Choosing Appropriate Incentives to Deploy Renewable Energy by xiangpeng

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									Deutsche Bank
DB Climate Change Advisors




          Choosing Appropriate Incentives
          to Deploy Renewable Energy
          Workshop, World Bank Headquarters
          Mark Fulton
          Global Head of Climate Change Investment Research
          Deutsche Bank Climate Change Advisors
          http://www.dbcca.com/research


          January 30th, 2012
TLC: What Investors Want From Policy


  Investors essentially look for 3 key drivers in policy:




  In assessing the potential success of policies, these factors should be
  taken into account


 Deutsche Bank                           Mark Fulton
 DB Climate Change Advisors              Choosing Appropriate Incentives to Deploy Renewable Energy   2

03-Feb-12                     2010 DB Blue template
    Best-in Class Policy:
    Driving Transparency, Longevity and Certainty (TLC)
                                       Emissions Control                                        Financial Support
                                                                                                                                                 Grid          Budget           Capital
                                            Renewable       Long-term                                                                          Improve-        Strength       Investment
     Country                 Binding                                         Feed-in       Long-term                         Long-term
                                            Electricity      Energy                                            Tax                               ment         (% of 2010      200 0-2010
                            Emissions                                         Tariff       Govt-based                         Funding
                                             Standard       Efficiency                                        Benefit                            Plan           GDP)           (USD Bn)
                             Target                                           (FiT)       ‘Green Bank’                        Program
                                              (RES)            Plan


China                            ✔                ✔              ✔              ✔                ✔               ✔                ✔                ✔             -1.6%            148.3

Germany                          ✔                ✔              ✔              ✔                ✔               ✔                ✔                ✔             -3.6%            393.2

United Kingdom                   ✔                ✔              ✔              ✔                ✔               ✔                ✔                ✔            -11.5%            384.1

                               6
United States                                State-level    State-level     State-level          6               ✔           State-level      State-level       -10.0%            164.1
                             COP Acc

 California                      ✔                ✔              ✔              ✔                X               ✔                ✔                ✔             -1.0%              -

 Texas                           X                ✔              ✔               X               X               ✔                ✔                ✔             -2.2%              -

Brazil                           ✔                ✔              ✔               X               ✔               ✔                ✔                ✔             -2.2%            42.3

                               6
South Korea                                       ✔              ✔              ✔                X               ✔                ✔                ✔             -1.1%            31.2
                             COP Acc
                               6
India                                             ✔              ✔          State-level          X               ✔                ✔                ✔             -5.5%            27.1
                             COP Acc

Australia                        ✔                ✔              ✔          State-level          X               ✔                ✔           State-level        -4.2%             9.8

                               6
South Africa                                      ✔              ✔              ✔                X               X                ✔                6             -5.3%             0.4
                             COP Acc
         Notes: 6COP Acc = policy is a submission to the Copenhagen Accord and is not legally binding ; 6 = tentative / unconfirmed policy dependent on certain provisions (e.g. funding)
         Source: DBCCA Analysis 2011
        Deutsche Bank                            Mark Fulton
        DB Climate Change Advisors               Choosing Appropriate Incentives to Deploy Renewable Energy                                                                          3
Major Policy Mechanisms for Promoting Renewables

            Policy Mechanism                                                                          Description
 Feed-in Tariff (FiT)                                               Guarantees generator a fixed price per kWh, usually
                                                                    over a long period of time (~20 years)

 Renewable Energy Standard                                          Mandates that utilities procure a certain % of electricity
 (RES) with capacity auctions                                       from renewable sources; utilities can fulfill this quota
 or tradable certificates                                           by (1) seeking bids from renewable generators via
                                                                    capacity auctions; or (2) buying RES certificates on the
                                                                    spot market (each certificate represents a certain
                                                                    amount of renewable electricity that has been
                                                                    generated)


 Tax Incentives or Credits                                          Investment in RE technologies or production of RE
                                                                    yields tax credits (which often can be traded)

 Direct Cash Grants/Rebates                                         Grants/rebates from government budgets offset a
                                                                    portion of RE investment costs

  Source: “Deploying Renewables 2011”, International Energy Agency (IEA), 2011

 Deutsche Bank                           Mark Fulton
 DB Climate Change Advisors              Choosing Appropriate Incentives to Deploy Renewable Energy                         4

