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The economic impact

of Centrica in the UK

A report prepared for


Contents

Foreword by Sam Moore 1

Executive Summary 2

1 Introduction 4

Purpose of the study 4

Introduction to impact analysis 4

Metrics used in economic impact studies 5

Report structure 5

2 Economic impact 6

Centrica’s direct economic impact 6

Centrica’s contribution to UK GDP 6

Employment at Centrica 7

Centrica’s direct tax contribution 8

Centrica’s impact on its UK supply chain 9

Centrica’s wage consumption impact 9

Centrica’s total economic impact 10

3 Centrica’s impact on the UK’s nations and regions 11

Centrica’s direct economic impact 11

Centrica’s direct contribution to GDP in the regions 11

Employment at Centrica 11

Supply chain contribution to each region 13

Centrica’s wage consumption impact by region 15

Centrica’s total economic impact by region 15

4 Wider catalytic impacts 17

Apprenticeships and training 17

Security of supply and a low-carbon power industry 18

Centrica’s pivotal role in gas supply 18

Wind power 19

Boosting customer energy efficiency 20

Insulating Britain’s homes 20

Smart metering 20

5 Conclusion 21

Front cover: Centrica Energy’s York gas

field in the Southern North Sea which will

produce and transport 120m cubic feet

per day, at its peak, to the new terminal

at Easington, East Yorkshire, operated by

Centrica Storage.


The economic impact of Centrica in the UK

Foreword

Foreword by Sam Moore

At a time when the economy has experienced little or negative economic growth since

2007, companies that can grow and employ people are highly important.

This report explains how the activities of Centrica, a large and successful British company,

contribute to the UK economy, especially the labour market and public finances. The

analysis shows the contribution Centrica makes to UK GDP, the number of people who rely

on Centrica for their employment and the amount of tax receipts it supports.

The report reveals the impact of Centrica extends right across the UK’s nations and regions,

well beyond its 69 major operational sites where most of its employees are based. Centrica

sources supplies from companies in 377 out of Britain’s 380 local authorities. This creates

employment, wages and profits for firms of all sizes in many localities.

Centrica also enhances the supply-side of the economy by increasing the skillset of its UK

labour force, notably through the apprentices it employs. It also acts to secure current and

future energy supplies for the UK population. The firm also boosts its customers’ energy

efficiency by insulating homes and fitting smart meters.

I hope you enjoy the report.

Sam Moore

Chief Operating Officer

Economic Impact and Cities Service

1


The economic impact of Centrica in the UK

Executive Summary

Executive Summary

This report investigates the contribution Centrica makes to the UK economy. It

quantifies the direct impact that Centrica’s UK operations have on the UK through its

upstream, downstream and storage activities, but also the indirect impact generated

through its procurement of inputs of goods and services from its UK supply chain

and the induced wage consumption impacts due to spending by Centrica staff and

suppliers’ staff.

By generating tax revenue, supporting jobs and stimulating economic activity along its

supply chain, the impact of Centrica is shown to extend well beyond its core function

of delivering a secure energy supply to businesses and consumers across the country.

In 2012, Centrica:

■■

Made a £14.1 billion contribution to UK GDP, equivalent to the size of the

economy of the City of Manchester. 1

■■

Supported 174,000 jobs in the UK, equivalent to total employment in the City

of Leicester. 2

■■

Purchased inputs of goods and services worth £9.4 billion 3 from over 6,000 UK

businesses located in 377 of the 380 local districts in Britain.

■■

Generated £4.2 billion in total tax receipts for the Exchequer 4 , including

the supply chain and wage consumption impacts, equivalent to £158 for every

household in the UK.

Centrica also has powerful effects on the UK’s nations and regions.

■■

In 2012, Centrica supported at least a £0.5 billion contribution to GDP in

11 out of the 12 UK nations and regions, with the biggest impacts of over £2.5

billion each in Scotland and the South East of England.

1 Defined using the metropolitan borough of Greater Manchester.

2 Defined using the unitary authority of Leicester.

3 Includes the purchase of UK commodities (Power and Gas) from outside Centrica’s upstream power and gas

business.

4 Total tax includes corporation tax, upstream taxes (i.e. petroleum revenue tax, climate change levy and SCT),

employees and employers’ national insurance contributions, PAYE, and other miscellaneous taxes (e.g. business

rates and vehicle excise duty). VAT paid and collected by Centrica is excluded.

■■

Relative to the size of the local economy, Centrica makes the largest

contribution to the Scottish and North East of England economies,

supporting 2.4% and 1.7% of GDP respectively.

■■

Ten out of the twelve of the UK’s nations and regions received at least 5% of

Centrica’s expenditure on inputs of goods and services.

■■

All regions of Great Britain receive a contribution to GDP of over £100 million

from the spending of wages by Centrica employees and those in its supply chain.

Centrica is also an enabler whose activities improve the functioning of the UK economy.

■■

The training and apprenticeships Centrica offers help the young people involved

to acquire skills and experience that will increase their life-time probability of

being employed and lift their expected wage rates. Level 3 apprenticeships are

estimated to increase the likelihood of employment over a person’s lifetime by

3.8% and have a wage premium of 18%.

■■

Centrica has made commitments totalling more than £50 billion to secure longterms

supplies of gas and power for UK customers by increasing extraction

of hard-to-reach gas, exploring new overseas sources and securing long-term

deals to import liquefied natural gas as the UK’s own reserves decline.

■■

Centrica’s Rough storage reservoir, off the coast of Lincolnshire, provides

75% of the UK’s total long-range storage capacity and is sufficient to meet

10% of the UK’s peak-day demand.

