Powering the UK 2013

The sector’s contribution to the UK economy

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The energy sector:

  • Is a large, consistent contributor to UK GDP, providing £24bn directly to the UK economy in 2012, an increase from £21bn in 2011.
  • Contributed an additional £78bn indirectly through its supply chain for a total economic value added £102bn.
  • Paid £3bn in taxes, 40% in corporation tax.

A large, consistent contributor to the UK economy

Direct impact

In 2012 the sector’s direct contribution to UK GDP as measured by Gross Value Added4 or GVA of the organisations operating in the energy sector was an estimated £23.8bn – a £3.1bn increase on 2011.


Chart 1: Energy Sector contribution to the UK Economy (GDP) in 2012

EY - Energy Sector contribution to the UK Economy (GDP) in 2012

 

Source: EY Analysis, ONS Data


Indirect impact

The sector is dependent on many others for its supply chain. For example it buys intermediate fuel inputs (e.g., gas and biomass) daily. It also buys capital goods and services such as construction services for new infrastructure, and manufactured industrial goods for use in energy networks. These activities add further indirect value across the UK economy.

The energy sector’s 2012 indirect contribution is estimated at £78.3bn, up from £68.1bn in 2011.5

Energy has a larger positive impact on its supply chain activities than other capital-intensive/infrastructure sectors. For every £1 of value added, roughly £3 is created in other areas of the economy. The ratio of indirect to direct value added is referred to as ‘the indirect to direct GVA multiplier’. For energy this is £3, whilst for many other sectors it was around £1–£2.

Definition of Gross Value Added (GVA)

One way to measure a company’s, industry sector’s or economy’s value is to determine its size in terms or output or turnover (total sales). Another key measure is the contribution made, often defined as the ‘Gross Value Added’. This is the difference between the value of the goods and services produced and the cost of inputs, such as raw materials and energy consumed.

The Gross Value Added (or GVA) generated by all sectors adds up, with some adjustments (e.g., for taxes and subsidies), to a country’s Gross Domestic Product (GDP). On these pages we use ‘GVA’ and ‘contribution to GDP’ interchangeably.

Sectoral productivity

The energy sector not only contributes around 3% of UK GDP, but is also one of the most productive sectors as is indicated by GVA per direct employee. As our chart ‘GVA per employee across sectors, 2012’ highlights, at £164,000 per employee, this is almost double the value added per employee in the finance and insurance sector, and almost five times the contribution per employee in the wholesale and retail trading sector.

A key reason for this productivity is the high level of capital investment in the sector compared to others. By contrast, growth in the service sector creates jobs which have lower value-addition, albeit sometimes in greater numbers.


Chart 2: GVA per employee across sectors, 2012

EY - GVA per employee across sectors, 2012

 

Source: ONS Data


Large tax contribution to the exchequer

In 2012 the energy sector directly contributed tax revenues equal to c. £3bn, broken down as follows:

  • £1.2bn in corporation tax
  • £760m income tax and £460m employee National Insurance contributions, largely collected by the energy sector on HMRC’s behalf.
  • £530mn via employer National Insurance contributions.

The sector paid around 3% of HMRC’s total 2012 corporation tax receipts – a substantial contribution. It invests heavily in capital construction, which would be expected to reduce corporation tax, since tax reliefs reduce taxable profits. But those projects also drive additional tax take in the form of, for example, employment taxes from the construction sector, reflecting how high the proportion of capital costs is in practice made up of labour.

In addition to these payments, the energy sector pays other contributions or levies under the EU Emissions Trading Scheme, Climate Change Levy, Renewables Obligations, the Carbon Price Floor and Energy Company Obligation, and business rates to local authorities across the UK.


4 The Gross Value Added (GVA) is the difference between the value of the goods and services produced and the cost of the inputs such as raw materials and energy consumed as well as the goods and services purchased as intermediate inputs. The GVA generated by all sectors of an economy adds up (with some adjustments) to the country’s Gross Domestic Product (GDP).

5 Based on latest available ONS data