For allying with ethel you'll need to make specific moves in sequence, and the consequences are permanent. During act 1's mayrina quest, drop her health below 30% then accept her ability boost deal to keep her alive. Later at the blushing mermaid, she shows up as captain grisley and presents a crucial choice. Accept her deal to kill Lora for 6000 gold, which triggers the alliance option.

Going through with the deal grants temporary group invisibility and secures support for the finale, but it comes at a cost. Vanra transforms into a hag, you'll lose access to the staff of interruption, and the hag survivors quest fails completely. Maybe interesting to note that this path locks you into the evil route permanently, so consider carefully before accepting.