■■

Centrica plays a central role in encouraging households to take up schemes to

improve energy efficiency. Over the past five years, Centrica has installed 3.2

million insulation measures in UK houses.

■ ■ Centrica is leading the roll-out of smart meters, with nearly one million

already installed in homes and businesses across the country.

2


The economic impact of Centrica in the UK

Executive Summary

Centrica itself

Centrica’s supply chain

Wage consumption impacts

Total

Centrica contributes £3.7 billion to UK GDP

• 33,100 people work for Centrica spread

across 52 different local authorities in

Great Britain

• £1.1 billion in tax receipts paid by

Centrica and its staff

Centrica’s employees are 2.25 times as

productive in terms of GDP contribution

as the UK average

• 6,000 UK companies supply inputs of goods

and services to Centrica

• 80,000 jobs are supported by Centrica’s

procurement from its supply chain

Centrica’s purchases of inputs generates

an estimated £7.8 billion contribution to

UK GDP

• £1.6 billion in tax payments resulting from

Centrica’s procurement from UK-based firms

• 61,000 jobs are supported by Centrica’s staff

and those in its direct supply chain spending

their wages at retail and leisure outlets

• £2.6 billion in GDP created by Centrica’s

direct and supply chain staff spending

their wages

• £1.4 billion in tax receipts from Centrica’s

staff and those in its supply chain spending

their wages

• 174,000 jobs are dependent

on Centrica

• £14.1 billion GDP is

supported by Centrica

• £4.2 billion in tax payable to

the Exchequer is supported

by Centrica; equivalent to

£158 for every UK household

=

3


The economic impact of Centrica in the UK

Introduction

Purpose of the study

This study examines the contribution that Centrica makes to the UK and the local

economies of its nations and regions. This contribution can be broken down into

a number of elements, some of which are readily quantifiable while others, though

important, require a more qualitative discussion.

The report aims to provide all stakeholders in Centrica – customers, Government,

taxpayers, suppliers, employees and shareholders – with a better understanding

of the value that Centrica generates for the UK each year and the role it plays in

ensuring homes, businesses and public organisations have the energy they need.

The quantified elements of this study focus on 2012. Over the year, Centrica

generated worldwide revenues of £23.9 billion. In the UK in 2012, Centrica served

the energy needs of 15.7 million residential customers and over 900,000 businesses.

Introduction to impact analysis

Introduction

To assess the economic contribution of Centrica to the UK economy and its nations

and regions, this report examines three channels of economic impact:

■■

Direct impacts – these comprise the gross value added contribution to GDP,

employment and tax revenues generated by Centrica itself.

■■

Indirect impacts – these are the impacts which occur as a result of Centrica’s

expenditure on inputs of goods and services from its UK supply chain. These

impacts are quantified in terms of the value added generated in suppliers’

businesses, the number of jobs supported and the consequent tax receipts.

■■

Induced impacts – these are the impacts which arise from Centrica’s employees,

and those employed in its direct supply chain, spending their wage income on

consumer goods and services. The impacts are first felt at the retail and leisure

outlets close to where Centrica’s and its suppliers’ staff live, but will also ripple out

through the supply chains of the businesses selling consumer goods and services.

Calculation of these quantifiable impacts is on a gross basis. They therefore make no

allowance for what the people and the other resources deployed by Centrica and its

suppliers would have contributed to the economy if Centrica did not exist.

In addition to these effects, Centrica also enables other economic activity. The report

seeks to describe these ‘catalytic’ impacts. These are split into two types. Supplyside

catalytic effects boost the productive potential of the economy in some way,

for example, through increasing skill levels or competition. Demand-side catalytic

effects alter consumer or investment behaviour, for example, by improving consumer

knowledge of energy efficiency measures.

Worker cuts first steel on Centrica Energy’s £1.4bn Cygnus gas field project

at Heerema Fabrication’s Hartlepool yard in North East England

Catalytic impacts are typically very difficult to quantify, as they accrue to sectors other

than the focus of the study. Also, some of the effects are intangible, such as the

impact on productive potential. As a result, this study discusses the catalytic impacts

of Centrica but only quantifies some aspects of this contribution. The catalytic impacts

are not added into the £14.1 billion estimate of Centrica’s contribution to GDP.

4


The economic impact of Centrica in the UK

Introduction

Metrics used in economic impact studies

The economic impacts measured in this study are quantified using three metrics.

These are:

■■

Gross value added contribution to GDP – measures the contribution to the

economy of each individual producer, industry or sector in the United Kingdom. It

is a measure of net output. It is aggregated to form the basis of Gross Domestic

Product (GDP) which is the main measure of the total level of economic activity

in the UK economy.

■■

Employment – this is measured on a headcount rather than a full-time equivalent

basis. This is to facilitate comparison with employment data for other businesses

and industry sectors sourced from the Office for National Statistics (ONS).

■■

Tax revenues – this is the amount of tax revenue flowing to the Exchequer.

Report structure

The rest of the report is divided into three chapters as follows:

■■

Chapter 2 focuses on the quantifiable direct, indirect and induced economic

impacts of Centrica on the UK economy.

■■

Chapter 3 discusses the distribution of these economic impacts across the

nations and regions of the UK.

■■

Chapter 4 explores the wider catalytic impacts that Centrica generates.

■■

Chapter 5 provides conclusions from the research study.

British Gas’ National Distribution Centre in Leicester, which provides

national coverage and overnight delivery for over 6m parts per year

5


The economic impact of Centrica in the UK

Economic impact

Main points

■■

On its UK turnover of £16.9 billion in 2012, Centrica made a £14.1 billion

contribution to UK GDP.

■■

For every £1 billion it contributes to GDP itself, Centrica generates another

£2.9 billion in the rest of the UK economy through its procurement and the

wages paid to employees in its own businesses and across its supply chain.

