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You can choose not to capture the demonic city. But to make the next mission easier, I try to get the most out of each mission:
1. Reach the development limit.
2. Visit all the places that increase stats.
3. If there is a utopia, treasure trove, or pyramid, get a full set of high-level spells from there.
After capturing the demonic castle, I sent all the elves to the sacrificial pit for experience and switched to native troops. Although, maybe it would be more reliable to play with only druids. You can recruit them from three castles. But I got tired of giving them to a support hero every night. I relied on the power of Agrael. He didn't disappoint.