Advanced metering infrastructures (AMIs) enable two-way communications between the utility and customers opening up opportunities for an efficient and reliable smart grid. This, however, opens up the grid to a vast amount of attack vectors and intruders. Therefore, cyber security is an indispensable part of the smart grid communications’ infrastructure and must be considered in the early phases of planning. The achievement of a secure grid infrastructure requires cryptographic primitives whose strength is dependent on the utilized keys, raising the need for secure key generation/distribution mechanisms. Furthermore, the underlying security mechanisms should be scalable due to the large AMI network sizes. In this paper, we propose the usage of identity-based-cryptography as the basic block of the key distribution mechanism to generate secret keys between neighboring smart meters in a non-interactive manner. Physical unclonable functions are proposed on the hardware platform to eliminate key compromise at the hardware level. We also propose a secure mechanism for updating private keys that are utilized as a seed within the identity-based cryptosystem. A lightweight key delivery mechanism exploiting multicast network features is presented along with a new authentication algorithm for the updated keys. Hardware tests are performed on a Cortex M3-based microcontroller to mimic smart meters’ processors and assess the feasibility of the proposed key authentication. Experiments conducted on a network simulator validate the feasibility of the proposed methodology indicating key delivery latency reduction up to 80% and network traffic reduction up to 27%.