■■

Centrica’s total economic multiplier of 3.9 is well above the average of 2.3

across all industrial sectors in the UK.

■■

Centrica’s total contribution to UK GDP in 2012 equates to the economy of

the City of Manchester.

■■

Centrica supports 174,000 jobs in the UK, made up of 33,000 in the

company itself, 80,000 in its supply chain and 61,000 in businesses

which benefit from the spending of wages by Centrica and supply chain

employees. This is equivalent to all the people employed in Leicester.

■■

Centrica supports £4.2 billion in total tax payable to the Exchequer, equivalent

to £158 for every household in the UK or 0.9% of total Government tax

receipts for 2012.

Centrica’s direct economic impact

Economic impact

Centrica’s contribution to UK GDP

In 2012, Centrica’s UK operations generated turnover of £16.9 billion. On these

earnings, Centrica is estimated to have made a £3.7 billion contribution to UK GDP. 5

This comprises gross profits (as measured using earnings before interest, taxes,

depreciation and amortization) at 60% and employee compensation at 40% (Chart 2.1).

Chart 2.1: Centrica’s contribution to UK GDP in 2012

Employee

compensation

40% £3.7 billion

GDP

Profits

60%

Source: Oxford Economics/Centrica

To give a sense of scale, Centrica’s direct contribution to UK GDP is equivalent to the

economy of the London Borough of Kingston-upon-Thames.

5 The estimate is made using the income approach to national income accounting. This measures the income

generated by Centrica’s operations, so, for example, the wages paid to its employees and profits to the

shareholders. It should be equivalent to the output approach measure which is defined as turnover less the

intermediate costs of producing those sales.

6


The economic impact of Centrica in the UK

Economic impact

Employment at Centrica

At the end of 2012, Centrica employed 33,100 people (employees, contractors and

agency staff) in the UK. This means it employs more people than work in television

and radio programming and broadcasting activities (25,000) in the UK. 6

Of its employees, 93% work in Centrica’s downstream business (Chart 2.2).

Downstream business units which employ large numbers include: British Gas Home

Services (13,812 people in Chart 2.3), British Gas Residential Energy (7,518 people);

British Gas Business (2,759 people) and British Gas Smart Metering (1,661 people). The

remaining 6% and 1% work in Centrica’s upstream and storage activities, respectively.

The largest upstream business unit is CE Upstream, which employs 1,053 people.

Chart 2.2: Centrica’s employment profile in 2012

Upstream

6%

Storage

1%

Chart 2.3: Centrica’s ten largest business units by employment size in 2012

British Gas

Home Services

British Gas

Residential Energy

British Gas Business

British Gas

Smart Metering

CE Upstream

British Gas

New Energy

British Gas

Business Services

CE Upstream EIS

Downstream

Upstream

Storage

Centrica Storage - CSL

Dyno Rod - Drains

0 2 4 6 8 10 12 14 16

Employees (000’s)

Downstream

93%

Centrica employs over 9,000 engineers. Of these, 95% work supporting residential

customers, 4% are employed helping their business customers and 1% are spread

across the remainder of the business.

Source: Oxford Economics/Centrica

6 ONS, (2012), ‘Annual Business Survey 2011’. Uses data for SIC code 60 for programming and broadcasting activities.

7


The economic impact of Centrica in the UK

Economic impact

Centrica’s workforce is highly productive. On average, its staff contribute £111,000

in gross value added to GDP per head. This is 2.25 times the average for the whole

economy of £49,000 (Chart 2.4). If Centrica were an industrial sector in its own right

its productivity would place it in the top 15% of all UK sectors. 7

Chart 2.5: Centrica’s total tax contribution by type in 2012

Other miscellaneous taxes

2%

Chart 2.4: GDP per head of Centrica’s staff versus the whole economy in 2012

Centrica

Employers’

National

Insurance

11%

Employee

Income Tax

20%

Whole Economy

Total

£1.1 billion

Employee National Insurance

8%

0 20 40 60 80 100 120

£ 000’s

Source: ONS/Oxford Economics/Centrica

Centrica’s direct tax contribution

In 2012, Centrica’s UK operations generated a total of £1.1 billion in tax payable to

the Exchequer (Chart 2.5). Total tax payable includes corporation tax, upstream taxes

(i.e. petroleum revenue tax, climate change levy and SCT) employee and employers’

national insurance contributions, PAYE, and other miscellaneous taxes (e.g. business

rates and vehicle excise duty), while VAT paid and collected by Centrica is excluded.

Centrica’s tax contribution is large relative to other similarly sized corporates. Figures

for Centrica in 2011 show it was accountable for 5% of taxes payable by the 100

largest FTSE companies. 8

Corporation Tax plus

upstream taxes

59%

Source: Oxford Economics/Centrica

7 Based on ONS (2012), ‘Annual Business Survey’ data for productivity in all industrial sectors classified at the 3

digit Standard Industrial Classification (SIC) level. Figures for 2011 are projected forward to 2012 using Oxford

Economics’ UK Macroeconomic Model’s forecast of whole economy productivity growth in 2012.

8 Uses data on the FTSE 100 companies’ tax contribution from PwC (2012), ‘Total tax contribution: Surveying the

Hundred Group’. Based on corporation tax, petroleum revenue tax, business rates, employers’ national insurance

contributions, irrecoverable VAT, vehicle excise duty and climate change levy.

8


The economic impact of Centrica in the UK

Economic impact

Centrica’s impact on its UK supply chain

In 2012, Centrica purchased inputs of goods and services worth £9.4 billion from UK

businesses. Of this total, £3.9 billion (41%) was spent on the purchase of commodities

(electricity and gas). 9 Transportation and distribution of gas and electricity accounted

for over 40% of the remaining £5.6 billion of spend. The remainder of the expenditure

was spread over a wide variety of categories (Chart 2.6).

