Emissions house of the year: Vertis Environmental Finance

Energy Risk Awards 2024: Emissions trader provides research, advisory and trading capacity to support transition planning

Gauthier Bily, Vertis Environmental Finance

It’s been a choppy ride recently for the price of carbon in the European Union emissions trading system (EU ETS). Prices of EU ETS allowances (EUAs) hit an all-time high of €100.34 ($107.16) per tonne (/t) of carbon dioxide in February 2023, before halving in value by February 2024, sinking to just €52/t. By mid-April, they had rallied back to €75/t, leaving many feeling bullish on the price short term. However, Stefan Feuchtinger, head of research and analysis at Vertis Environmental Finance, believes they have further to fall.

“We are more bearish than most research providers out there,” says Feuchtinger. “We are saying to those of our clients who want to buy that… yes, we’re below historical averages but, according to our fundamental analysis, there’s more downside to come.”

Stefan Feuchtinger

The reason, he explains, is that falling power prices have pushed the clean dark spread (the difference between wholesale power prices and the cost of coal and EUAs) earned by German utilities into negative territory. This means it has become more profitable to buy power in the spot market and unwind their hedges – selling coal and EUAs – than to generate power themselves. In addition, hedge funds are liquidating long positions and the EU’s REPowerEU regulation will bring more than 200 million additional EUAs to market over the next three years to help fund increased renewables capacity.

Vertis, winner of Energy Risk’s 2024 Emissions house of the year award, combines incisive fundamental analysis with consultancy and full execution capabilities, allowing clients to explore all their options and come up with optimal hedging strategies.  

For most of the firm’s clients, the decline in EUA prices is good news. The company trades on behalf of around 2,700 industrial, aviation and shipping companies across Europe, all sectors included in the EU ETS.

They tend to be short EUAs and have limited access to information regarding the EU ETS. A big part of Vertis’s value proposition is, therefore, providing its clients with the carbon market intelligence that they don’t have the scale to generate themselves; the firm produces about 19 market bulletins each week.

Additionally, it gives its more risk-averse clients access to more sophisticated analytical tools, such as spot corridor trading using Monte Carlo analysis, to support their hedging strategies. “It provides a statistical estimation of how likely the price is to fall or increase beyond certain levels,” says Feuchtinger. Clients can use this to pre-determine allowance sales or purchases, “freeing up their time to focus on their core activities”, Feuchtinger says. “This isn’t something I’ve seen other firms providing.”

Gauthier Bily, chief executive of Vertis, understands the challenges faced by the company’s clients go well beyond the EU ETS. The most prominent one is about integrating short-term trading strategies with their longer-term investment plans, he says. “They might be considering investments in carbon capture and storage, or biomass generation, but the question is, at what point in time does it make sense for them to make those big investments?” He notes that, while EUA prices may be soft over the next year or two, Vertis’s expectation is that prices will experience steep gains from 2026–27 as frontloaded volumes from the REPowerEU reforms are clawed back from the market.

Helping them make those decisions often involves Vertis providing consultancy services alongside trading capacity, Feuchtinger adds. The company also provides long-term impact assessments, estimating clients’ likely free allocation of EUAs in the face of changing benchmarks. Under the EU ETS, the number of allowances that industrial emitters are granted depends on the calculation by the European Commission of emissions-intensity benchmarks for various industrial processes, with allocations calculated against the best performing 10% of emitters; these benchmarks are due to be recalculated in 2025. Vertis combines these assessments with its forecasts for EUA volumes and prices to calculate its clients’ long-term financial exposure to the carbon market.

Vertis’s close relationships with its clients have helped underpin strong growth. It increased its headcount by 25% between 2022 and 2023, and now employs more than 100 staff across Europe. 

Bily is optimistic about the company’s prospects. The EU’s gradual expansion of carbon pricing into new sectors, such as transport fuels, and to importers of carbon-intensive goods from outside the bloc – via the Carbon Border Adjustment Mechanism – is creating more opportunity for Vertis, Bily says.

“We are developing specialised lines for new sectors,” he says, noting that Vertis set up a shipping emissions desk two years ago, and observing that the EU is adding waste incineration to the EU ETS from 2028.

“Eventually, we expect to see physical markets like biofuels and biomethane become more correlated to the EUA market. If an industrial can switch to biomass and reduce emissions for less than the cost of EUAs, then that’s a good thing to do. That will probably be one of the biggest trends we see in the next couple of years,” he says.