03-Feb-12                     2010 DB Blue template
Viewing Renewable Energy Policy
Through a Lens of Impact and Cost-Effectiveness

The IEA evaluates RE policy in terms of impact (deployment to meet GHG-reduction
targets) and cost-effectiveness using 3 key measures:


 Policy Impact Indicator                               • Assesses countries’ progress in stimulating RE deployment toward the
          (PII)                                          levels that IEA envisions in its 450 ppm scenario




                                                       • Compares remuneration levels across countries, taking into account:
Remuneration Adequacy                                    (i) payment schedule of incentives;
   Indicator (RAI)                                       (ii) influence of resource endowment; and
                                                         (iii) interaction between incentives and system prices (cost-effectiveness)



                                                       • To quantify the total cost of policy support in various countries, calculates
Total Cost Indicator (TCI)                               the amount of additional annual premiums that are paid for additional
                                                         renewable generation produced in a given year (cost-effectiveness)



 Sources: “Deploying Renewables 2011”, International Energy Agency (IEA), 2011

 Deutsche Bank                           Mark Fulton
 DB Climate Change Advisors              Choosing Appropriate Incentives to Deploy Renewable Energy                                      5

03-Feb-12                     2010 DB Blue template
  IEA: Assessing FiTs and RES capacity auctions

FiTs
 High level of investor security ideally suited to earlier-stage technologies: in
  nearly every solar PV success story, FiTs have been the policy driver
 Simplified procedures/contractual arrangements establish low-risk environment
  that encourages entry of smaller players – valuable for distributed technologies
 As system costs evolve with deployment, frequent tariff reviews necessary to
  keep investor premiums in-check and manage deployment volumes
 Aggressive degression schedule useful to encourage cost-reducing innovations


RES capacity auctions
 Controls deployment volumes while encouraging price discovery
 Subjects investors to high initial risks and significant transaction costs
 Best for larger-scale and mature technologies closer to cost-competitiveness
 May be useful to structure with public agency as buyer for small projects
   Sources: “Deploying Renewables 2011”, International Energy Agency (IEA), 2011; DBCCA analysis, 2011

   Deutsche Bank                           Mark Fulton
   DB Climate Change Advisors              Choosing Appropriate Incentives to Deploy Renewable Energy    6

  03-Feb-12                     2010 DB Blue template
 IEA: Comparing FiTs and RES capacity auctions


 A FiT optimizes the trade-off between impact and total premium costs better
  than does an RES capacity auction
 If receiving support via an RES capacity auction as opposed to a FiT, wind
  energy investors will require 50% higher risk premia1
 For onshore wind, average total remuneration in auction countries is 20%
  higher than in FiT countries ($213K/MWyr vs. $176K/MWyr)
 FiTs and auctions represent ends of a spectrum; hybrid systems possible
 Difference between systems tends to be smaller than differences among
  countries with the same system
 Focus on details and non-economic barriers enables high impact at low cost
 Cost-effectively scaling RE requires policy engagement above and beyond
  the choice between FITs and RES capacity auctions

  1   Risk premia estimates from survey results presented in “Deploying Renewables 2011”, Figure 3.8 International Energy Agency (IEA), 2011; IEA estimates adapted from
      “The Price of Renewable Energy Policy Risk: An Empirical Analysis Based on Choice Experiments with International Wind and Solar Energy Investors,” Institute for Economy
       and the Environment (IEE), 2010.

  Deutsche Bank                              Mark Fulton
  DB Climate Change Advisors                 Choosing Appropriate Incentives to Deploy Renewable Energy                                                                          7

 03-Feb-12                       2010 DB Blue template
Investor Perspective on Key FiT Design Elements –
TLC (1 of 2)
FiT markets have deployed 59% of global wind capacity and 87% of global solar
PV capacity                                      Items in red are essential to investors