Chart 2.6: Centrica’s purchase of inputs from UK suppliers by type (excluding

commodities)

Transportation & distribution

of gas and power

Heating services

Information systems

and telecoms

Business services

Energy efficiency products

As a result of its procurement of inputs of goods and services, Centrica is estimated

to generate a £7.8 billion contribution to UK GDP in its supply chain. Using labour

productivity estimates in each of the industries affected, this activity is likely to

support 80,000 people in employment. Assuming those people and firms earned

average wages and profits for their industrial sector, Centrica’s purchases of inputs

support tax payments of £1.6 billion in 2012. 10

Centrica’s wage consumption impact

In 2012, Centrica paid its UK staff £1.2 billion in wages and salaries. The 80,000

people supported in employment in Centrica’s supply chain are estimated to have

earned £3.1 billion in wages. 11 Using consumption multipliers calculated from ONS

data 12 , the spending of wages and salaries by Centrica’s staff and those in its direct

supply chain are estimated to support a further £2.6 billion contribution to UK GDP

at retail and leisure outlets and in their supply chain. This spending activity supported

61,000 people in employment in the UK. Assuming those people and firms earned

average wages and profits for their industrial sector, the wage consumption impacts

of Centrica’s UK activities in 2012 support £1.4 billion in tax receipts payable to the

Exchequer. 13

Sales and marketing

HR services

Outsourcing

Facilities management

Other expenditure

0 10 20 30 40 50

%

Source: Oxford Economics/Centrica

9 To avoid double counting, the £3.9 billion figure excludes commodities purchased from Centrica’s upstream power

and gas businesses.

10 The ‘indirect’ calculation excludes the impact of spending by Centrica on fixed capital (£618 million in 2012). This

spending is treated as being made out of profits rather than as reducing profits, and so is already reflected in full in

Centrica’s own direct contribution to GDP.

11 Calculation assumes people are paid the mean wage for their industrial sector using data from ONS, (2011),

‘Annual survey of hours and earnings’. Data are for 2011 uprated to 2012 using Oxford Economics’ UK

Macroeconomic Model’s forecast of whole economy average earnings growth.

12 A consumption (also known as a Type II) multiplier shows the impacts of the local expenditure by those who derive

their incomes from the direct and supply linkage impacts of Centrica.

13 Tax generated includes indirect tax payments paid by consumers (e.g. VAT and excise tax), based on ONS data

published in ‘The effects of taxes and benefits on household income, 2010/2011’ HMRC (June, 2012).

9


The economic impact of Centrica in the UK

Economic impact

Centrica’s total economic impact

Adding together the direct impact of Centrica itself to its supply chain and wage

consumption impacts shows that, in total in 2012, Centrica made a £14.1 billion

contribution to UK GDP (Chart 2.7), equivalent to the economy of the City of

Manchester. For every £1 billion it contributes to GDP itself, it generates another £2.9

billion in the rest of the UK economy through the supply chain and wage consumption

multiplier impacts. Centrica’s GDP ‘multiplier’ of 3.9 14 is well above the average of 2.3

across all industrial sectors in the UK. 15

In total, Centrica is estimated to support 174,000 people in employment in the

UK, equivalent to total employment in the City of Leicester. Of these, it employs

33,100 itself and supports 80,000 in its supply chain and a further 61,000 due to

wage consumption impacts. Centrica’s employment multiplier is therefore 5.3. The

multiplier’s size reflecting the productivity of Centrica’s workforce relative to the

average across the UK.

In 2012, Centrica generated £4.2 billion in total tax receipts payable to the Exchequer,

equivalent to £158 for every household in the UK or 0.9% of total Government tax

receipts for 2012. 16

Chart 2.7: Centrica’s contribution to UK GDP and employment in 2012

£ billions People (000s)

18

180

16

14

12

10

8

6

4

2

0

GDP

Source: ONS/Oxford Economics/Centrica

Jobs

160

140

120

100

80

60

40

20

0

Wage consumption

impacts (induced)

Supply chain (indirect)

Direct

14 GDP multiplier = (Direct GDP + supply chain GDP + wage consumption GDP) / Direct GDP.

15 Oxford Economics’ calculations using ONS (2011), ‘Input-output analytical tables, 2005 edition’, 2 August.

Comparison is made using the unweighted average of all 123 industrial sectors.

16 Total tax receipts figures from HM Treasury, (2013), ‘The Budget 2013’, 20 March.

10


The economic impact of Centrica in the UK

Centrica’s impact on the UK’s nations and regions

Centrica’s impact on the UK’s nations and regions

Main points

■■

In 2012, Centrica supported at least a £0.5 billion contribution to GDP in

11 out of the 12 UK nations and regions, with the biggest impacts of over

£2.5 billion each in Scotland and the South East of England.

■■

Relative to the size of the local economy, Centrica makes the largest

contribution to the Scottish economy, with its activities supporting 2.4% of

the nation’s GDP. Its impact is second largest in the North East of England,

where it is estimated to support 1.7% of regional GDP.

■■

The total impact of Centrica’s operations supports around 0.8% of all jobs

in the North East of England, the East Midlands, Scotland and the North

West of England.

■■

Centrica’s UK supply chain is extensive. The company buys goods and

services from over 6,000 individual businesses in Great Britain, with

suppliers located in 377 out of 380 British local authority areas.

Centrica’s direct economic impact

Centrica’s direct contribution to GDP in the regions

In 2012, Centrica is estimated to have made a £3.7 billion contribution to UK GDP.

