Solar energy is ready to expand dramatically in Texas

Normally when the sun shines bright on August afternoons, millions of air conditioners make the Texas electric grid groan. That's about to change.

After generations of being the technology of tomorrow, solar energy is coming of age because of rising photovoltaic efficiency, shrinking production costs, and growing consumer and investor appetite for the technology.

"We have installed more renewable energy around the world in the last year than conventional resources," said Kyung Ah-Park, managing director of environmental markets at investment banker Goldman Sachs. "The underlying thesis behind clean energy has become very strong and is only becoming stronger, and I say that first and foremost because of the economics."

Michael Eckhart, global head of environmental finance at Citigroup, said solar power is proving commercially viable and low risk, drawing interest from investors traditionally interested in conventional generators.

"This is the decade of innovation in the finance of clean energy, and I would say we are 40 years into a 100-year transition to clean energy," he added.

Park and Eckhart were speaking at Fortune's BrainstormE meeting in Austin, one of several conferences I've attended in recent weeks where industry experts heralded the rapid expansion of solar energy. I have also heard a lot about the growth of solar power at home from my wife, who works for a renewable energy company.

Nationally, solar is the fastest-growing segment of the electricity market, with a 43 percent compounded annual growth rate from 2004-2014, according a new report by consulting firm Deloitte. Solar represented 32 percent of new generation capacity added in 2014, and some forecasts predict it will represent 75 percent of new capacity in 2016.

Meanwhile, China plans to add as much solar power next year as what the U.S. has already installed, more than 20,000 megawatts.

The acceleration in construction is due to cheaper, more efficient panels that have slashed the per-megawatt cost of solar energy by 53 percent since 2009. In Italy, Japan, South Africa and most of South America, solar costs about the same as conventional sources.

In Texas, solar's penetration into the ERCOT electricity market, which covers 90 percent of Texas' demand, is still a tiny 387 megawatts of capacity on a 70,000-megawatt grid. But the Solar Energy Industries Association reports 129 of those megawatts were installed in 2014 and another 260 megawatts will connect to the grid in 2015, enough to power 28,000 homes.

And the stage is set for more solar power in Texas. Recent utility-scale solar projects in the state are priced below $50 a megawatt-hour, putting them on par with natural gas, the benchmark conventional fuel, over a 20-year period.

"Some of the prices out there are very, very compelling," said Cris Eugster, chief generation and strategy officer at CPS Energy, San Antonio's city-owned utility.

He told Deloitte's Alternative Energy Seminar that renewable energy sources are more attractive than conventional ones because they have zero fuel costs, zero emissions, lower operation and maintenance costs and rarely shut down unexpectedly. CPS Energy will achieve its goal of 20 percent generation from renewable sources in 2016, four years ahead of schedule.

"We see a limited amount of solar in Texas compared to what it should be," said Tom Werner, CEO of SunPower, a California-based manufacturer of high-efficiency photovoltaic cells. SunPower has an office in Austin and is developing large-scale projects across Texas that are price competitive thanks to the federal investment tax credit.

Texas has all the right conditions for solar: plenty of sun, growing demand and high wholesale electricity prices on hot August afternoons, Werner said in an interview. Commercial users, like SunPower partners Toyota and Apple, are signing long-term contracts for solar power to take advantage of the tax credits, but also to lock in a guaranteed price for electricity over the next 20 years, a great hedge against higher natural gas prices.

That fact highlights how solar is fundamentally different from fossil fuels. When demand for natural gas goes up, the price follows. By contrast, the cost of solar energy is in the manufacturing process, which gets cheaper with time and scale.

"The more we actually deploy and grow the demand, the cheaper the energy becomes, which in turn further drives demand," Goldman Sachs executive Park said.

No doubt, solar energy is only economical now due to the investment tax credit, but coal and natural gas also receive subsidies. Renewable-energy advocates say they would happily give up the credits, if lawmakers leveled the playing field with fossil fuels. That seems like a small request before the tax credits come up for renewal in late 2016.

Solar energy is maturing rapidly, and soon the hot Texas sun will no longer be the grid's enemy.