In this sluggish economy, you would think that selling expensive electricity to businesses or homeowners would not be a good business. But the solar-power industry is doing exactly that. Solar power is more expensive that making electricity from natural gas, coal, wind or existing nuclear plants, and yet the business is booming.

Hardly a day goes by without good news for the solar industry. For example:

BrightSource Energy, Inc. just announced that power generation company NRG Energy will invest up to $300 million to become the biggest owner of the Ivanpah Solar Electric Generating System, the largest solar thermal system in the world, just beginning construction in California's Mojave Desert. Gov. Schwarzenegger and Interior Secretary Ken Salazar joined in a groundbreaking today. That's a mock-up of the Ivanpah plant pictured at right.

And:

SunRun, a California-based home solar company, said this week it received an additional commitment of tax equity from an affiliate of U.S. Bancorp to develop 1,900 residential solar installations. Given that the typical installation costs about $35,000, that's roughly a $65 million investment. SunRun has now raised more than $300 million in project financing.

Recently, I visited a solar PV manufacturer, Solyndra, at its headquarters in Fremont, CA. While Solyndra is worried about competition from low-cost manufacturers in China, it is still selling all of the photovoltaic panels it manufacturers. Recently:

It announced deals to install its cylindrical solar panels on the roof of a Frito-Lay manufacturing plant and on rooftops in the Los Angeles area that will supply 16.2 MW of power to Southern California Edison.

None of this comes cheap, although calculating the cost of solar power is not simple–it depends on the kind of system in place, its location and the costs of financing, since "fuel" from the sun is free. Solarbuzz, a respected source, says that:

Solar Electricity Prices are today, around 30 cents/kWh, which is 2-5 times average Residential electricity tariffs.

According to the Energy Information Administration, the average residential price for electricity in June was 12 cents/kWh, the average commercial retail price was 10.70 cents/kWh and the average industrial retail price was 7.31 cents/kWh.

So why do the economics of solar power work for the industry? The answer, you won't be surprised to learn, is generous government subsidies.

Take that Ivanpah solar-thermal plant. It's big: 392MW, enough to power 140,000 homes. "That's greater than all of the solar in the U.S. that was constructed last year," said Brightsource CEO John Woolard, on a call with reporters today.

Getting the project off the ground required a$1.375 billion in loan guarantees from the U.S. Department of Energy as well as a cash grant of $500 to $600 million under a Treasury Department program that has replaced, temporarily, an investment tax credits for solar. Put another way, the government is investing twice as much in the plant as NRG, which will own 40 to 60 percent of the equity.

What's more, California has an aggressive Renewables Portfolio Standard, requiring utilities to buy 20 percent (soon likely to be lifted to 33 percent) of their power from renewable sources by 2030, which helped create demand for the Ivanpah plant. That law permits Pacific Gas and Electric (PG&E) and Southern California Edison (SCE), which have contracted to buy the electricity, to charge ratepayers for the higher costs of renewable energy.

SunRun and its investor, U.S. Bancorp, also benefit from the Treasury Department grant program (known as 1603, and part of the 2009 stimulus package) and from the California Solar initiative, a state program that offers homeowners and businesses cash rebates if they install solar power. Rebates can cover as much as one-third of the cost of a home system; the $3 billion, 10-year estimated cost is shared by all ratepayers. Solyndra, meanwhile, also won approval for a $535 million DOE loan so it could build a cool new factory (see photos below) to make its innovative cylindrical CIGS thin-film solar modules.

Good arguments can be made on behalf of all these projects, and their subsidies. First, they displace fossil fuels, which for now (and for the foreseeable future in the U.S.) can emit global warming pollutants into the air without paying a price. Second, they can help the still-new solar industry get bigger and bring down its costs, through economies of scale and learned efficiencies.

"We're striving to get a point where the global demand is no longer metered by the political incentives," said Mike Grunow, vice president of marketing for Solyndra. The company also has to compete on the global market with Chinese panel makers that benefit from cheap financing and land, as well as low labor costs.

David Crane, the CEO of NRG, said today that without clean-energy subsidies, utilities would build only natural-gas plants right now because gas prices are so low. "That would be a huge mistake for our country in terms of fuel diversity and the environment," Crane said. Natural gas burns cleaner than coal, but it still produces significant greenhouse gas emissions. Utility-scale solar-thermal technology, he argues, has the potential over time to compete with fossil fuels.

For their part, SunRun, which serves homeowners by providing finance and taking the hassle out of solar installations, and Solyndra, whose cylindrical panels are designed for flat, commercial roofs, both provide electricity at places where it's used (as opposed to in large-scale plants like Ivanpah). By doing so, they eliminate the costs of transmission and compete not with the wholesale cost of burning fossil fuels but with the retail price of electricity.

Ed Fenster, SunRun's chief executive, told me by phone the other day that Solar PV is "well suited to displace the most expensive power you can find. That is the power that's sold to homeowners." He added: "You could never build a residential-scale, cost-effective nuclear power or natural gas plant." True enough.

But assuming we can agree that there's good reason to subsidize solar power, as well as other forms of low-carbon electricity (including nuclear), you have to ask -- is this hodge-podge of loan guarantees, federal funds and ratepayer support an efficient way to do so? Wouldn't it be better to enact a steep carbon tax, and then let all forms of energy compete? Should a friend of mine who lives in upscale Los Altos and put a $35,000 solar system on his roof be subsidized by the rest of us? Is this going to lead us to a sustainable energy future, one in which we can collectively make smart choices? I don't know. But somehow I think not.

GreenBiz.com Senior Writer Marc Gunther is a longtime journalist and speaker whose focus is business and sustainability. Marc maintains a blog at MarcGunther.com. You can follow him on Twitter @marcGunther.