Q&A with Rahul Saili

As the UK approaches a general election in early July, the stakes are high for the nation's energy sector, which has reached a critical juncture in the transition to renewables and support for net zero ambitions.

The incoming government will need to accelerate progress on emerging energy technologies quickly, drive transition within the North Sea oil & gas sector and generate a favourable climate for international investment.

Given the UK’s leadership on climate in recent years, close attention will be paid to policies toward emerging technologies such as carbon capture, usage, and storage (CCUS) and green hydrogen. While seen as crucial technologies for net zero, the sectors continue to grapple with challenges in commercialisation and scalability.

How can we evaluate the UK's progress in the energy transition compared to global trends? What actions are necessary for the UK to enhance its capabilities in CCUS and green hydrogen? What strategies are essential to achieve an optimal balance between government and private sector roles in fostering the adoption of renewable energies? Additionally, what role do mergers and acquisitions (M&A) play in advancing these energy transition trends?

To explore these questions, Andrew Leming, founder and CEO of Pimlico Strategy & Insights, recently sat down with Rahul Saili, a UK-based business consultant with deep expertise in the energy investment sector. 

The following transcript has been lightly edited for clarity and readability.

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Andrew Leming 

Rahul, thanks for taking time to speak with us today. Please share an overview of your background experience and what factors you find most interesting.

Rahul Saili 

I have ten years of energy sector experience, and the majority of that was at an investment bank where I spent nine years focusing on mid-market M&A transactions within the energy sector. I originally focused on oilfield services but began to pivot to new energy in 2020. Over the past year, I've been helping a publicly listed oil & gas company establish its new energy business and develop energy transition projects in the UK.

Andrew Leming 

What were some of the most engaging challenges you encountered over that period?

Rahul Saili 

The oil & gas market has had significant volatility over the past decade. When oil prices were low and the energy transition was taking shape, there wasn’t much confidence in oilfield services, the financial performance of businesses was being negatively impacted and investors were pulling capital from the sector. We had to leverage creative strategies to present our businesses attractively to a limited number of acquirers and create competitive tension.

As I pivoted towards new energy transactions, I had to be adaptable and quickly learn how those energy verticals operated, any pitfalls and what specific metrics would be most interesting to potential acquirers. 

Andrew Leming 

What's your current assessment of where the energy transition is headed?

Rahul Saili 

The goal of the energy transition is to reduce greenhouse gas emissions across all industries through various forms of decarbonisation. World leaders signed up to the Paris Agreement which pledged to prevent global temperatures from rising by more than 1.5°C, and subsequently countries announced net zero targets.

Has there been some progress towards these targets? Yes, there has been, and according to the International Energy Association, 507 gigawatts of renewable capacity were added globally last year. However, more needs to be done, as it stands most countries are not even on track to meet their 2030 emission goals. We need to accelerate investment in development and infrastructure projects, with analysts suggesting that $2.7 trillion of investment is required per year.

It is also key that governments undertake actions through policy to create a nimble and dynamic environment for projects to take final investment decision (FID) sooner. If this can be achieved, there's a chance that any progress lost towards net zero targets can be clawed back. But oil and gas is here to stay in until at least the medium term. You can't just suddenly switch off oil and gas and pivot to renewable sources, and the market understands this.

Andrew Leming

Where do you think the balance of responsibility is currently for driving the energy transition for net zero?

Rahul Saili

To help develop the renewables market and achieve goals previously mentioned, significant government involvement is essential to encourage the supply and demand side to take the required investment through policy incentives. 

On balance, I think at the start it's likely going to be 80% government. But as the market matures, the government needs to step back, enabling businesses to establish themselves and for the market to run independently without government intervention. Power purchasing agreement (PPAs), contracts for difference (CfDs) can all help accelerate that transition.

If we look at businesses more generally, they are more likely to buy into the energy transition when the cost of low-carbon and renewable energy falls. This is because a CEO is more likely to be judged on a company’s profitability than their emissions profile.

Andrew Leming 

So, how is M&A activity evolving within the energy sector against this backdrop?

Rahul Saili

Towards the end of last year, most thought that M&A activity was going to increase, but high inflation, high interest rates, and geopolitical uncertainty impacted debt availability. As a result, businesses are struggling to get access to certain financing from banks, creating a challenging environment for M&A in the short term.

If we look at oil and gas companies, their financial position dramatically improved compared to recent years, due to the higher oil price. They have better cash flows and cash reserves as well as lower leverage. This would normally indicate that companies would be open to M&A, and I would predict an uptick in activity in the medium to long term.