Of this, £1.2 billion (or 33%) was made in the South East of England (Chart 3.1).

Significant contributions of £0.6 billion were made in the North West of England; £0.6

billion in Yorkshire and the Humber; and £0.5 billion in Scotland. 17

17 Centrica’s direct contribution to a region’s GDP is calculated as the sum of wages paid and profits generated in the

region. Estimating Centrica’s total wage costs in each region uses data for employment categorised to 8 different

job grades in each region. To derive the total regional wage costs, the average wage levels for each of the 8 job

grades was applied to the number of employees in that category in the region. The profit measure used in GDP

calculations is earnings before interest, taxes, depreciation and amortisation. Data for this measure for Centrica is

not available at a regional level but has been estimated on the basis of total regional wage costs.

Chart 3.1: Centrica’s direct GDP contribution by region in 2012

£ millions

1,400

1,200

1,000

800

600

400

200

0

South East

North West

Yorks & the Humber

Source: Oxford Economics

Employment at Centrica

Scotland

East Midlands

Wales

West Midlands

Greater London

East of England

South West

North East

Northern Ireland

Centrica’s workforce is located across 69 major sites in the UK. These are located

in 52 different local authority districts in Great Britain (Map 3.1). 18 The highest

concentrations of employment by local authority district are in Leeds where 3,289

people (or 10% of total) work at three sites and in Staines, where it employs 2,957

people (or 9%) at three different sites.

18 The 380 local districts in Great Britain are made up of metropolitan boroughs, London boroughs, non-metropolitan

districts, unitary authorities, as well as the City of London and the Isles of Scilly.

11


The economic impact of Centrica in the UK

Centrica’s impact on the UK’s nations and regions

Analysed by the UK’s nations and regions, 7,607 (or 23%) of Centrica’s staff were

employed in the South East (Chart 3.2). Other major areas of employment were the

North West (5,584 people), Yorkshire and the Humber (5,214 people), and Scotland

(4,169 people).

Chart 3.2: Centrica’s direct employment in 2012

People

7,000

Map 3.1: Location of major concentrations of Centrica’s workforce across

Great Britain in 2012

Aberdeen

North Lanarkshire

Edinburgh

South Lanarkshire

6,000

Storage

Upstream

Barrow-in-Furness

Lancaster

5,000

Downstream

Bradford

Leeds

Greater Manchester

4,000

East Riding of Yorkshire

Rotherham

> 2001

North East Lincolnshire

3,000

1001-2000

Sandwell

Cardiff

2,000

1,000

201-1000

100-200

50-99

Leicester

Blaby

Oxford

Windsor and

Maidenhead

Runnymede

0

South East

North West

Yorks & the Humber

Source: Oxford Economics/Centrica

Scotland

East Midlands

Wales

West Midlands

London

South West

East of England

North East

Eastleigh

Source: Oxford Economics/Centrica

12


The economic impact of Centrica in the UK

Centrica’s impact on the UK’s nations and regions

Supply chain contribution to each region

The company’s UK supply chain spreads right across the country, covering over

6,000 different UK businesses located in 377 of the 380 local districts in Great Britain

(Map 3.2). It spent at least £50 million on orders for inputs of goods and services

from suppliers in 58 local authority districts.

Map 3.2: Location of Centrica’s domestic suppliers in 2012

1,000 (or 16% of total) of Centrica’s UK suppliers in 2012 were located in London

(Chart 3.3). Purchases of inputs were also made from large numbers of firms in the

South East (16% of all suppliers), Scotland (13%) and the North West (10%).

Chart 3.3: Centrica’s suppliers – number of businesses by region

Number of businesses

1,200

1,000

800

600

400

200

Spend by Local Authority District

Zero

< 500,000

500,000 – 1,000,000

1,000,000 – 5,000,000

5,000,000 – 10,000,000

> 10,000,000

0

Greater London

South East

Scotland

North West

Source: Oxford Economics/Centrica

Yorks & the Humber

East of England

East Midlands

West Midlands

South West

Wales

North East

Northern Ireland

Crown Copyright ©

13


The economic impact of Centrica in the UK

Centrica’s impact on the UK’s nations and regions

By value, 17% of Centrica’s procurement expenditure was made in Scotland, 14%

in the South East and 9% in London (Chart 3.4). Ten out of the twelve of the UK’s

nations and regions received at least 5% of Centrica’s expenditure. To an extent the

spatial pattern reflects the centres of activity for Centrica’s operations, but particularly

in the case of Scotland it also reflects the upstream purchases of gas and electricity

central to Centrica’s operations.

Chart 3.4: Centrica’s procurement by region in 2012

Yorks & the Humber

6.5%

East of England

7.1%

Wales

4.0%

Northern Ireland

0.2%

Scotland

17.1%

The impact of Centrica’s purchases on each of the regional economies depends on

both the size of the purchases themselves and the type of input bought. Purchases

from some industries have higher multiplier impacts on the regional (and national)

economy than others. For example, Scotland accounts for nearly a quarter of the

indirect contribution to UK GDP from Centrica’s purchases, compared with 17% of

the value of Centrica procurement. The South East also accounts for a greater share

of indirect GDP supported by Centrica than its share of supply chain purchases

(Chart 3.5).

Chart 3.5: Centrica indirect contribution to GDP by region

Sout West

5%

Yorks & the Humber

6%

Wales

3%

Northern Ireland

0%

South West

7.1%

East

Midlands

8.3%

Source: Oxford Economics/Centrica

North

East

8.7%

West

Midlands

8.8%

North

West

9.2%

South East

13.8%

Greater

London

9.2%

East of England

7%

East

Midlands

7%

West

Midlands

8%

North

East

8%

North

West

9%

Scotland

24%

Greater

London

11%

South East

12%

The purchases Centrica makes also range widely across the industrial spectrum. The

relationship between turnover and GDP 19 for the industrial categorisation of Centrica

suppliers provides the basis for estimating the indirect GDP impact driven by these

purchases.