   FIT DESIGN FEATURES                                                OPTIONS                                         TLC AT THE RIGHT PRICE
Explicit objectives                    -       Policy explicitly linked with qualitative objectives     FIT policy includes specific policy objectives
                                       -       Objectives are not linked to the policy
Integration with national              -       FITs are not directly linked to national targets / no    FITs are directly linked to national targets
policy goals                                   national target exists
                                       -       FITs are directly linked to national targets
Technology eligibility                 -       Technology                                               Broad eligibility with links to climate goals
                                       -       Owner
                                       -       Size
                                       -       Location
                                       -       Off-grid vs. on-grid
Payment differentiation                -       Differentiated                                           Differentiation for energy portfolio goals
                                       -       Non-differentiated
Rate setting method                    -       Generation cost                                          Reflects generation cost
                                       -       Value
Payment structure                      -       Fixed floor                                              Fixed floor
                                       -       Fixed ceiling
                                       -       Premium
                                       -       Spot market gap
Inflation                              -       Rate adjusted for inflation                              Varies by technology due to O&M content, country
                                       -       Rate not adjusted for inflation                          Inflation hedge attractive to investors
Interconnection guarantee              -       Guaranteed interconnection                               Guaranteed interconnection
                                       -       Evaluated on a case-by-case basis
Interconnection costs                  -       Costs borne by generator                                 Costs borne by ratepayer
                                       -       Costs borne by ratepayer
 Sources: DBCCA analysis 2012; Meister Consultants Group 2012

 Deutsche Bank                             Mark Fulton
 DB Climate Change Advisors                Choosing Appropriate Incentives to Deploy Renewable Energy                                                    8

03-Feb-12                     2010 DB Blue template
Investor Perspective on Key FiT Design Elements –
TLC (2 of 2)                         Items in red are essential to investors
   FIT DESIGN FEATURES                                                 OPTIONS                                      TLC AT THE RIGHT PRICE
Purchasing requirements                 -        100% purchase / must take or pay                        100% purchase / must take or pay
                                        -        Utility does not have purchase obligation
Purchasing entity                       -        Utility                                                 Creditworthy counterparty (or counterparty with
                                        -        Third party                                             guarantees)
                                        -        Government
Policy cost recovery                    -        Ratepayer pays                                          Ratepayers (in most cases)
                                        -        Taxpayer pays
Adjusting the purchase                  -        Triggers                                                Time-based trigger with a published and
requirement (Digression)                -        Adjustment Processes                                    automatic adjustment schedule (can be volume
                                                                                                         sensitive?). Grid parity is best practice.
Program caps                            -        Capacity caps                                           Capacity caps
                                        -        Generation caps
                                        -        Cost caps
Dispatch                                -        Priority dispatch                                       Priority dispatch
                                        -        Economic curtailment possible
Contract Length                         -        Long-term                                               Long-term (in most cases) - from 15-20 years (for
                                        -        Medium-term                                             wind, solar PV) to 5-10 years (for biomass)
                                        -        Short-term
Contract in place?                      -        Contract used                                           Contract
                                        -        No contract
Standard contract                       -        Standard contract                                       Standard
                                        -        Negotiated on a case-by-case basis
Contract currency                       -        Domestic currency                                       Hard currency
                                        -        Hard currency
Queuing                                 -        Queuing rules in place                                  If the policy is capped, queuing rules should be
                                        -        No queuing rules in place                               transparent and enforced
 Sources: DBCCA analysis 2012; Meister Consultants Group 2012
 Deutsche Bank                              Mark Fulton
 DB Climate Change Advisors                 Choosing Appropriate Incentives to Deploy Renewable Energy                                                      9

03-Feb-12                     2010 DB Blue template
       Case Study: Germany Has Led the Way in RE
       Deployment Through Feed-in Tariffs
  Germany currently accounts for 43% of total installed solar PV globally
  Germany's total renewable power output in 2011 (20%) was larger than the
  contribution from nuclear and hard coal
                                                                                                                                                                          National
                                                                                                                                                      Renewable          Renewable
                                                 Renewable Energy                                                    EU ETS Participation in         Energies Heat      Energy Action
                                                                                                                                                                                      EEG
                                                   Sources Act                                                         first trading period               Act      EEG      Plan
                                                                                                                                                                                    Amendment
                                                       (EEG)                                                                (2005-2007)                          Amendment
                                                 FiTs emphasized


                                  25%                                                               EEG Amendment                                                                               60
                                                             Energy Saving
                                                                                                     FiTs uncapped
RE Generation (% of Total Consumption)




                                                               Ordinance

                                                                                                                                                                                                50
                                  20%                                      Combined Heat