Another factor to consider is that investors have stated they have substantial dry powder available. They're keen to invest in the energy transition but are waiting for the right opportunity as energy transition investments may give lower returns relative to oil and gas. We’ve also seen traditional energy private equity houses raise energy transition funds.

Andrew Leming 

That raises the question of what are the key factors in mid-market transactions that determine the attractiveness of M&A targets in the energy or renewable sectors.

Rahul Saili

One of the main factors is technology and how proven it is. A lot of technologies in the renewables sector are early stage and haven’t even reached commercialisation. In mid-market transactions you rarely want to acquire technology at the testing stage – you want something that's proven and works. 

If a technology could have multi-sector applications, for example, it could play in both old energy and new energy that would be highly desirable. Would it transform a business? Would it future-proof a business by providing an offering in new energy? If so, this would also be attractive to acquirers.

Given the current market, people are more important than ever and having a strong management team will help underpin the credibility of any target business.

Andrew Leming

What is your assessment of early-stage technologies such as hydrogen and carbon, capture, use, and storage (CCUS) and their trajectory in the UK?

Rahul Saili

If we look at CCUS first, the UK Government has taken a tracked approach that focuses on large industrial clusters with high emissions. The UK has an abundance of storage capacity in the North Sea and can also repurpose existing oil and gas infrastructure. The UK Government has also committed £20 billion for early deployment to kick-start this new market.

This is a good start, but the market still has challenges. Firstly, the UK is currently unable to serve European markets due to issues with the London Protocol and the misalignment between the UK and EU emission trading schemes (ETS), which is discouraging EU emitters from using UK storage sites.  Secondly, it's unclear if projects awarded funding are progressing according to their timeline.

If the UK Government can resolve this misalignment it will provide access to a larger customer base and more offtake customers, helping CCUS projects undertake FID.

It's a similar story for green hydrogen. The UK Government again has provided support to establish the market and progress projects, but two key issues remain. It's very expensive to produce green hydrogen in the UK due to the cost of technology (e.g. electrolysers) and renewable power. There are also insufficient incentives to encourage the demand side to adopt hydrogen solutions, limiting the number of offtake customers.

The UK used to be judged as a leader in green hydrogen, but as progress stalls, they are falling behind other countries. The incoming government has a real job on their hands to get both markets back on track.

Andrew Leming

So how do you see the market for green hydrogen developing internationally?

Rahul Saili

Internationally, green hydrogen has become more important than ever, as governments view it as a key energy source.

Within Europe, we've just had the outcome of the pilot Hydrogen Bank Auction. There were seven winners selected from 132 projects, which shows that across Europe there was a lot of interest. The results were surprising though, because the project subsidies were a lot lower than I thought, with the lowest being €0.37 per kg of hydrogen. So, it will be interesting to see how these projects return a profit, what price they are going to charge offtake customers, and how it will impact adoption.

In the US, the Inflation Reduction Act under the Biden Administration introduced an incentive of up to $3.00 per kg of clean hydrogen produced. The credit received depends on the hydrogen’s carbon intensity. Given the strict rules to receive the maximum amount of credit, key stakeholders are in unison believing the rules are “unworkable”. If a solution is not found, the market may stall and hinder the US from achieving its goals.

In Canada, the government introduced an investment tax credit based on carbon intensity. Draft legislation was well received by the market and companies are providing feedback to the government. Existing pathways to renewable energy will also accelerate hydrogen production, and enable Canada to export to other regions quickly.

Countries in the Middle East have also set ambitious green hydrogen targets as they can leverage the abundance of renewable sources naturally available, such as solar, to produce green hydrogen at a lower cost. The region is also well-placed to export hydrogen to Western Europe and Asia.

Countries have different definitions for green hydrogen based on carbon intensity. For global export/import markets to develop an established standard and certification stating the carbon intensity will be required.

Overall, international markets seem to be progressing on hydrogen, but they all have their own nuances.

Andrew Leming 

What are your next steps in your professional journey, Rahul?

Rahul Saili  

I've been fortunate enough to spend my whole career in the energy sector and see it evolve, it's been a great learning experience. I'm excited to carry on my development in the sector and will focus on helping companies navigate the energy transition through developing renewable projects, raising capital or by undertaking strategic M&A activity.

I am currently working with Canadian Power-to-X Partners, a green hydrogen developer who is focused on 100MW projects to help decarbonise Canada.

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Many thanks to Rahul for joining us for this conversation.

Be sure to look out for our next Pimlico Q&A.

Pimlico Strategy & Insights is a London-based firm founded in early 2023 to provide market intelligence and consultancy services. We specialise in ESG strategy and analysis using proprietary frameworks to help companies grow through sustainability.

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