AMID the market turbulence of recent weeks an announcement that provoked little comment shed a worrying light on a well- intentioned Government scheme that seems to have been a costly flop.
Two weeks ago Glasgow-based Smart Metering Systems revealed that it had sold a portfolio of meters to the Equitix private equity house in a £291 million deal that reflected the scale of investor interest in the specialist market.
Scottish energy services company sells assets to raise £291m
Smart Metering Systems is one of a small band of firms that install smart gas and electricity meters in homes for energy suppliers under a programme launched by the Government in 2012 amid claims it could play a big part in the effort to tackle climate change.
By giving consumers more information on their energy usage, it was assumed smart meters would provide a big boost to energy efficiency while helping cut household bills.
Energy firms were meant to supply them to all their domestic and small business customers by the end of 2020.
But the deal between SMS and Equitix may have left some people wondering if the biggest winners from the scheme have been private sector businesses rather than consumers.
The deal involved 187,000 of the 1.2 million meters in SMS’s portfolio. The company said the proceeds would allow it to implement an enhanced, long-term sustainable dividend policy with payouts set to increase at least in line with Retail Price Index inflation annually until 2024.
It increased dividends to 6.88p per share in 2019 from 5.98p.
SMS had £224m net assets at the year end, before taking account of the £193m profit that it will book on the deal with Equitix. The gain will be reflected in its 2020 results.
The fact Equitix was prepared to pay such a premium to enter the smart meter market reflects the appeal of a sector which allows investors to generate steady returns over long periods. SMS noted its earnings are underpinned by an inflation-linked recurring revenue stream.
Smart meter firm's revenues rise as it reaches one million installations
After the Bank of England cut the base rate cut to a record low of 0.1 per cent last week in response to the coronavirus risk the prospect of those kind of returns will be the envy of many firms.
Other investors have gone large in the smart meter sector.
Livingston-based Energy Assets was sold to Alinda Capital Partners in 2016 in a £209 million deal. The takeover went through only after Alinda raised its offer, after investors such as Oakcliff Capital Partners threatened to block it.
Australian investment bank MacQuarie has become a force in the market helped by the £274m acquisition of Onstream from National Grid in 2011.
Another big player ,Calisen, floated on the London market with a £1.2 billion valuation in February. In 2016 US investment giant KKR bought the business for a reported £1bn from Infracapital.
In a recent note on Calisen, Credit Suisse forecast the company could generate returns on investment in meters of 8% after tax. The investment bank highlighted opportunities for growth in the meter market..
But millions of consumers appear to remain unconvinced about smart meters.
In its latest review of the programme the Department of Business, Energy and Industrial Strategy noted only 30 million smart meters were set to be installed by the end 2020 deadline, just 57% of the 53m target.
The programme has been extended to 2024, with compulsory targets.
Noting that smart meter penetration levels varied greatly between energy suppliers, BEIS said: “We anticipate that without further Government action investment in the rollout will slow down and it will be difficult to regain momentum.”
As consumers will end up paying for the smart meter scheme through their bills, the slow progress is worrying. At a time when the public and household finances are set to come under huge pressure lessons must be learned.
Private sector participants will likely argue they have provided a value for money way of harnessing technology for the greater good while creating jobs in the process and paying tax. The profits that look likely to be generated over the life of the scheme raise questions about whether the price to be paid for it is a reasonable one.
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