First Solar Cimarron Project Image

Image source: First Solar.

While the world of residential solar struggles with changing utility rules and uncertainty in long-term contracts, the utility-scale solar business has never looked stronger. Utilities are eager to sign contracts for large solar projects at highly attractive prices, and unlike residential customers, they're extremely solid counterparties.

First Solar (NASDAQ:FSLR) showed some of that momentum this week when it signed 500 MW worth of solar contracts with Southern California Edison (SCE), a subsidiary of Edison International (NYSE:EIX).

Big demand for big solar
The deal between SCE and First Solar is for four solar projects totaling 500 MW of capacity to be completed by the end of 2019. Two of the projects with 250 MW of capacity will be in California, one 100 MW project will be in Nevada, and a 150 MW project will be in Arizona. When completed, they will bring the agreements between SCE and First Solar to 2.2 GW of capacity.  

Contract details weren't announced, but the trend for power purchase agreements in the U.S. suggests the price for energy will be less than $0.05 per kWh. That's competitive with wholesale rates, and the energy from these solar plants is highly reliable.

The impact on First Solar
500 MW of capacity is about one-sixth of First Solar's expected production in 2016, so this agreement is a big deal. And this is the first major announcement from First Solar that will take advantage of the extended solar investment tax credit (ITC).

Utility-scale solar projects take longer to contract and build than rooftop projects, so the market had been at a standstill while Congress debated extending the ITC. Now that it's been extended, solar companies can plan projects years in advance, something I think we'll see more of throughout the year. 2019 is a significant date because it's the final year of the 30% ITC before it begins to step down, so expect to see start dates around then.

SCE will need to evolve as a utility
The sheer scale of solar in SCE's territory is impressive, especially when you consider that the 2.2 GW I mentioned above doesn't include the residential and commercial customers who have put up solar in the last five years. That may make SCE a testing ground for the future of energy by the time projects like this are done. The utility may need to install massive amounts of energy storage to adapt to all of this solar, and it may even incorporate demand response on a wider scale.

What's encouraging for utility investors is that the company seems willing to adapt to these new energy sources. It's adapt or die in today's energy business, so being forward-thinking is important.

A solar wave is coming
This is one of the bigger solar contracts announced recently, but don't be surprised if it's just the beginning. The ITC extension will make solar cheaper for developers, and regulators are pushing for utilities to buy more solar. It's a good time to be a solar investor, especially if you can ride out the ups and downs the market can throw at you.

Travis Hoium owns shares of First Solar. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.