Goldman Sachs-backed electric company will reach more American homes

Goldman Sachs abandoned its ill-fated push into consumer banking at the end of 2022, but its investment in the Texas energy retailer means its reach in American homes is about to grow.

Energy of rhythma Houston-based energy supplier controlled and privately owned by Goldman Sachs. fundhas received federal approval to expand from its home market into more than a dozen states where deregulated energy companies operate, CNBC has learned.

That includes power grids, mostly in the Northeast, that provide electricity to 190 million Americans, according to the federal government. data.

The idea that the Goldman-linked company is seeking to make a splash by providing vital services to Americans could prompt scrutiny of the bank and its efforts to boost revenue through so-called alternative investments. It also brings Goldman into an industry, albeit through an intermediary, that critics call a hotbed of consumer abuse.

A wave of energy deregulation that began in the 1990s led to the emergence of a new group of retailers promising savings over existing utilities. State attorneys general, consumer groups and industry watchdogs supposed that some of these retailers use deceptive marketing and billing practices to burden customers with higher costs. According to one estimate, customers paid $19.2 billion more than they needed in deregulated states in a decade.

Rhythm, which calls itself the largest independent clean energy provider in Texas, has positioned itself as an honest company in a field of less honest players. The startup, which began offering retail energy plans to Texans in 2021, avoids competitors’ teaser rates and hidden fees. said.

“While some of our competitors like to charge up to 18 hidden fees, we pride ourselves on charging exactly 0,” Rhythm says in its report. Web site.

But Rhythm’s customers in Texas paid an average of 18 cents per kilowatt-hour in 2022, five cents per hour more than customers of the state’s regulated providers paid, according to the U.S. Energy Information Administration.

That figure does not include the impact of credits provided to solar customers, which lower their costs, according to a person familiar with the company who was not authorized to speak officially.

While there have been “bad players” in the home energy space, there have also been “great retailers with innovative products,” says James Bride, an energy expert. consultant“, he said in an interview. “Realization of potential depends on ethical behavior of the company.”

Nothing in online reviews, interviews with current and former customers, or conversations with supervisors contradicts Rhythm’s claims of fair dealing and good service.

“Goldman Sachs invests in many sectors of our private funds on behalf of clients,” a spokeswoman for the New York bank said in response to this article. “Many of these companies operate businesses that serve retail customers. This is not new.”

Goldman’s reputation with American consumers is mixed: the bank accused profiting from the 2008 housing bubble by betting on subprime securities. Years later, the bank named its consumer business “Marcus,” in part to distance itself from that memory. But the consumer unit has been battered by mounting losses, a flight of talent and unwanted regulatory attention.

Goldman CEO David Solomon has now poured his fortune into the bank’s wealth management division, calling it an “engine of growth” following the collapse of the retail banking sector. As part of these efforts, Goldman is seeking to attract more client money to private equity funds to help its goal of creating 10 billion dollars fees this year.

Private equity firms have changed the energy landscape in the nation’s largest energy markets. For example, in PJM zone Including Pennsylvania, New Jersey and Maryland, private equity owns about 60% of fossil fuel producers and enjoys less regulatory oversight than legacy utilities, according to an August report from the Institute for Energy Economics and Financial Analysis.

“Ownership status is important,” wrote report author Dennis Wamsted. “Utilities are controlled by government regulators who have an interest in controlling taxpayer costs; private capital is largely free from this oversight.”

The company “Rhythm”, which buys energy on wholesale markets and sells it to consumers, first appeared in headers in November, after his filing with the Federal Energy Regulatory Commission appeared.

The move was made by Goldman Sachs, through its private equity arm, one of the first firms on Wall Street to sell retail energy contracts to households, according to the company. Tyson Slocumdirector of energy and climate at consumer watchdog Public Citizen.

Slocum marked that Goldman’s trading division handles energy contracts and owns, along with other lenders, a fleet of fossil fuel generators along the Northeast Corridor, while a separate division has formed a solar energy company. named MH8 Energy. The ability to influence retail sales, energy production and trading in energy contracts could lead to abuse, he said.

“Goldman knows how to operate, they own and manage energy assets and participate in the futures and physical markets,” Slocum said. “They will be able to handle it well. Will clients be able to do the same? I’m not sure”.

Goldman has “strict information barriers between public and private businesses” that discourage such self-dealing, a company spokeswoman said.

In a statement provided to CNBC, Rhythm CEO PJ Popovich stated that his firm “has never purchased power from Goldman Sachs or any Goldman Sachs-owned or affiliated power generation assets, nor has Rhythm ever purchased physical or financial capacity from Goldman Sachs or any of its subsidiaries on commodity markets.”

Rhythm operates “standalone” from West Street Capital Partners, a Goldman Sachs private equity fund that is listed on federal documents as the owner, according to the person who was not authorized to speak on behalf of the company.

However, Goldman Sachs has been involved with Rhythm since its founding in 2020, and the bank has placed at least one director on Rhythm’s board, a typical situation in the private equity industry, according to this person.

According to the Columbia Business School finance professor, private equity firms can influence portfolio companies in a variety of ways, including by hiring and firing CEOs and signing acquisitions and divestitures. Michael Youens.

But the overarching goal of Goldman Sachs managers—to ensure a profitable outcome for West Street Capital Partners investors and improve their chances of participating in future rounds—is to instill discipline in how the companies are run, Ewens added.

“People tend to think a lot of bad things about private equity, but Goldman will always have one major problem,” Ewens said. “Will anyone buy this company in five years for more than they paid for it?”