Source: Oxford Economics/Centrica

19 Data on the UK turnover to GDP ratio are sourced from the ONS (2012), ‘Annual Business Survey 2011’, 15 November.

14


The economic impact of Centrica in the UK

Centrica’s impact on the UK’s nations and regions

Centrica’s wage consumption impact by region

Centrica generates wage income for both its 33,100 direct employees and the 80,000

people it supports in employment at its suppliers, with more than 3,000 jobs supported

in each of the nations and regions of Britain. The North West, Scotland and the South

East each have around 10,000 supply chain jobs. The spending of this income

supports GDP across the UK’s nations and regions, with the impact on regional GDP

dependent on the number and types of job supported by Centrica and the extent to

which consumer spending on one region spills over into other parts of the country.

As might be expected, the regions that enjoy the biggest jobs impacts from Centrica

purchases – the South East, North West, Scotland and the East Midlands – enjoy the

largest induced contribution from Centrica’s operations, ranging from £500 million

for the South East to £260 million for the East Midlands. All regions of Great Britain

receive an induced contribution from Centrica’s activities of over £100 million.

Chart 3.6: Centrica wage consumption impacts on GDP in 2012

£ millions

600

Centrica’s total economic impact by region

Scotland and the South East enjoy the largest total contribution to GDP from Centrica’s

operations, with GDP impacts of £2.7 billion and £2.6 billion, respectively. The North

West, Yorkshire & the Humber, London and the East Midlands all see contributions of

well over £1 billion, with all other nations and regions in Britain enjoying contributions

in excess of £0.5 billion

Chart 3.7: Centrica total GDP impact in the UK’s nations and regions in 2012

£ millions

3,000

2,500

2,000

Induced

Indirect

Direct

500

1,500

400

300

1,000

200

500

100

0

South East

North West

Source: Oxford Economics

Scotland

East Midlands

Yorks & the Humber

Greater London

West Midlands

East of England

Wales

North East

South West

Northern Ireland

0

South East

North West

Source: Oxford Economics/Centrica

Scotland

East Midlands

Yorks & the Humber

Greater London

West Midlands

East of England

Wales

North East

South West

Northern Ireland

15


The economic impact of Centrica in the UK

Centrica’s impact on the UK’s nations and regions

As the nature of Centrica’s operations and purchases varies by region, the ranking of

the total employment effects is slightly different to that for total GDP. Scotland, though

it has over 22,000 jobs supported by Centrica, has a lower employment than GDP

ranking. The same is true for Yorkshire & the Humber, London and the South West.

Chart 3.8: Centrica’s total employment impact in the UK’s nations and regions

in 2012

People

30,000

25,000

20,000

Induced

Indirect

Direct

Scotland and the North East enjoy the largest contribution to GDP from Centrica

relative to the overall size of their economies. Compared with the 1% contribution

that Centrica supports across the whole UK economy, the impact in Scotland and

the North East is 2.4% and 1.7%, respectively. The East Midlands, Yorkshire & the

Humber, the North West, the South East and Wales also all enjoy greater proportionate

contributions to GDP from Centrica than the UK as a whole. London sees the lowest

proportionate contribution to GDP among the regions of Great Britain.

There is less disparity in the importance of the employment supported by Centrica

across the UK’s nations and regions. The company supports 0.8% of total employment

in the East Midlands, North East, North West and Scotland.

Anthony Pickering prepares to go offshore to

Centrica Energy’s Morecambe Bay gas fields

15,000

10,000

5,000

0

South East

North West

Source: Oxford Economics/Centrica

Scotland

East Midlands

Yorks & the Humber

West Midlands

Greater London

East of England

North East

Wales

South West

Northern Ireland

The size of the UK’s regional and national economies varies considerably. This means

that Centrica’s contribution to an area’s GDP and employment gives a better measure

of the company’s importance to the regional economies.

16


The economic impact of Centrica in the UK

Wider catalytic impacts

Wider catalytic impacts

Main points

■■

Centrica is an enabler whose activities improve the functioning of the UK

economy.

■■

Centrica’s training and apprenticeship programmes raise the qualification

levels of attendees, thereby boosting both their life-time probability of being

employed and future wage rates. It also enhances the UK’s skills base.

■■

A higher skilled workforce will boost revenue for the Exchequer. According

to a BIS study, there is a return over time to the Exchequer of between

£56,000 and £81,000 for each successful Level 3 apprenticeship.

■■

Centrica is dedicated to securing the UK’s future energy supply. It has

committed £50 billion to secure long-term supplies of gas and power,

by increasing extraction of hard-to-reach gas, exploring new overseas

sources and securing long-term deals to import liquefied natural gas.

■■

By 2019, all 53 million gas and electricity meters in UK homes are due

to be replaced by ‘smart’ meters. Centrica is leading the roll-out of

smart meters, with nearly one million already installed in homes

and businesses across the country. Nearly 75% of users who were

surveyed said that smart meters and monitors have made them more

aware of the energy they use.

So far, this study has focused on how the impacts from Centrica’s operations flow

through the UK economy. However, Centrica is also an enabler whose activities

improve the functioning of the UK economy. These effects include impacts on the

supply-side capabilities of the UK economy, for example the ways in which Centrica’s

activities help build skills in the workforce and enhance the capacity and security

of energy supply. On the demand-side, Centrica’s initiatives help promote energy

efficiency, thus leaving businesses and households with more spending power for

other goods and services.

