energy sustainability & competitive markets: some ... - perez-arriaga.pdf · energy...

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Energy sustainability &

competitive markets:

Some regulatory challenges

Ignacio J. Pérez-ArriagaInstituto de Investigación Tecnológica (IIT) & BP Chair on Energy & Sustainability, Comillas University (Madrid, Spain)CEEPR, MIT (Boston, USA)

SYMPOSIUM “ENERGY SUSTAINABILITY & COMPETITIVE MARKETS”

Chair in Energy Sustainability

IEB, Barcelona, January 29, 2013

Markets & energy policy in a

low-carbon economy

�A sustainable economy has to be based on a sustainable energy model , where the power sector (& the closely related gas sector) is a key component

�The current regulatory paradigm has to be reconsidered in this new context, where public energy policy will play a major role

�This adds a new perspective to the present deliberation on the energy sector regulatory model & the role of regulators

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What is meant by a sustainable

energy model?

�It must satisfy some minimum requirements�Tolerable environmental impact

�Reasonably fair universal access (worldwide) to modern forms of energy supply

�It must facilitate a reliable, lasting & affordableenergy access that is compatible with maintainingor increasing the aggregated capital that makeshuman welfare possible (natural, built, knowledge, cultural, human relations)

�Acceptably equitable access to surpluses 3

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“The currently observed changes to the Earth System are unprecedented in human history. Efforts to slow the rate or extent of change – including enhanced resource efficiency and mitigation measures – have resulted in moderate successes but have not succeeded in reversing adverse environmental changes. Neither the scope of these nor their speed has abated

in the past five years.

As human pressures on the Earth System accelerate, several critical global, regional and local thresholds are close or have been exceeded. Once these have been passed, abrupt and

possibly irreversible changes to the life-support functions of the planet are likely to occur, with significant

adverse implications for human well-being.”

UNEP, “GEO5, Global Environment Outlook”, June 6, 2012

UNEP GEO5, 2012

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Source: UN Environmental Program (UNEP), GEO5, June 2012

Compared

with NO

POLICY

What would we

buy with STABILIZATION

of CO2 at 550 ppm?

A NEW WHEEL

with lower odds

of EXTREMES

HOW CAN WE EXPRESS THE VALUE OF A

CLIMATE POLICY UNDER UNCERTAINTY?

http://web.mit.edu/globalchange

MITwheels

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How to improve /redesign the

power sector’s regulation to

facilitate the implementation

of sustainable policies?

The new context for power

sector regulation

�Security & sustainability will have at least the same priority as efficiency in the regulatory design

�This serious (& justified) global concern will affect energy policy & power sector investments profoundly � intense political oversight & interference is

anticipated

�New & emerging clean technologies will be crucial in attaining a sustainable power system model, but their development & commercial deployment will typically need regulatory support

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Power system challenges for

21st century

�How can power systems be transformed to � become fully decarbonized by 2050?

� support electrification of transport & heating?

� integrate large amounts of intermittent &/or distributedgeneration?

� make full use of ITC?

� fully incorporate consumer response & choice?

� plan & build huge volume of new infrastructure required?

� encourage innovation & new business models?

� make markets & governments compatible?

reliably, efficiently & with acceptable environmental impact?

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Future power markets will ...

�be far-reaching geographically & well-integrated

�value & remunerate supply flexibility, demand & (later) storage participation, external support

�require advanced functions by system operators & redefine the enabling role of networks & DSOs

�include new business models in

� energy efficiency services

� aggregation of demand & distributed generation

�make use of improved capacity mechanisms

�have strong mutual interaction with gas markets

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Looking for a strategy

Energy & sustainability

Major items in a strategy

�A vision / plan for the future

�A sound regulatory approach & institutions

�Provision of universal energy access

�Be ready for strong penetration of intermittent renewables

�Networks as enablers of the new paradigms

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8

How to make markets & public energy policies compatible?

