The islands of Hawaii are known for their gorgeous landscapes and world famous beaches, but they're probably not the first place you think of when you think of renewable energy. But they should be. 

Hawaii is the first state in the U.S. where rooftop solar has become an almost standard item on homes and businesses, something I personally witnesses recently driving around the islands of O'ahu and Kaua'i. Solar panels are also in places unthinkable in other locations. They face north, they're covered by trees, and some look like they're barely attached to the roof itself. But Hawaiians find solar to be so economical that almost all solar makes sense, and they are increasingly finding energy storage an economical solution as well. Understanding just how energy storage is working here can help us understand why companies are proving their technologies of the future on the Hawaiian Islands. 

Solar On A Roof

Image source: Getty Images.

Island energy doesn't look like continental U.S. energy

On average, U.S. residential consumers pay 12.45 cents per kWh for electricity. Prices vary by state in the continental U.S., from 9.33 cents per kWh in Louisiana to 19.95 cents per kWh in Connecticut, but the prices in the lower 48 states pale in comparison to those in Hawaii. 

According to the EIA, in October 2016 residential electricity prices in Hawaii were 27.54 cents per kWh, and on the island of Kaua'i rates are 32.78 per kWh starting this year. That makes solar extremely viable given the fact that power purchase agreements for residential projects can be found for less than $0.13 per kWh. Utility contracts are going for less than $0.05 per kWh. And the difference means energy storage can make financial sense as well. 

Big investments being made on Kaua'i

SolarCity and Tesla Motors (NASDAQ:TSLA) were the first big investors in Kaua'i, building a 13 MW solar plant and 52 MWh battery system. They combined with 24 MW of existing solar power to provide as much as 13 MW of power to the grid during evening's peak hours of 5 p.m. to 10 p.m. The reported price per kWh of electricity from the Tesla/SolarCity system was 14.5 cents per kWh. 

This week, AES Corp announced a deal to build a 28 MW solar farm with a 100 MWh battery system attached. This time, electricity will be sold to KIUC for 11 cents per kWh. When completed, Kaua'i will get over 50% of its electricity from renewable sources. 

In less than a year and a half between the Tesla/SolarCity deal and the AES deal, the cost of solar+storage fell 30%. And it shouldn't go unnoticed that the price of electricity is now below the retail rate most consumers pay in the continental U.S. Hawaii is proving that a 100% renewable energy future is not only possible, it's closer than you might think. 

Islands are the new proving grounds

SunPower (NASDAQ:SPWR) won a bid to build a similar system in the French West Indies and Corsica. The company will build 20.7 MW of solar power plants on the islands and five projects totaling 18.4 MW of solar power that will include energy storage. 

Islands around the world rely on burning diesel for electricity, so they're taking notice to the falling cost of solar+storage. 

Solar+storage is the next big energy trend

Solar energy contracts in the U.S. are now below $0.05 per kWh, and by the end of 2017 we should see contracts below $0.04 per kWh. So solar energy is competitive with new fossil fuel plants on a per unit of energy basis. But the intermittency of renewables is still a challenge, something batteries can help address. 

What Kaua'i is showing is that combining solar with energy storage can create an economical energy combination that can supply electricity beyond the hours the sun is out. The cost of $0.11 per kWh is economical for a Hawaiian island, and with consistent cost reductions over the next decade it could be economical for some states in the U.S. as well. And as solar+storage becomes a very real option for utilities, businesses, and homeowners it will change the way we think about energy forever. 

Travis Hoium has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Tesla Motors. The Motley Fool has a disclosure policy.