Center for Strategic Communication

Solar Panels at Naval Air Station in Jacksonville

While the shale gas revolution and the resurgence in U.S. oil production have garnered a lot of attention in the energy world in recent months, the solar industry has quietly made significant gains in bringing down costs.

Much of the cost reductions come through innovative ideas for financing pioneered by solar firms like SolarCity, which has rapidly become the nation’s largest installer of residential photovoltaic panels. Under their third-party financing scheme, homeowners can install solar panels on their roofs which are then owned by a third party, such as a utility. The homeowner pays nothing upfront, and simply pays a monthly “lease” payment to the utility. This gets around the obstacle that has bedeviled the solar industry for so long: solar panels may make economic sense in the long-run, but the upfront costs were prohibitive for most homeowners.

With manufacturing capacity set to double in the next several years, manufacturers will make cost gains due to economies of scale, more efficient supply chains, declining cost of capital, reducing costs by 10% annually for the rest of the decade. According to McKinsey, this would make solar modules cost-competitive with fossil fuels in sunnier places within the next few years, and a much wider array of geographic areas by 2020. Solar panel prices have already declined by 75% over the past seven years.

But, the huge drop in costs has also been due to overcapacity, with a dramatic build out, particularly in China. The glut of solar panels have pushed down prices, forcing high-cost manufacturers out of business. This is why Solyndra, which had an especially costly business model, went bankrupt. A solar “shakeout” will likely continue, but the firms that do survive will have promising prospects.

Sharply lower prices, although bad for manufacturers, have spurred demand. For the first quarter of 2012, solar installations in the U.S. are up 85% from Q1 of 2011. According to the Solar Energy Industries Association, an estimated 3.3 gigawatts of capacity are expected in 2012.

The industry will also receive a shot in the arm from international markets. As of July 1, a strong feed-in-tariff went into effect in Japan, which pays $0.53 cents per kilowatt-hour for solar power, effectively three times the price of fossil fuels and nearly double the level of Germany’s feed-in-tariff, the largest solar market in the world. This policy will likely catapult Japan’s solar market to the top of the list, and will mop up some of the excess supply floating around the globe.

China also quadrupled its solar target for 2015 to 21 gigawatts, which may spark a large build out of solar capacity in China over the next three years.

The progress made for the solar industry means that solar power has reached grid-parity in sunnier places, such as Hawaii.

While major news outlets focus on the bankruptcies of high-cost firms, which is inevitable in nascent industries, the solar industry is undergoing a quiet revolution of sorts. Indeed, the future looks bright.