Image source: SunPower.

The recent extension of the solar investment tax credit (ITC) in the U.S. was cheered as a boon for the solar industry, and rightfully so. The ITC is a key subsidy that will help grow solar installations, drive costs down, and lead to a more competitive industry in the long term. From the government's perspective, more solar will mean cleaner energy and more jobs in the U.S. 

But there are also side effects from the ITC extension that many in the energy industry don't fully appreciate. Solar will grow so much in the next five years that it will become a significant percentage of the grid, particularly in the Southwestern U.S., and as that happens it'll drive a whole new world of energy innovation that could change how we look at energy forever. 

For companies like SunPower (SPWR 5.48%), SolarCity (SCTY.DL), and Tesla Motors (TSLA -1.91%), which are developing renewable energy solutions, it means there may be a growing opportunity to provide even more services to customers. 

The scale of solar
GTM Research predicts that the ITC extension will lead to 20 GW of solar installations in the U.S. annually by 2020 -- a figure even GTM thinks is conservative. That's a big number, but it needs some context to be fully appreciated.

If each solar panel generates electricity 20% of the time (known as the capacity factor), the industry would need to install about 22 GW of solar to replace 1% of all electricity production in the U.S., based on annual EIA data. So, in five years, solar could be approaching 5%  of all of the electricity we consume and growing another percentage point every year .

That's a big increase from solar generating about 1% of electricity in the U.S. today, and it will create a domino effect in the energy industry. Utilities will have to adapt to keep the grid running with these new intermittent resources, and with consumers having the option to produce their own electricity, there will be more choice about energy than ever before. Let me explain how that's likely to create a cascading number of unintended consequences. 

Demand for the Powerwall will be driven by consumers taking control of their energy usage. Image source: Tesla Motors.

Small-scale solar leads a revolution
These unintended consequences will first be seen on small-scale solar projects. In Nevada and Hawaii, utilities have convinced regulators that solar energy generated on a home and sent to the grid during the day shouldn't be credited at the retail price of electricity, which is known as net metering. Instead, customers are getting wholesale prices for what they send to the grid. 

Utilities see this as a way to make solar energy less economical for homeowners, but as the cost of solar falls, it could actually be making it economical for homeowners to become less reliant on the grid. They could put up solar panels: creating energy during the day, storing it, and then consuming that energy in evening hours. It's even possible that going off-grid will be economical in some locations. Utilities will likely see the ITC extension as a threat, leading them to add fees for residential solar that's booming across the country. But that could also drive more self consumption, causing less demand for electricity from the grid and even more energy innovation. Utilities could inadvertently help their own demise if they fight solar too much.

A similar dynamic plays out on commercial buildings, where energy storage is already being used to reduce demand charges based on peak energy consumption, which can be as much as half of a customer's utility bill. The ITC extension will help commercial customers think differently about energy and spend less on electricity from utilities in the long run. 

This is what Tesla Motors sees happening, and why it's building the Powerwall and Powerpack, some of which will be installed through SolarCity's sales network. It's why SunPower has invested in partnerships to understand and control energy consumption and storage for residential and commercial customers. Energy innovation is creating new business opportunities that seemed impossible just a few years ago.

Utilities will be forced into this energy future
Small-scale solar systems will lead this surge in energy innovation, but utilities will eventually be forced to play a role as well. A small handful of states like New York and Hawaii are already starting to think about how energy storage and demand response could create a grid that's more reliable, less costly, and cleaner. 

Many utilities are already playing a role in this future, buying up renewable energy projects across the country. In that respect, they'll have a financial incentive in ensuring that they play a role in building this new grid of the future. But that grid will be driven by the wave of renewable energy that will be built over the next decade. 

Energy storage changes everything
If consumers, large and small, start to generate more of their own electricity and start storing it for use when it's most economical, it changes the electricity dynamic. Now, the industry can start thinking about how much a unit of energy costs and how it's going to be stored, not the old paradigm of matching electricity supply with demand at every moment of the day.

This could lead to further innovations in large-scale energy storage, whether that takes the form of batteries, pumped hydro, hydrogen, or another technology. There will be so much solar installed in the next five years -- particularly in Southwestern states -- that the utility industry will need ways to store energy, and when energy storage becomes commonplace, the fossil fuel industry's era of dominance will be over. 

One challenge for everyone in the energy industry is that no one knows exactly what the new energy industry will look like. We know that more storage is needed, but what kind and where? That creates both opportunities and threats for the companies creating this energy future. 

Solar for oil will be a boon for solar
When the ITC extension was traded for oil exports it was intended to save thousands of solar jobs and keep a clean source of new energy growing. But the scale of solar that will be installed in the next five years is going to reshape the grid and may create a new paradigm in the way we think about electricity. If you're a solar company, a battery company, or in the business of energy management, that creates a world of opportunity. If you're in the business of selling coal, natural gas, or oil, it should make you nervous about the future.