I've long seen Hawaii as the solar industry's proving grounds, and that's true now more than ever -- particularly for the island of Kaua'i. 

Earlier this year, electricity generator AES Corp. (NYSE:AES) signed a deal with the Kaua'i Island Utility Cooperative to sell electricity from a 28 MW solar farm and 100 MWh energy storage facility for 11 cents per kWh. SunPower Corp. (NASDAQ:SPWR) recently announced that it will supply the components for the project. The price of 11 cents per kWh would be competitive with retail rates on the mainland, but it's about one-third the cost of electricity on the islands, meaning it's a low-cost supplier. If Hawaii can make solar plus energy storage work economically, it'll prove the rest of the world can too. 

Na Pali Coast on the Hawaiian Island of Kauai.

Image source: Getty Images.

Solar is already huge in Hawaii

While most of the U.S. is just starting to see solar panels pop up widely, in Hawaii, solar is commonplace. According to the Solar Energy Industries Association, 782.5 MW of solar had been installed in the state as of the end of 2016, accounting for 8.2% of all electricity generation and powering 197,000 homes. That's incredibly high penetration for a state with 1.4 million people. 

Solar adoption in Hawaii is driven by the fact that electricity prices in the state can exceed 30 cents per kWh, nearly three times the national average. On the sunny Hawaiian Islands, the economic case for solar was easy to make, particularly when net metering was still in force. 

In the last few years, though, Hawaii's utilities cut net metering, forcing consumers to self-supplement with solar power systems with energy storage, or accept a rate of as little as 15 cents per kWh for the electricity they exported to the grid -- half of the net metered rate. The change hasn't slowed adoption. Instead, it's opened up a whole new industry. 

Energy storage is growing because it has to

Without net metering, suddenly energy storage was financially justifiable. Sunrun (NASDAQ:RUN), SunPower, and Tesla (NASDAQ:TSLA) were able to sell storage systems to homeowners for their personal use, pairing with solar sales. But the serious growth in energy storage is taking place first on a larger scale. 

Privately held Stem Inc. completed the installation of 1 MW of commercial energy storage systems at 29 commercial sites earlier this year in a pilot program with Hawaiian Electric Industries (NYSE:HE). That project could be a template for how to build distributed solar on site under a utility's control. 

Tesla and SunPower are going the utility route on Kaua'i. Tesla built a 13 MW solar system with a 52 MWh energy storage system on site. The AES/SunPower system will take that to another level at 28 MW of generation and 100 MWh of energy storage. 

Solar plus storage is a slippery slope (and that's a good thing)

The reason energy storage is such a big deal in Hawaii is that it could prove that renewable energy sources can power a grid 24/7. If energy storage can fill the generation gaps inherent in these variable energy sources, renewables could replace fossil fuels altogether. It becomes harder and harder to justify operating fossil fuel plants if the combination of solar, wind, and energy storage offers a cheaper solution. 

Hawaii's small footprint, high-cost electricity, and abundant sunshine make it the perfect proving ground for renewables-plus-energy-storage systems. If things continue at this pace, they'll likely replace most fossil fuel plants in the state in the next decade. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.