                                                                                                                                                                                                     Cumulative Installations (GW)
                                                                           and Power Act
                                                                                                                                                                                      24.8      40
                                  15%                                                                                                                                       17.3
                                                                                                                                                                   9.9                          30
                                                                                                                                                         6.1
                                  10%                                                                                                          4.2
                                                                                                                                2.9
                                                                                                                     2.1                                                                        20
                                                                                                         1.1
                                                                                             0.4                                                                            27.2      29.2
                                         5%                                      0.3                                                                    23.8      25.7
                                                                                                                                20.6       22.2                                                 10
                                                                    0.2                                 16.6         18.4
                                                       0.1                       12.0        14.6
                                                       6.1          8.8
                                               0.0
                                         0%    0.1                                                                                                                                              0
                                              1990    2000       2001           2002        2003        2004       2005        2006        2007         2008      2009      2010     2011
                                                              Wind                Solar PV            RE Generation (in relation to total gross electricity consumption)

                           Notes: Investment data converted from Euros to USD according to average of monthly USD-EUR foreign exchange rate; RE generation includes hydro
                           Sources: TechI; Business Week; Global Wind Energy Council; German Federal Ministry for the Environment; DEWI; DBCCA Analysis 2012

                       Deutsche Bank                                      Mark Fulton
                       DB Climate Change Advisors                         Choosing Appropriate Incentives to Deploy Renewable Energy                                                                10

     03-Feb-12                                            2010 DB Blue template
German FiT Degressions have Exerted Consistent
Downward Pressure on PV Prices
                                                                    Germany’s Solar PV FiT Rates and Capacity Additions
                                                                                                              (2001 - 2010)
                                            8,000                                                                                                                                            €0.70
                                                                                                                                                                   7,400          7,500

                                                                                                 0.62
                                            7,000                                                             0.60                                                                           €0.60
     Annual Installed Solar Capacity (MW)




                                                                                                                        0.56
                                                                                                                                  0.53
                                            6,000         0.51                                                                                0.52
                                                                                                                                                                                             €0.50
                                                                       0.48




                                                                                                                                                                                                     Solar FiT (EUR/kWh)
                                                                                    0.46         0.46
                                            5,000                                                          0.43                                         0.43
                                                                                                                        0.41
                                                                                                                                   0.38                                0.39                  €0.40
                                                                                                                                             0.35 3,806
                                            4,000
                                                                  Added MW                                                                                  0.32
                                                                                                                                                                                             €0.30
                                                                  Upper Bound                                                                                                         0.29
                                            3,000
                                                                  Lower Bound                                                                                              0.24
                                                                                                                                                                                      0.21 €0.20
                                            2,000                                                                                         1,809

                                                                                                                               1,271
                                                                                                        951          843                                                                     €0.10
                                            1,000                                          670

                                                    110          110          139
                                               0                                                                                                                                             €0.00
                                                    2001         2002         2003         2004         2005         2006      2007       2008       2009          2010           2011
 Sources: DBCCA analysis 2012; Meister Consultants Group 2012

 Deutsche Bank                                                          Mark Fulton
 DB Climate Change Advisors                                             Choosing Appropriate Incentives to Deploy Renewable Energy                                                                                         11

03-Feb-12                                              2010 DB Blue template
German FiTs for Solar PV – Tracking Solar System
Costs
 Germany’s PV FiT rates have tracked solar system costs more closely than
         other markets
 FiTs in NPV OF EUROPEAN FEED-IN TARIFFS AND SYSTEM COST
               ($/W)            NPV of European Feed-in Tariffs and System Cost ($ / Watt)

                         8

                         7                                                                                                     System
                                                                                                                               Cost
                         6                                                                                                     ($/W)
                                                                                                                               Germany
                         5

                         4                                                                                                     Spain

                         3
                                                                                                                               Italy
                         2

                         1                                                                                                     Czech
                                                                                                                               Republic
                         0
                              Q2       Q4        Q2       Q4        Q2       Q4        Q2   Q4   Q2       Q4    Q2      Q4
                              06       06        07       07        08       08        09   09   10       10    11      11
               Notes: NPV calculated at 5% discount rate. System cost represent s German
 Notes: NPV calculated at 4% discount rate; system cost represents German average and excludes impacts of “value-based pricing” in high FiT markets
              average and excludes impacts of “value-based pricing” in high FiT markets.                         Source: Bloomberg New Energy Finance
 Source: Bloomberg New Energy Finance