Apprenticeships and training

Centrica offers young people a career path. The training and apprenticeships it offers

help the young people involved to acquire skills and experience that will increase their

life-time probability of being employed and lift their expected wage rates.

Currently Centrica employs 1,000 apprentices across the UK. Apprentices complete

a 4 year programme involving a mix of formal classroom learning and on-the-job

experience. This involves satisfying the conditions for the NVQ Level 2 Performance

Engineering Operations in their first year, moving on to NVQ Level 3 and HNC

qualifications on the completion of their apprenticeships.

There is a well-developed academic literature setting out the economic benefits to

the individual and society of being more qualified. 20 For the individual, the returns

to training are increases in the likelihood of being employed and receiving higher

wages. BIS (2011) suggests a Level 2 apprenticeship provides a wage premium of

16% and increases the probability of being employed over a working lifetime by 2.7%

relative to someone who has a Level 1 qualification. 21 Level 3 apprenticeships are

estimated to provide a wage premium of 18% and increase the probability of being

in employment by 3.8% relative to Level 1 qualifications.

20 Garrett, R, Campbell, M, and Mason, G, (2010), ‘The value of skills: An evidence review’, UK Commission for

Employment and Skills, Evidence Report No. 22, July.

21 BIS, (2011), ‘Measuring the economic impact of further education’, Research Paper Number 38.

17


The economic impact of Centrica in the UK

Wider catalytic impacts

A better qualified workforce is also good news for the Exchequer. A BIS study on the

returns from vocational training concludes that there is a strong, positive lifetime effect

on tax revenues raised associated with the majority of vocational qualifications, even

allowing for the upfront costs of supporting the attainment of qualifications. The study

reports that there is a return to the Exchequer of between £31,000 and £48,000 for

Level 2 qualifications and between £56,000 and £81,000 for Level 3 apprenticeships. 23

Security of supply and a low-carbon power industry

UK security of energy supply is of increasing concern. Ten years ago the UK was selfsufficient

in gas and able to export surplus production. Now imports make up around

half of total gas needs, with that proportion expected to rise to 75% by the end of

the decade. Moreover, with around a quarter 24 of electricity generation dependent on

gas, there are key linkages that make Centrica’s investments to secure gas supplies

and the development of wind power of critical importance.

The House of Commons Energy and Climate Change Committee has urged the

Government to take a strategic view on how to protect the UK’s energy supply against

short-term shocks and rising global energy prices. The Committee also points out

that 19 gigawatts (GW) of ageing electricity plant will close by 2018 and the UK will

become increasingly reliant on energy imports as North Sea oil and gas reserves

decline. The Committee expects that new electricity generation currently being built

or planned will fill this gap. But it urges the Government to ensure security of supply

by delivering on its energy efficiency targets, rolling out smart meters – helping to

balance demand – and maintaining a diverse energy mix. 25

Apprentices working at Centrica Energy’s Barrow Terminals situated

on the Irish Sea coast and serving its Morecambe Bay gas fields

Training also benefits work colleagues and other firms. Co-workers benefit from skill

transfers or faster R&D and technology adoption that boosts their productivity and

wages. 22 Other firms gain from the ability to hire more highly qualified labour.

22 Dearden, L, Reed, H, and Ven Reenen, J, (2005), ‘The impact of training on productivity and ages: Evidence from

British panel data’, CEP Discussion Papers No. 674, February.

Centrica’s pivotal role in gas supply

In 2012 Centrica had interests in 39 of the UK’s North Sea’s gas fields. It produced

1,080mmth of gas. This is equivalent to 7% of the UK’s natural gas production or 4%

of the gas inputted into the transmission system.

23 For a discussion of the issues and recent research see BIS (2012), ‘Returns to intermediate and low level vocational

qualifications’, Research Paper Number 74, May 2012.

24 Department of Energy and Climate Change, (2013), ‘Electricity production and availability from the public supply

system (ET5.4)’. Provisional data for 2012.

25 Energy and Climate Change Committee, (2011), ‘The UK’s energy supply: security or independence?’, House of

Commons, 10 October.

18


The economic impact of Centrica in the UK

Wider catalytic impacts

Over the last few years Centrica has committed £50 billion to secure a long-term

supply of gas and power by increasing extraction of hard-to-reach gas, exploring

new overseas sources, and securing long-term deals to import liquefied natural gas.

Specific initiatives include:

■■

a new generation of production platforms and innovative drilling technology to

extract gas from remote and challenging gas fields in the North Sea. For example,

the new York platform, which recently went into production, is drilling a second

well 6 kilometres long.

■■

a strategic relationship with Qatargas, involving a three-year contract to deliver

enough liquefied natural gas (LNG) to supply around 2.5 million homes.

■■

extending its gas supply agreement with Statoil by 10 years from 2015 in a £13

billion deal for 50 billion cubic metres of gas, enough to power 3.5 million homes

or around 5% of the UK’s gas requirements.

■■

a £0.7 billion investment and 49% share in the development of the Cygnus gas

field off the Lincolnshire coast, the biggest gas discovery in the Southern North

Sea in the last 25 years. As well as contributing to energy security, the project

will create 4,000 jobs in construction work and the related supply chain in the

four years to 2016, with 80% of investment spend expected to go to UK-based

companies.

Gas demand fluctuates with the seasons, peaking during cold weather in winter.

Storage capacity is therefore important to allow supplies extracted during periods of

weak demand to be available as soon as demand picks up. The House of Commons

Energy and Climate Change Committee concluded that “gas storage capacity needs

to be increased in the UK to minimise the potential damage from supply interruptions

or price spikes; the UK’s current storage capacity of only 14 days’ worth of gas

supply is dangerously low.” 26 Relative to some other European countries, the UK has

lower storage capacity and Centrica’s Rough reservoir off the coast of Lincolnshire

provides 75% of the UK’s long-range storage capacity – sufficient to meet 10% of

the UK’s peak-day demand.

