Goldman Sachs’ Entry into Consumer Banking

Goldman Sachs abandoned its previous foray into consumer banking in late 2022. However, the banking giant’s investment in a Texas energy retailer called Rhythm Energy signals its expansion into American homes.

Rhythm Energy, an electricity provider based in Houston and owned by a private equity fund of Goldman Sachs, has received approval from federal authorities to expand its operations from its home market to deregulated power firm-operated states in the Northeast, covering an estimated 190 million Americans.

This move may draw scrutiny on Goldman Sachs, given the potential impact on the bank and its efforts to generate revenue through alternative investments. Additionally, entering an industry notorious for consumer abuse raises concerns.

The wave of energy deregulation that began in the 1990s brought forth a new group of retailers offering potential savings compared to traditional utilities. However, allegations have emerged from state attorneys general, consumer groups, and industry watchdogs about deceptive marketing and billing practices by some of these retailers, resulting in higher costs for customers.

Rhythm Energy, positioning itself as an honest company among its less scrupulous counterparts, claims to be the largest independent green energy provider in Texas. It avoids using teaser rates and hidden fees, providing transparent pricing to its customers.

However, Rhythm’s Texas customers paid on average 18 cents per kilowatt-hour in 2022, five cents more than what customers of regulated providers paid. It should be noted that this figure doesn’t account for the impact of credits provided to solar customers, reducing their costs.

Independent energy consultant James Bride emphasized the importance of ethical company behavior in realizing the potential of the residential power field.

Goldman Sachs has a mixed record in dealing with the American consumer. It faced accusations of profiting from the 2008 housing bubble and subsequently launched its consumer division named Marcus to distance itself from that reputation. However, the consumer division experienced losses, talent drain, and regulatory scrutiny.

Goldman CEO David Solomon has redirected the bank’s focus to its asset management division, considering it the “growth engine” after the retail banking setback. To achieve this, Goldman aims to raise more client money for private equity funds, aiming for $10 billion in fees this year.

Private equity firms have had a significant impact on the nation’s largest power markets, with less regulatory oversight compared to legacy utilities. Rhythm Energy, as one of the first Wall Street firms involved in selling retail energy contracts to households, represents Goldman Sachs’ venture into this domain.

Consumer watchdogs have raised concerns about potential conflicts of interest for Goldman Sachs. The bank’s trading arm is involved in energy contracts and owns fossil fuel generators along the Northeast corridor. Additionally, Goldman Sachs formed a solar power firm named MN8 Energy. The intersection of retail sales, energy generation, and power contract trading could give rise to abuses.

Goldman Sachs, however, claims to have strict information barriers between its public and private businesses, preventing any self-dealing. Rhythm CEO P.J. Popovic confirmed that Rhythm has not purchased power from Goldman Sachs or any of its affiliates in the physical or financial power markets.

While Rhythm operates autonomously from Goldman Sachs’ private equity fund, the bank has been involved since its founding in 2020 and has at least one director on Rhythm’s board, a common arrangement in the private equity industry.

Professor Michael Ewens of Columbia Business School explains that private equity funds can exert influence on portfolio companies through various means, but Goldman Sachs’ overriding concern is ensuring profitability for investors and the potential for future acquisitions. However, consumer advocate Tyson Slocum remains unconvinced of Rhythm’s ability to prioritize customer welfare.