 Deutsche Bank                               Mark Fulton
 DB Climate Change Advisors                  Choosing Appropriate Incentives to Deploy Renewable Energy                                                 12

03-Feb-12                     2010 DB Blue template
Germany’s Volume-Sensitive Degression Schedule for
Solar FiTs

                                                                                       Degression                            Degression
             Scenario                          MW installed
                                                                                         (2010)                                (2011)

        < -2 GW                                       < 1500                                  6%                                   1.5%
        -2 GW                                         1500                                    7%                                     4%
        -1 GW                                         2500                                    8%                                   6.5%

        Base case                                     3500                                    9%                                     9%

        +1 GW                                         4500                                   10%                                    12%
        +2 GW                                         5500                                   11%                                    15%
        +3 GW                                         6500                                   12%                                    18%
        > +3 GW                                       > 6500                                 13%                                    21%
        > +4 GW                                       > 7500                                  NA                                    24%


  Note: the latest EEG amendment in 2011 increased the maximum degression to 24%, if installed capacity exceeds 7500 MW – as indicated in bottom row of above table
  Sources: DBCCA analysis 2012; Meister Consultants Group 2012

 Deutsche Bank                           Mark Fulton
 DB Climate Change Advisors              Choosing Appropriate Incentives to Deploy Renewable Energy                                                                   13

03-Feb-12                     2010 DB Blue template
A Policy That Works: Solar PV Already Below or
Nearing Retail Electricity Rates in Germany
                     0.60                                                                                           3500 MW Corridor (<30 kW)
                                                                                                                                                               0.60
                                                                                                                    > 7500 MW Corridor (<30 kW)
                                                                                                                    3500 MW Corridor (Freestanding)
                                                                                                                    > 7500 MW Corridor (Freestanding)
                                                                                                                    Average Elec. Price Euro / kWh
                     0.50                                                                                                                                      0.50




                     0.40                                                                                                                                      0.40
        Euro / kWh




                                                                                                                                                                      Euro / kWh
                     0.30                                                                                                                                      0.30




                     0.20                                                                                                                                      0.20




                     0.10                                                                                                                                      0.10




                     0.00                                                                                                                                      0.00
                            2004     2005      2006        2007    2008       2009      2010      2011     2012   2013      2014         2015           2016
                                                                                        Year
 Sources: DBCCA analysis 2012; Meister Consultants Group 2012

 Deutsche Bank                                Mark Fulton
 DB Climate Change Advisors                   Choosing Appropriate Incentives to Deploy Renewable Energy                                                                           14

03-Feb-12                          2010 DB Blue template
 Germany a Global Leader in Renewables

Share of power from renewables is expected to more than double by 2020
Also expect 11.4% reduction in power production by 2020 due to efficiency gains
         Germany’s Electricity Supply Mix                                                                Germany’s Electricity Supply Mix
                    2010A                                                                                           2020E
                                                                                                                            Other
                   Biomass                                                                                                   2.1%
                      6%                                                                                        Biomass Hydro
              Wind       Hydro                                                                                           5%
                   Solar 3%                                                                                       7.5%
               6%                                                                                                                                        Coal
                     2%                                                                                        Solar         Geothermal
                                                                                                                                                         37%
                                                                                                               6.5%             0.3%
                      Oil
                      1%
                                               Coal
      Nuclear                                  52%
       21%                                                                                                 Wind
                                                                                                           23%            Oil
                                                                                                                         0.1%
                     Natural                                                                                           Nuclear
                      Gas                                                                                               5.5%          Natural Gas
                       9%                                                                                                                17%


                       17% RE                                                                                              38% RE
  Note: Totals may not add due to rounding; Germany’s National Renewable Energy Action Plan (NREAP) targeted 38.6% RE by 2020; “Other” includes waste-to-energy, biogas
  and landfill gas
  Sources: EWI; GWS; Prognos; DB Research

  Deutsche Bank                           Mark Fulton
  DB Climate Change Advisors              Choosing Appropriate Incentives to Deploy Renewable Energy                                                                      15