Start with a long-term

vision / plan”When there is no vision, people perish” (Proverbs, 2 9:18)

“A compelling vision, backed up by precise, simple, clear policy, needs to be implemented if larger institutions and

investors are to create the argument internallythat a greater proportion of the balance sheetneeds to be available for sustainable energy”

Source: Chatham House, “ Unlocking finance for clean energy” , 2009, www.chathamhouse.org.uk

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First, indicative planning

�What is intended to accomplish? (national & supranational energy policies require long-term analysis with sustainability

criteria) � indicative planning (IP)

� The IP procedure is meant to characterize meaningful energy development paths that meet any prescribed high level (sustainability & others) targets, in order to facilitate political decisions

�Note that, once one path is chosen, IP

�is more than just prospective analysis (find what could happen)

�has normative character (identify what has to be done to make sure that a future with some desirable features happens)

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EU Electricity Directive, 2009

Art. 2: “… In relation to security of supply, energy efficiency/demand side management and for the fulfillment of environmental goals and goals for energy from

renewable sources, … Member States may introduce the implementation of long-term planning, taking into account the possibility of

third parties seeking access to the system.”

Art. 7.2: “Member States shall lay down the criteria for the grant of authorisations for the construction of generating capacity in their

territory. In determining appropriate criteria, Mem ber States shall consider: … (j) the contribution of the generating capacity to meeting the overall Community target of at least a 20 % share of energy from renewable sources in the Community’s gross final consumption of energy in 2020... and (k) the contribution of generating capacity to

reducing emissions.”

Art. 10: “Member States shall implement measures to achieve the objectives of social and economic cohesion and environmental

protection, which shall include energy efficiency/demand-side management measures and means to combat climate change, and security of supply, where

appropriate. Such measures may include, in particular, the provision of adequate economic incentives…”

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The boundary conditions

�2050 EU Roadmap for a low-carbon economy

� 80-95% reduction target in GHG emissions

�Need to fix the energy policy after 2020 (with the current policies the GHG reduction would be 40%)

�Much uncertainty on 2050… but we are only one investment cycle from that date

�No U-turn in the EU energy market liberalization strategy

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20Source: “A Roadmap for moving to a competitive low carbon economy in 2050”, EU

Commission (DG Climate), COM(2011) 112 final, March-8-2011

The EU 2050 Climate Change Roadmap

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Source: Helen Donoghue, DG Energy, EU Commission.


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23Source: “A Roadmap for moving to a competitive low carbon economy in 2050”, EU

Commission (DG Climate), COM(2011) 112 final, March-8-2011

The EU 2050 Climate Change Roadmap


The EU Energy Roadmap 2050

Requirements for a sound

vision / plan

�Any vision / plan has to be backed-up by objective quantitative analysis (a sound & transparent model)

�Open debate among stakeholders with public participation & information and subject to due process

�Commitment to the plan by the main political parties (this matter should be above party politics)

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Objective model-based decision making

ENERGÍA NUCLEAR0.68 EJ/11.3% / +17.5%

1. Valor EJ2. % Consumo total E primaria3. Crecimiento (+ ó -) respecto a año anterior (%)

CARBÓN 0.23 EJ / 3.8% / -17.5%

PETRÓLEO CRUDO2.24 EJ / 37.4% / +0.3%

DERIVADOS DEL PETRÓLEO0.51 EJ / 8.5% / -10.1%

GAS NATURAL 0.31 EJ / 5.2% / -7.3%

2.43 EJ40.7% -0.9%

2.56 EJ42.7% +0.9%

1.00 EJ16.8% +0.4%

3.01 EJ50.4% +4.3%

1.74 EJ29.1% +2.2%

0.94 EJ15.8% +9.4%

1.20 EJ20.1% +3.7%

1.56 EJ26.1% -1.6%

0.37 EJ / 6.2% / -8.6%

0.21 EJ / 3.5% / -2.7%

IMPORTACIONES4.95 EJ / 82.7% / -0.1%

GENERACIÓN ELÉCTRICA Y COGENERACIÓN

EXPORTACIONES DE ELECTRICIDAD0.03 EJ / 0.5% / +3.0%

RED ELÉCTRICA

REFINERÍAS Y OTRAS TRANSFORMACIONES ENERGÉTICAS

REDES DISTRIBUCIÓN COMBUSTIBLES

PÉRDIDAS

AUTOCONSUMOS

CONSUMO INDUSTRIA

CONSUMO SECTOR USOS DIVERSOS

CONSUMO TRANSPORTE

ENERGÍA PRIMARIA5.98 EJ / 100% / +2.2%

BIOMASA, RESIDUOS Y BIOCARBURANTES0.27 EJ / 4.5% / +39.0%

CARRETERA

AVIÓN

FERROC.BARCO

S. PRIM.

S. TERCIARIO

S. RESIDENC.

MNM, S y C**QUÍM.