Wind power

The UK has ambitious plans to reduce emissions of CO2, with electricity generation

from wind turbines playing a significant role. The UK’s island setting means that wind

is a frequent feature of the weather and harnessing wind power is a feasible means of

generating renewable energy. Though output fluctuates from day-to-day depending

on wind conditions, wind turbines now generate around 5% 27 of the UK’s electricity.

As well as two onshore wind farms in Scotland, Centrica is at the forefront of the

exploitation of the UK’s offshore wind resources. Currently Centrica has equity

interests in three operational offshore wind farms, one project in construction and

several development opportunities on the drawing board.

Centrica is helping to push the efficiency of offshore wind farms forward. The first

investment in 2006 near Barrow-in-Furness comprises thirty 3 megawatt turbines,

enough to supply 65,000 homes. The turbines for the Lynn and Inner Dowsing wind

farm in The Greater Wash have 3.6 megawatt rating. The Lincs wind farm, located

8km off the Lincolnshire coast will, once complete, be capable of producing power

for 200,000 homes. A decision on a further development on Race Bank, 17 miles off

the Norfolk and Lincolnshire coasts, is pending.

Wind power – MV Resolution

installing a wind turbine in

Centrica Energy’s Lincs wind

farm in the Greater Wash

26 Energy and Climate Change Committee, (2011), ‘The UK’s energy supply: security or independence?’, House of

Commons, 10 October.

27 Department of Energy and Climate Change, (2013), ‘Electricity production and availability from the public supply

system (ET5.4)’. Provisional data for 2012.

19


The economic impact of Centrica in the UK

Wider catalytic impacts

Boosting customer energy efficiency

The UK’s commitments to reduce carbon emissions also require measures to reduce

energy demand and implement micro-generation technologies. Here too Centrica

acts as a facilitator of change.

Insulating Britain’s homes

Households can cut up to £175 off their heating bills every year by installing loft

insulation and up to £135 by installing cavity wall insulation 28 . Using Government

funding, an offer of free loft and cavity wall insulation is available to all households in

the UK, with money available to elderly customers to meet the costs of loft clearance

prior to laying insulation. To meet its obligations set out by Ofgem 29 , Centrica plays a

central role in encouraging take up of these schemes, targeting marketing and sales

effort at households and by qualifying and managing specialised sub-contractors

who carry out the work.

Over the past five years, Centrica has installed 3.2 million insulation measures into

UK homes.

Smart metering

All 53 million 30 gas and electricity meters in UK homes are due for upgrade by 2019. 31

The Government believes that smart meters will provide customers with greater

visibility and control over energy use which will deliver environmental benefits and

help meet some of the long-term challenges of ensuring affordable, secure and

sustainable energy supplies. 32

smart meters are expected to help consumers manage how they use appliances

and identify the steps they could take to reduce energy consumption. Smart meters

also offer greater scope for varying the price of energy to reflect peaks and troughs in

demand, incentivising customers to shift their usage of power to ‘off-peak’ periods.

With nearly 1 million smart meters installed, Centrica is leading the roll-out of smart

meters across the country. Early results from a sample of residential customers show

that the vast majority (85%) find smart meters and their energy monitors easy to use.

And nearly 75% say that smart meters and monitors have made them more aware

of the energy they use.

Smart meters are the starting point in what will be a major upgrade and renewal

of the entire energy chain, from generation to consumption, in homes, offices and

even transport. The endpoint in this journey is the ‘smart grid’, where the entire

grid is intelligently swapping real-time information about its operations to optimise

performance and reduce demand.

British Gas’ ‘In Home Display’ giving electricity and gas

consumption, including costs in pounds and pence in real time

Smart meters provide the basis for accurate billing without the need for visits by

meter readers and could increase competitive pressures among energy companies

by making it easier to switch supplier. There are also potential benefits in relation

to customer demand for energy. By offering real-time information on power usage

28 Savings and cost figures are from the Energy Saving Trust website article on Roof-and-loft-insulation.

29 Carbon Emissions Reduction Target.

30 Department of Energy and Climate Change, (2011), ‘Smart metering implementation programme, response to

prospectus consultation’, March.

31 Department of Energy and Climate Change, (2013), ‘Smart meters: a guide’.

32 Department of Energy and Climate Change, (2010), ‘Smart metering implementation programme, prospectus’.

20


The economic impact of Centrica in the UK

Conclusion

Conclusion

This report investigates the contribution Centrica makes to the UK economy.

In 2012, Centrica employed 33,100 people at 69 major sites across the UK and

contributed £3.7 billion to GDP. But through its procurement from its extensive UK

supply chain, the company had created additional economic activity across the

UK’s nations and regions. This report finds that once the supply chain and wage

consumption impacts of Centrica’s UK operations in 2012 are considered, the

company supported:

■■

174,000 people in employment in the UK.

■■

A £14.1 billion contribution to UK GDP.

■ ■ £4.2 billion in tax receipts for the Exchequer, equivalent to £158 for every

household in the UK.

But the impact of Centrica does not stop there. The company’s apprenticeship

and training programmes are likely to enhance the UK’s skills base and the

job prospects and future wage rates of its participants. Ongoing investment

worth tens of billions of pounds has been committed to secure future energy

supplies and help develop a low-carbon power industry. Smart metering and

insulating homes will boost energy efficiency in the home.

Engineer installing loft insulation; over the past five years British Gas

has helped to insulate over 3.2 million customers’ homes

21


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