The Middle East has long been a huge potential market for the solar industry given the high solar intensity of the desert and the fact that most countries burn oil to supply electricity, rather than exporting it. But until recently, there's been very little solar development in the region.

Saudi Arabia is trying to change that, recently offering a tender of 300 MW to developers as part of a plan to build 9,500 MW of solar. The low bid of 1.78 cents per kWh from Masdar and EDF Energies was the lowest price ever seen for solar energy and should turn the heads of other countries in the region. If it's a sustainable price for solar, it would be a game changer for all of energy.

Government backing makes solar this cheap possible

First of all, the 1.78 cent per kWh bid is amazing because it's less than the cost of building a new coal, natural gas, or nuclear plant by a wide margin. But it's worth noting that Masdar, in particular, has close ties to government funds as the subsidiary of a state-owned company in Abu Dhabi. That could give it the financing and incentive to make an artificially low bid for this project, meaning the economics aren't sustainable without government support.

Nevertheless, solar energy for under 2 cents per watt is an incredible milestone for the solar industry and shows just how cheap solar systems have become, even if this project isn't wildly profitable.

2 cent solar is a game changer

Even if this project is subsidized and may not make money, the fact that anyone is building solar plants that charge less than 2 cents per kWh for electricity is a game-changer. It would make it economical to produce and store electricity in batteries or another energy storage medium and use solar energy all day.

When you look at the energy landscape, the biggest players in solar are already preparing for how cheap solar and energy storage will change their business forever.

Preparing for the future

The three companies that I think show where energy is headed are First Solar (NASDAQ:FSLR), SunPower (NASDAQ:SPWR), and Tesla (NASDAQ:TSLA). First Solar is upgrading its manufacturing to a product called Series 6, which is really more than just a solar module. It's a utility-scale solar solution that can plug in energy storage at the project level where it's financially viable.

SunPower and Tesla are already installing solar and energy storage at the commercial and residential level. Their model is a little different, aiming to save customers money rather than provide a service to utilities.

The reason these solutions are important is; as more solar energy goes onto the grid it creates something called a duck curve. Without energy storage, demand for non-solar electricity is high in early morning hours but declines while the sun is out and then shoots higher as people get home from work and the sun goes down. This stresses the grid and may limit how much solar energy can be efficiently put on the grid.

Energy storage can solve the duck curve problem by storing daytime solar energy for evening hours. And if utilities can control energy storage at the plant level or control storage in businesses and homes, it could increase the amount of solar energy the grid can handle. But the first step is having abundant low-cost solar electricity, which a country like Saudi Arabia is proving is available around the world.

This is a big step for solar energy

Even if Saudi Arabia's solar bid is artificially low and solar electricity bids regularly come in at the 3 to 4 cent per watt range normally, it'll open up a world of potential for the solar industry and energy storage. According to investment bank Lazard, the cost per kWh to build a fossil fuel plant today ranges from 4.8 cents per kWh for the cheapest natural gas option to 28.1 cents per kWh for a diesel plant (primarily used on islands). Below the 4 cents per kWh level would make solar energy cheaper than all fossil fuel options.

24/7 solar power would require additional costs, but the first step is solar energy being the lowest cost option. And it looks like in Saudi Arabia, solar energy is a no-brainer. If Saudi Arabia is going to be a big source of solar demand you know the industry is making inroads in upending energy as we know it.