OTRAS

ENERGÍA SOLAR0.04 EJ / 0.7% / +43.0%

FRONTERA DE ESPAÑA

ENERGÍA EÓLICA0.16 EJ / 2.6% / +15.6%

ENERGÍA HIDRÁULICA0.14 EJ / 2.4% / +49.6%

*ENERGÍA FINAL: CONSUMOS TOTALES ENERGIA FINAL + EXPORTACIONES+ PÉRDIDAS + AUTOCONSUMOS**MNM, S Y C: MINERALES NO METÁLICOS, SIDERURGIA, Y CONSTRUCCIÓN

ELECTRICIDAD ÚTIL

CALOR ÚTIL COGENERADO

PÉRDIDAS TÉRMICAS

COMBUSTIBLESPROCESADOS2.03 EJ / 39.9% / -0.1%

DERIVADOS DEL PETRÓLEOEXPORTADOS0.30 EJ / 5.1% / +2.1%

ENERGÍA FINAL*5.99 EJ / 100.3% / +1.0%

0.22 EJ / 3.3% / +11.0%

0.97 EJ / 16.2% / -7.8%

GAS NATURAL LICUADO0.98 EJ /16.4% / +2.0%

REGASIFICADORAS

RED DE GAS

A sound regulatory approach

with credible & competent

regulatory institutions

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Need for huge investments

�Europe's energy system requires investments of ca. €1 trillion by 2020 of which €200 billion is needed for electricity and gas networks alonehttp://ec.europa.eu/energy/publications/doc/2011_energy2020en.pdf

�This does not include investment in large-scale electricity storage that is difficult to quantify precisely today and are expected to grow significantly in the next decade.

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Global Energy Assessment report

Recommendations (1 of 2)

1. Energy Systems can be transformed to support a sustainable future

2. An effective transformation requires immediate action

3. Energy efficiency is an immediate and effective option

4. Renewable energies are abundant, widely available & increasingly cost-effective

5. Major changes in fossil energy systems are essential & feasible

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Global Energy Assessment report

Recommendations (2 of 2)

6. Universal access to modern energy carriers & cleaning cooking by 2030 is possible

7. An integrated energy system strategy is essential

8. Energy options for a sustainable future bring substantial multiple benefits for society

9. Socio-cultural changes as well as stable rules and regulations will be required

10.Policy, regulations & stable investment regimes will be essential

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Source: Platts Industry Survey Report: Trends in European Power Generation January 2013

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An adequate regulatory context

for clean energy

�For the most part the market for clean energy is policy-driven (for a good reason)

�In a policy-driven market regulation itself is a risk

�Therefore, to unlock finance for clean energy there is a need for “investment grade” policy

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Policy needs to be “loud, long & legal”

�Loud

�Policy instruments make a difference, so that investments in clean energy become commercially attractive

�Long

�Policy instruments are sustained for a period that is consistent with the financial characteristics of the project

�Legal

�Policy instruments are based on a clear, stable & well-established regulatory framework

Based on “ Unlocking finance for clean energy” , www.chathamhouse.org.uk, 2009

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The role of regulators

�These issues should be explicitly included

within the responsibilities of energy

regulatory agencies

�Governments should set the high level targets &

approve an “indicative” sustainable plan

�Regulators should design the regulatory instruments to

make this possible within a market environment

�Regulatory stability & predictability. Regulation

must be “loud, long & legal”35

What can be said about the

situation in Spain?

�Lack of a plan or vision

�Regulation is in the hands of the government

�Very limited responsibilities of the independent regulatory authority (& it will be worse soon)

�There is no respect for the due process

�Decisions are made without transparency, public debate or predictability

�Key appointments to regulatory positions ignore professional qualifications for the job

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How to get there (2050)?

