The dream of using the sun's abundant energy 24/7 took a major step closer to reality recently when utility company Tucson Electric signed a power purchase agreement last week for solar plus storage at a price of less than 4.5 cents per kilowatt-hour (kWh) over 20 years. That's less than half the price of retail electricity power and a price low enough to compete with natural gas, coal, and nuclear power head to head in wholesale markets for what some might call "baseload" power. 

It's hard to overstate what a big deal this is for solar energy, energy storage, and disruption in the grid overall. This makes the market for solar exponentially larger, married with a massive storage market, and could eventually lead to a fundamental change in the way we think of the electric power industry. Investors need to make sure this trend is a tailwind and not a headwind, because the solar-plus-storage train is coming faster than anyone expected.

SunPower power plant in a grassy field.

Image source: SunPower.

Solar plus storage is no flash in the pan

The Tucson Electric power deal was already surprising because it had a price of $0.03 per kWh for solar, meaning the energy-storage portion added about a penny and a half to the bid. But what was especially surprising about the Tucson Electric Power announcement is that it was signed with NextEra Energy (NYSE:NEE), a major U.S. utility. This isn't a crazy developer just hoping to offload the project to someone else or a product company looking for a good headline. This utility isn't going to be doing deals it doesn't think are profitable and has no interest in building solar plus storage for the sake of building solar plus storage. It's building this project because the economics work. 

Tesla (NASDAQ:TSLA) has shown a path forward for solar plus storage in the past, with an $0.11-per-kWh contract in Hawaii earlier this year, but having a utility building these projects gives them more credibility financially. It could also mean we'll solar companies such as SunPower (NASDAQ:SPWR) and First Solar (NASDAQ:FSLR) including storage with projects in the future, something both have discussed and have designed into their power-plant designs. And no matter who is providing the equipment, this makes the solar and energy-storage markets much bigger overall. 

This makes the solar-plus-storage market exponentially bigger

If solar plus storage can compete with coal, natural gas, wind, and nuclear on a cost basis -- and remember that both solar and storage are getting cheaper every year -- it's hard to overstate how big the opportunity is. The Energy Information Administration estimated last year that by 2040 the world will consume 36.5 trillion kWh of electricity annually

If we assume that solar power plants produce energy 20% of the time -- the sun isn't out 24/7, after all -- then there would need to be 20,833 GW of solar power production globally to meet global demand and tens of thousands of GWh of energy storage. To put that into perspective, GTM Research predicts that at the end of 2017 there will be 306 GW of solar installed. In other words, the industry could grow cumulative installations 68 times over in the next 23 years if we got 100% of our energy from solar power. 

It may seem like a pipe dream to get all of our energy from solar, but the economics are what matters here. If a unit of solar energy can be produced and stored for less than the cost to produce energy from any other energy source, there's nothing stopping solar growth. And this might change everything for solar companies as well as utilities. 

First Solar power plant built in the desert.

Image source: First Solar.

Utilities are now in serious trouble

The threat to utilities short-term is that low solar-plus-storage prices will lead to a lower asset base from which to charge customers. On the monopoly utilities side, companies require a growing base of power plants, transmission lines, and distribution assets so they can charge customers for them and generate guaranteed profits. If customers are making and storing their own energy, or if solar and storage mean fewer major grid and power plant upgrades, there would be less money to be made, even for monopoly utilities, unless they can convince regulators to allow them to rate base the assets, which may bring higher costs to customers. 

In wholesale markets, low solar-pus-storage costs could make existing natural gas, coal, and even nuclear power plants obsolete on the open market, exacerbating current struggles for wholesalers. Natural gas has already decimated the coal fleet, and this could bring down the market opportunity for fossil fuels across the board. On the bright side, utilities who make the transition to solar and storage quickly and manage to keep their borrowing costs low -- as NextEra has done through its yieldco NextEra Partners -- could develop a competitive advantage long-term. 

The existential threat to utilities long-term is that distributed energy resources -- energy generation and storage that consumers can own, such as rooftop solar and batteries -- become economical. This would make leaving the grid feasible for millions of households and effectively make utilities as we know them obsolete. This could be the biggest news in electricity since the light bulb. 

Where does energy go from here? 

Tucson's energy contract is a leading indicator of where energy is going, because it has very strong solar resources. So it may be a while before less solar-friendly locations can get solar plus storage for 4.5 cents per kWh. But the fact that costs that low are here, and that large, well-run utilities are bidding prices that make solar plus storage competitive with fossil fuels, is a huge development for the energy industry. And it makes the financial opportunity for solar and energy storage almost unfathomable around the world.  

Travis Hoium owns shares of First Solar and SunPower. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.