 03-Feb-12                     2010 DB Blue template
Renewables are trending toward grid parity
Conventional technologies have started out at very high cost and have only
achieved cost reduction with economies of scale
Solar and Wind are still more expensive than fossil generation and require
interim support until adequate scale is reached
                                                              U.S. Electricity Generation and Retail Cost by Energy Source 1930 – 2010
                                           2,200                                                                                                                                                          1.4
                                                                                                                                                                                                            1.4
                         2200
                                                   Coal, Natural Gas, and
                                           2,000   Nuclear required massive
                         2000
                                                   achievements in improving                                                                                                                                1.2
                                                                                                                                                                                                          1.2
                                           1,800
                         1800                      scale to achieve current
                          1,600
                                                   favorable cost structures
                        1600                                                                                                                                                                                1.0
                                                                                                                                                                                                          1.0
     Generation (TWh)




                                                                                                                                                                                                                                        Retail Cost $/ kWh
                          1,400                                                                                                                                      Solar and Wind are
                        1400




                                                                                                                                                                                                                  Retail Cost ($/kWh)
                                                                                                                                                                     experiencing significant
                        Generation (TWh)




                                                                                                                                                                                                            0.8
                                                                                                                                                                                                          0.8
                          1,200
                                                                                                                                                                     improvements in their
                        1200
                                                                                                                                                                     cost structure with small
                           1,000
                                                                                                                                                                     increases in scale
                         1000
                                                                                                                                                                                                            0.6
                                                                                                                                                                                                          0.6

                                    800
                                  800

                                  600
                                    600                                                                                                                                                                   0.4
                                                                                                                                                                                                            0.4

                                  400
                                    400
                                                                                                                                                                                                          0.2
                                                                                                                                                                                                            0.2
                                  200
                                    200

                                            0 0                                                                                                                                                             0.0
                                                                                                                                                                                                          0.0
                                                1930
                                               1930      1935
                                                        1935          1940
                                                                     1940     1945
                                                                             1945     1950
                                                                                     1950     1955
                                                                                             1955       1960
                                                                                                       1960     1965
                                                                                                               1965      1970
                                                                                                                        1970      1975
                                                                                                                                 1975        1980
                                                                                                                                            1980     1985
                                                                                                                                                    1985      1990
                                                                                                                                                             1990      1995
                                                                                                                                                                      1995      2000
                                                                                                                                                                               2000    2005
                                                                                                                                                                                       2005     2010
                                                                                                                                                                                               2010
                                                   Coal Generation
                                                   Coal Generation                    Gas Generation
                                                                                        Gas Generation                 Nuclear Generation
                                                                                                                         Nuclear Generation             Solar Generation
                                                                                                                                                          Solar Generation             Wind Generation
                                                                                                                                                                                       Wind Generation
                                                   Coal Cost Trend                    Gas Cost Trend                   Nuclear Cost Trend               Solar Cost Trend                Wind Cost Trend
                                                   Coal Cost-trend                      Gas Cost-trend                   Nuclear Cost-trend                 Solar Cost-trend           Wind Cost-trend
  Source: Hudson Clean Energy Partners Analysis, 2011
Deutsche Bank                                                                Mark Fulton
DB Climate Change Advisors                                                   Choosing Appropriate Incentives to Deploy Renewable Energy
GET FiT Program: Public-Private Parntership to
Create Markets for RE in Developing Countries




 Deutsche Bank                           Mark Fulton
 DB Climate Change Advisors              Choosing Appropriate Incentives to Deploy Renewable Energy   17

03-Feb-12                     2010 DB Blue template
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Ordinance and shall not be distributed to non-Professional Investors in Hong Kong or to anyone in any other jurisdiction in which such distribution is not authorised. For the purposes of this statement, a
Professional investor is defined under the SFO.

For Investors in MENA region:
This information has been provided to you by Deutsche Bank AG Dubai (DIFC) branch, an Authorised Firm regulated by the Dubai Financial Services Authority. It is solely directed at Market Counterparties or
Professional Clients of Deutsche Bank AG Dubai (DIFC) branch, which meets the regulatory criteria as established by the Dubai Financial Services Authority and may not be delivered to or acted upon by any other
person.
       I-026184-1.2
     Deutsche Bank                                    Mark Fulton
     DB Climate Change Advisors                       Choosing Appropriate Incentives to Deploy Renewable Energy                                                                                                    18

								
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