Carbon policy strategies after 2020: The debate on intermediate targets

Should technology targets be set

for 2030? Of course, NOT

�Deployment (energy) targets for renewables:

�make it more expensive to meet the carbon targets

�waste resources that could be better used to stimulate low-carbon innovation

�disrupt markets discovery processes

�undermine the European Trading Scheme (ETS)

Source: Dr. Simon Less, Policy Exchange, London. Eurelectric Conference, Jan-2011.

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for 2030? Of course, NOT

�Instead, energy policy after 2020 should:�keep it simple

�focus on carbon price as “the” instrument & avoid technology-specific deployment targets

�focus (politically) on achieving a long‐term, credible carbon pricing framework

�focus any subsidies on stimulating most valuable innovation, while balancing R&D & learning-by-doing

�& overcome behavioral barriers to energy efficiency


for 2030? YES, of course

�Carbon price, for the time being, is not loud (too low to make an impact), long (no agreement after 2012) or legal (credible) enough�Any progress in this direction is very welcome

�Investment in subsidized technologies needs an adequate & credible regulatory framework�Clear targets & strong enough economic signals by 2030 for renewables & efficiency

�Adequate support instruments for R&D & deployment for each technology

�But avoid picking winners as much as possible

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Remember that sound energy policies are typically compromises between

competition & regulation .When dealing with these involved issues…

avoid regulatory fundamentalisms!

“ All competition is imperfect; the preferred remedy is to try to diminish the imperfection. Even when

highly imperfect, it can often be a valuable supplement to regulation.

But to the extent that it is intolerably imperfect, the only acceptable alternative is regulation. And for the

inescapable imperfections of regulation, the only available remedy is to try to make it work better”

Alfred Kahn, “ The economics of regulation”MIT Press, 1988

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Regulatory challenges in the

provision of universal

energy access

What do we mean by “universal

energy access”?

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“Access to energy services that are clean, reliable and affordable for cooking, heating,

lighting, health, communications and productiveuses”

The IEA has set 2030 as the target year to achieve universal access to modern energy services.

Energy for a Sustainable Future” (UN AGECC 2010)

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Lack of access to electricity in the worldSource: International Energy Agency, WEO 2010

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Example of a very much needed regulatory intervention

Energising Development

The EU talks about committing 50 M€/yr immediately & raising several hundred M€to leverage private funds; IEA WEO-2011 estimates a need of about 48b€/year to achieve energy access for all by 2030

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Isolated rural community in Cajamarca (Peru). Examp le of dispersed population.Source: Julio Eisman. Acciona Foundation. Peru Micr oenergia.

Source: Perú Microenergía

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Regulation for universal access

A list of challenging issues

�Characterization of electrification projects� Technology (from grid extension to off-grid)� Form of ownership�Delivery model (fee-for-service, dealers, hybrids)� Financing mechanisms / types of subsidies (connection vs.

consumption; targeted vs. untargeted)�Process of selection of operators (competition in the market

or for the market, by project, by cluster, by yardstick) & parameters to be bid (tariffs, connection charges, minimum required subsidies, number of new connected consumers)

�Risk allocation (between consumers, suppliers & government)�Quality of service standards�Assignment of maintenance responsibilities 49

Be ready for a strong

penetration of intermittent

renewable generation

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Impacts of the integration of

intermittent generation

�Impact on electricity generation

�Dispatch, market performance & prices

�under different IG support mechanisms

�Future electricity generation mix

�Future bulk power system operation

�Impact on transmission network expansion, cost allocation

�Impact on distribution network expansion, distribution system operation & tariffs

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Why energy markets?

In the midst of so much regulationWith such tough challenges

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Issues to be addressed

�Are energy markets meeting the needs for anefficient, secure & clean supply satisfactorily?

�In the present context of strong sustainability & security oriented policy measures

�How to improve / redesign market regulation to facilitate that these policies reach their objectives efficiently?

�How to make these policy measures compatible with the functioning of energy markets?

