Trading in environmental markets has some unique challenges. In particular, the plethora of emission-reduction compliance markets across the US – designed to address local air pollution caused by emissions of nitrogen oxides (NOx) and volatile organic compounds (VOCs) – are characterised by low liquidity, a limited number of participants and a lack of centralised marketplaces.
So when an existing client approached Element Markets in early 2017 with plans for a major expansion of its petrochemical facility on the Gulf of Mexico, and an associated need for a large volume of NOx and VOC credits, its traders realised they had their work cut out.
“Our client came to us seeking quick execution with anonymity as it had not yet announced its upcoming projects, which total in excess of $4 billion in capex,” says Randy Lack, co-founder and chief marketing officer at the Houston-based environmental trading company. “This was a daunting task, with a total order size in excess of $130 million.”
After 15 months of preparation and armed with a master agreement with its client, Element went out to market to undertake what is believed to be the largest procurement ever completed in the US regional emissions markets. Over 45 days, Element struck 23 different bilaterally negotiated transactions, many of them structured as forwards that all settled at the same time, designed to ensure the market did not move against Element Markets and its client.
“We completed more in volume in 45 days than had traded in the previous five years combined in that market,” says Lack. “Nonetheless, we were able to get it done around 11% under budget and since it was completed, the market has increased 75%.”
“I’ve been in the emissions markets for 20 years and that was the best transaction we’ve ever done,” he adds.
The transaction was followed by a similar-sized volumetric trade in the northeast US emissions markets. “With low-cost natural gas and crude, we’re seeing some major industrial expansion going on that is helping to drive growth in the emissions markets,” says Lack.
Set up in 2005, Element Markets has carved out a leading position in the USemissions markets. In the last year, the company has transacted more than $250 million of credits. It has also diversified into biogas – renewable natural gas (RNG), generated from agriculture or municipal waste – where it claims to be the largest independent marketer in the US, with an approximate market share of 20%.
In 2017, the company opened a West Coast office in Carlsbad, California to support its expanding environmental products group, led by seasoned RNG veteran Tom Moffett.
“That led to substantial growth and we have some very exciting deals in the pipeline,” says Lack. “We’re the primary supplier of biogas-derived RINs [renewable identification notes] for a couple of the largest obligated parties in North America.”
Refiners and importers of fuels are required to meet targets for blending renewable fuels, such as corn-based ethanol, advanced biofuels or cellulosic ethanol, including biogas, with their petroleum-based products.
The markets for these renewable fuels have been highly volatile, roiled by political pressure from refiners on the one hand and corn growers on the other.
“Regulatory uncertainties, illiquidity and an unpredictable administration have created a highly volatile market,” says Lack. “Our clients have relied on us to provide education, insights and strategies on how best to minimise risk but also take advantage of market opportunities.”
Federal policy around climate change – or the lack of it – is helping to boost another part of Element Market’s business. Lack describes this as “sustainability services” for large companies, including two of the world’s largest tech companies.
“We’re seeing a resurgence in greenhouse gas trading in America overall,” he says. “On the sustainability side, it has been a revolt by companies as they have lost confidence that the US government will lead the way and have been called to action to move on climate change.”
Meeting sustainability mandates
With investors increasingly concerned to see companies addressing climate risk, Lack says Element Markets can help them meet their corporate sustainability mandates through transaction services.
“We can use the same group of assets that we’re using to provide compliance solutions to help entities meet their sustainability goals,” he says.
Combining physical, renewable natural gas with green certificates from renewable energy projects with carbon offsets, Element Markets is an investor in, and/or an off-taker from, some 45 carbon-reduction projects across North America.
All of the above has contributed to a third-consecutive year of record revenues and income for the company, with some 30 staff working in offices in Houston, New York, San Francisco and Carlsbad.
“The next step is jumping the pond,” says Lack. “We’re in acquisition mode and we’re likely to make a European acquisition in the next year, with a view to expanding globally.”
This article was republished with permission from Energy Risk Magazine, and was orginally published here.