Energy: A Value Chain Analysis 2020

The Energy Value Chain (EVC) involves many diverse economic activities. Value is added by extraction of oil and gas from the ground. Value is also added by generating electricity from fossil fuels and renewables such as wind and water. Once the energy is extracted or generated it must then be distributed to the end user and further value is added in this part of the value chain. Finally, a considerable part of the value of some goods and services is made up of taxes on those products. These final stages of the EVC are the focus of this chapter.

Economic activity is divided according to the European NACE system. In this classification, distribution of electricity and gas is grouped with electricity generation, while distribution of solid and liquid fuel is classed with the wholesale and retail distribution of other goods.

Sector D (NACE 35) Electricity, Gas & Steam, as well as generation and manufacture, includes these sub-categories:

• 3512: electricity transmission systems that convey the electricity from the generation facility to the distribution system (operated by EirGrid)
• 3513: distribution systems (i.e., consisting of lines, poles, meters, and wiring) that convey electric power received from the generation facility or the transmission system to the final consumer (operated by ESB Networks)
• 3514: sale of electricity to the user - activities of electric power brokers or agents that arrange the sale of electricity via power distribution systems operated by others - operation of electricity and transmission capacity exchanges for electric power (operated by twelve licensed suppliers)
• 3522: distribution and supply of gas through the mains (operated by Gas Networks Ireland)
• 3523: sale of gas to the user through mains - activities of gas brokers or agents that arrange the sale of gas (operated by eight licensed suppliers).

Sector G (NACE 45-47) Wholesale and Retail includes 91 sub-categories and this chapter looks at just two:

• 4671: wholesale of fuels, greases, lubricants, oils such as: coal, firewood, oil, diesel, kerosene, petrol, butane and propane gas
• 4730: retail sale of fuel for motor vehicles and motorcycles (forecourts, filling stations).

This section focuses on this wholesale and retail of solid and liquid fuels. As shown above, the distribution of electricity and gas is categorised with electricity and generation (sector D). Other activities of energy distribution (for example sale of bottled gas in general hardware stores, or delivery of home heating oil) are included indistinguishably in other wholesale and retail sub-categories and are not part of this analysis (for instance, delivery of home heating oil is included in a sub-sector with auctions and vending machines and all other sales not online or in stores; this sub-sector has been omitted).

Wholesale & Retail

In National Accounts, the output of retail trade (shops) and wholesale trade in goods is the difference between what the goods are sold for and what they are bought for. The cost of the goods sold is not part of Intermediate Consumption or Output. Thus, the output on retail and wholesale of petrol and diesel is the traders’ margin, rather than the total turnover.

The following table splits the Energy Value Chain into two parts: first, the value added in Mining, Refining and Generating, which includes both the generation and the distribution of electricity, gas and oil; and second, the value added in those parts of wholesale and retail that trade in other fuels (mainly oil).

Around a quarter of the gross value added in the EVC is added at the final stage of Wholesale & Retail distribution to the customer. The value added in all parts of the chain up to Wholesale & Retail is €3.4bn, while those final stages add €1.1bn.

The production and transmission of electricity, oil and gas require capital investment in the land, buildings, machinery and equipment to build the plants and networks to convert and transport energy. On the other hand, Wholesale & Retail requires less fixed capital assets, as it is storing and selling finished products. In other words, production and distribution are generally more capital intensive than sales. This is reflected in the ratio of profit (gross operating surplus) to total Gross Value Added. In production and distribution, it is 70%, while in Wholesale & Retail it is 56%.

This profit share implies that the other component of GVA, wages (compensation of employees), makes up 30% of production and distribution but 44% of Wholesale & Retail. This is understandable if we consider that activities such as the operation of filling stations, which involve millions of customers and transactions requiring individual attention.

The sale of solid and liquid fuels has a lower total wage bill than the production of electricity and gas. As we saw in the Labour Chapter, average earnings are significantly higher in the generating sectors than in retail and wholesale.

Taxes on Production and Imports

Government levies a variety of taxes on energy products. In 2020 these taxes yielded €3.7bn in revenue for public services. The taxes are shown in Table 7.2 and include:

• Excise Duty: Excise Duty is charged on specific goods and services, such as alcohol, tobacco and energy products. It is calculated based on the volume supplied, rather than the value. It is levied on imports as well as on domestic products. For example, excise on petrol is currently €0.59 per litre. There is excise on oil products, natural gas, coal, and peat products (such as briquettes). Kerosene used for commercial flights is exempt from excise. There is also an excise duty on electricity but any supplies for domestic use are not subject to this tax.
• Value Added Tax (VAT): VAT is payable on goods and services based on their price (in contrast to excise, which is payable based on volume). The VAT rate varies by item, but for most energy products the VAT rate was 23% in 2020.
• Carbon Tax: The Emissions Trading Scheme is an EU system in which certain enterprises buy the right to emit specified pollutants. Companies that are regulated by this scheme include stationary installations (such as power plants, industrial plants and other large energy users) and airlines. These companies have to buy carbon allowances. For National Accounts, this purchase of allowances is treated as a tax on production.
• National Oil Reserves Agency (NORA) Levy: This is a charge of €0.02 per litre on most oil products such as petrol and diesel. It is to fund NORA which ensures that the State maintains a minimum of 90 days stocks of oil for use in the event of a physical shortage of supplies.
• Public Service Obligation (PSO) Levy: The PSO levy is a tax charged to all electricity customers in Ireland and to support the Irish Government in its national policy objectives related to energy. The proceeds are used to pay for the relevant costs incurred by supported electricity generators for whom the market price does not cover costs. For example, if the wholesale price of electricity is lower than the cost of generation by wind farms, those wind farms will receive a subsidy paid for by this Levy to ensure their costs are met. Prior to 2020, the Levy was used to pay for turf-burning power plants as well as renewables but this support expired at the end of 2019. Since 2020 the price of electricity has increased, meaning that renewable generators do not require a subsidy, and the Levy has been set to zero for 2023. The PSO Levy is collected from electricity customers by their electricity suppliers.

Taken together, taxes add €3.7bn to total uses of energy as summarised in Table 7.2.

In the EVC, the engineering complexity and physical assets required for extraction of fossil fuels and generation of electricity are obviously very significant. However, as we can see in this chapter, a great deal of the value is also added at the final stage after extraction, refinement and generation, in the trade in finished products and the associated margins. As we move towards less reliance on fossil fuels, the trade in these products will decline and the value chain may alter accordingly.