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Design of electricity markets is

difficult

�It has been learned that creating well functioning competitive wholesale & retail markets for electricity is very challenging, both technically & politically, & cannot be applied anywhere

�Where properly implemented, wholesale markets appear to have led to improved performance & have mobilized significant investments

�Despite some failures & implementation difficulties, the general trend in most liberalized power sectors is to proceed with the process of reforms, albeit typically augmenting regulatory intervention

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Integration of intermittent generation

What is to be expected?

�It is already happening (strongly nonlinear effects on operation & prices)

�plant cycling � loss of efficiency & extra costs

�zero or negative market prices

�wind curtailment

�need for more plant flexibility & demand response & storage

Leitmotiv: Strong intermittency penetration will reveal existing flaws in markets design & limitations

of current analysis models

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Open regulatory issues

Generation & wholesale markets

�Mitigation of intermittency impacts (flexible generation, demand response, storage, interconnections)

�How to attract the right generation mix?

�Targeted capacity mechanisms? Flexibility mechanisms?

�Interaction of gas & electricity markets

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A case example (*)

�How do solar & wind output affect generation dispatch & spot market prices in a specific power system?

�How do solar & wind penetration affect the optimal generation mix?

�Case example:

�2 representative weeks in a stylized version of the Spanish power system

�Different levels of penetration of wind and solar

�Nuclear is frozen; only coal & CCGT respond

Results obtained with the LEEMA computer model, Institute for Research in Technology, Comillas University (Madrid, Spain). Collaboration Comillas-MIT Energy Initiative. Researchers: Carlos Batlle, Pablo Rodilla & Andrea Veiga.

CCGT Coal Nuclear

Base case escenario: No PV

14-20 June 8-14 November

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CCGT Coal Nuclear

5 GW non dispatchable solar PV


CCGT Coal Nuclear



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CCGT Coal Nuclear



CCGT Coal Nuclear



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CCGT Coal Nuclear



CCGT Coal Nuclear



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CCGT Coal Nuclear



CCGT Coal Nuclear



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CCGT Coal Nuclear

Base case scenario: no wind


CCGT Coal Nuclear

5 GW wind


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CCGT Coal Nuclear

10 GW wind


CCGT Coal Nuclear

15 GW wind


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CCGT Coal Nuclear

20 GW wind


CCGT Coal Nuclear

25 GW wind


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CCGT Coal Nuclear

30 GW wind


CCGT Coal Nuclear

35 GW wind


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Increasing wind penetration level (MW)

Optimal generation capacity mixas a function of PV & wind penetration levels

The electricity networks as

enablers of the new

paradigm

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A tentative list of regulatory

challenges

�The need for adequate transmission & distribution networks

� Establish proper remuneration of distribution networks with distributed generation & active demand response

�Design, operation & control of distribution networks have to be adapted & costs will increase � need for new network models &

regulatory schemes (see detail in next slide)

� Attain adequate investment levels in transmissionnetworks with much intermittent/renewable generation

�The existing network (e.g. in the US & EU) lacks adequate interconnection capacity among regions, a comprehensive approach to coordinated transmission expansion & the institutional capability for an effective implementation

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What could be new in network

regulation? The underlying criteria

“The overriding objective of a future regulatory framework for energy network companies is to

encourage them to play a full role in the delivery of a sustainable energy sector & deliver long-term value for money network services for existing and future consumers

“RIIO is designed to promote smarter gas and electricity networks for a low carbon future”

(OFGEM, RIIO A new way to regulate electricity networks, Final report of the RPI-X@20 project, 2010)

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What could be new in network

regulation? The underlying criteria

“It is in the interests of consumers that a company that delivers these outcomes is rewarded. Delivery will require significant investment and we will ensure that network companies that deliver efficiently are able to raise the required finance at a reasonable cost to existing

and future consumers.”

(OFGEM, RIIO A new way to regulate electricity networks, Final report of the RPI-X@20 project, 2010)

And to finish…

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Inventing the future

�In the present circumstances, the objective of a developed society should be to grow better and not to grow more (in physical terms)

�We have to evolve from the industrial paradigm of continued statistical growth to a new paradigm of deliberate restraint and moderation . (the precautionary principle)

�Only radical innovation in our energy model will make this possible

�The role of sound & stable regulation & independent & competent regulatory institutions cannot be overemphasized

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Thank you for your

attention

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