began the Smart Metering Implementation Programme, which required energy suppliers to take “all reasonable steps” to install smart meters in homes and small businesses. The government recently doubled down on this initiative, setting binding targets for energy suppliers to install smart meters in 74.5% of homes and nearly 69% of small businesses by the end of 2025.
Decarbonization is one of the key themes for KKR’s Infrastructure platform, and our team recently acquired Smart Metering Systems (SMS), a U.K.-based company that installs smart meters for utilities. We spoke to Andrew Furze, a Managing Director on our Infrastructure team, about the investment, how smart meters can help consumers and the environment, and what’s coming next.
Andrew, can you start by telling us about how smart meters work and how they can reduce carbon emissions?
Andrew Furze: In general, meters are used to monitor and measure consumption of electricity, gas, water, or other utilities in a residential or commercial setting. In the United Kingdom, customers are required to send meter readings to the utility once a month, and they also get bills once a month. This doesn’t really provide much feedback to either party about how and when resources are being used, so there is limited opportunity to use or supply resources more efficiently.
But if a utility knows exactly how much energy its customers are using and when, they can introduce dynamic pricing, charging more at the times of day when demand tends to be highest. Homeowners can look at their usage, see when it’s particularly high, how that impacts their bills, and potentially change their behavior to save more energy. If they see they tend to use energy at peak times, when it is most expensive, they might choose to charge all their devices and run their appliances at times when power is cheaper, for example. The real-time information smart meters provide make these kinds of efficient choices possible. And ultimately, supplying and using energy more efficiently should reduce carbon emissions.
Beyond the immediate application for homes, smart meters pave the way for smart grids, which can achieve more efficient power distribution on a larger scale and therefore make a greater impact in reducing carbon emissions.
How did KKR come to invest in SMS?
AF: We started to look at the U.K. smart meter industry as an attractive infrastructure sector about 10 years ago because of the government-mandated rollout and long-term contracts. Before the SMS investment, we had previously owned a smart meter company called Calisen, so we knew the industry very well and had long admired SMS. So, in a way, you can think of this as a repeat investment.
However, we saw that the listed market was not the natural home for SMS at this point in its evolution. Developing the new capabilities we talked about requires a large amount of investment and capex that tends to be underappreciated by public shareholders. We thought that our prior experience in complex public-to-private transactions and the broader KKR toolkit could really benefit this business. We’re looking forward to making that happen.
How does the smart meter portion of SMS’ business work, and what made it stand out to the team as an attractive investment?
AF: Energy suppliers contract with SMS to install and manage smart meters. We like that business for many reasons. The contracts are evergreen in nature and in most cases, they are indexed to the U.K. Retail Price Index. These qualities are exactly what we tend to look for in our infrastructure investments. Maintaining the meters requires minimal capital expenditure, so the margins are relatively high.
This is also a business with strong regulatory tailwinds. The British government has set mandatory targets for energy suppliers to install smart meters. Today, only about 60% of domestic meters in the United Kingdom are smart meters, compared to the 74.5% government target for the end of next year and the long-term ambition of achieving full smart meter coverage.
SMS has a contracted order book for the next few years. Our goal would be not only to execute on that, but to grow the order book and capture as many of the 40% of traditional meters in the market today as possible, while also pursuing inorganic growth through acquisitions where it makes sense.
What are you most excited about for SMS in the future?
AF: We think that smart meters are only the start of the journey when it comes to decarbonizing the home. Once you have a smart meter, you might think about rooftop solar or heat pumps to further reduce your energy bills. As electric cars continue to become more popular, SMS could provide home charging solutions. These are all businesses we are exploring, and we see exciting growth potential. SMS already has a 600-strong force of field engineers who install meters, and we think their technical expertise will be critical to expanding into some of these new business lines.
When you think about the demand for decarbonizing a home in the United Kingdom, remember that people experienced huge spikes in their energy bills due to the conflict in Ukraine in 2021 and 2022. Bills went up from a couple of hundred pounds a year to several thousand in some cases. People are motivated to insulate themselves from these kinds of shocks in the future, and we want to help provide the solutions so they can do so.
