Executory Forward SREC Contracts - What Exactly Does This Mean?

By J. Wylie Donald

What happens to the payment for a solar renewable energy credit (SREC) when the payor closes its doors? Maryland citizens are finding out the hard way. The promises made to some of them are turning up empty.

Here are the details. Greenspring Energy was a promising solar installation company. As it describes itself: "Greenspring Energy offers a unique combination of high-quality solar energy systems and the best energy saving products and services in the marketplace today. Created to help people effectively and permanently reduce their utility bills, Greenspring Energy’s products and services will allow you to: Reduce your utility bills with innovative energy saving products, Produce your own energy with solar systems, Take advantage of federal, state, and local incentives to go solar, Increase the value of your property, Reduce your carbon footprint.” It was a good business model. Following its founding in 2007, Inc. reports it had revenues of $10.5 million in 2010 and 40 employees the next year. Its website boasts 2011 Inc. 500.

Then something happened. Jamie Smith Hopkins of the Baltimore Sun reports that Greenspring Energy closed its doors at the end of January this year. Its employees received rubber checks. And its customers, promised recurring payments for the SRECs associated with the electricity generated from their solar equipment, were likewise burned. This is not a particularly unexpected outcome. Entities regularly enter bankruptcy and their creditors take a beating. The solar industry is no different. In fact, one website compiled a list of dozens of “Deceased Solar Companies” through early 2013.

But what is not getting a lot of play (or even any) is the effect of a bankruptcy of the SREC provider. It is probably safe to say that most SREC transfers are the subject of executory contracts, long-term contracts where the provider agrees to transfer the SRECs accompanying its future electricity generation for some future consideration. In bankruptcy, such contracts may be assumed, or not, at the discretion of the bankruptcy trustee. 11 U.S.C. § 365, [enhanced version available to lexis.com subscribers]. Except, however, where such contracts are forward contracts. E.g., Master Solar REC Agreement (NJ BPU 2014) (“Buyer and Seller each acknowledge that it is a “forward contract merchant” and that all transactions pursuant to this Master Agreement constitute “forward contracts” within the meaning of the United States Bankruptcy Code.”). In that case, the trustee’s right to reject or assume the executory contract does not exist. 11 U.S.C. § 556, [enhanced version available to lexis.com subscribers].

So there is some complexity here. And it gets worse. The SREC does not exist but for the generation of 1 MWh of electricity, even if the SREC is sold separately from that electricity. It is not difficult to conceive of a situation where the value of the contract for the sale of electricity is going in the opposite direction of the value of the SREC contract. Suppose the bankruptcy trustee has the right to suspend electricity generation, even if it does not have the right to walk away from the SREC contract. Does an SREC contract have any value if there is no generation?

To our knowledge, SRECs (and RECs as well) have not been tested in the furnace of bankruptcy. We will be interested in seeing how that turns out.

    J. Wylie Donald, a partner at McCarter & English, LLP, counsels and litigates for clients on insurance coverage, environmental and products liability matters. Mr. Donald co-chairs the firm's Climate Change and Renewable Energy Practice. He draws on his substantial environmental experience, his prior non-legal technical work, and his deep involvement in risk management to assist clients in understanding and controlling the coming regulatory and non-regulatory impacts of climate change. He has tried cases and argued appeals in the state courts in New Jersey and Maryland, conducted private arbitrations and mediations, and argued motions in federal courts across the nation.

Read more at Climate Lawyers Blog by McCarter & English, LLP.

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