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Solar power has long been dismissed as too expensive, unreliable and dependent on uneconomic state subsidies to become anything more than a minor contributor to energy capacity in major markets. But the evidence points to a brightening outlook for the survivors of the solar wars, even as subsidies begin to fade and solar's share of electricity output remains minuscule.

The costs of capital, equipment and installation are falling dramatically and capacity is growing at a steady pace, while electricity prices in general are rising, McKinsey & Co. says in a report highlighting solar's "disruptive potential." All of this is putting solar on a more competitive footing with other energy sources and enticing more key markets such as Japan, where the government hopes solar can replace a big chunk of its nuclear capacity. Even oil kingpin Saudi Arabia intends to ratchet up its solar capacity, though the kingdom is motivated more by the opportunity to create jobs than by any concerns about the depletion of non-renewable resources.

All of this is paving the way for major changes in the way utilities and other key sectors of the economy operate. Their old business models will soon be turned on their heads.

"The industry is poised to assume a bigger role in global energy markets," the McKinsey report says. As the industry evolves, "its impact on businesses and consumers will be significant and widespread."

The bullish study acknowledges that the sector has been a notable underperformer, hurt by the financial crisis, subsidy cuts by cash-strapped governments, competition from cheap natural gas, and a glut of solar panels from Chinese producers. These conditions "have profoundly challenged the industry's short-term performance. But they haven't undermined its potential."

Solar installations continue to climb – by an average of more than 50 per cent a year globally since 2006 – as costs have plunged. In the U.S., the price of a rooftop solar photovoltaic system with top-of-the-line capacity fell from a peak of nearly $7 (U.S.) a watt in 2008 to $4 or less last year.

"These cost reductions will put solar within striking distance, in economic terms, of new construction for traditional power-generation technologies, such as coal, natural gas and nuclear energy," McKinsey notes. "That's true not just for residential and commercial segments, where it is already cost competitive in many (though not all) geographies, but also, eventually, for industrial and wholesale markets."

Solar still only accounts for less than 0.5 per cent of U.S. power supply and less than 1 per cent in Germany, despite hefty incentives in both markets. But the "business model for utilities depends not so much on the current generation base as on installations of new capacity," the report says. "Solar could seriously threaten the latter because its growth undermines the utilities' ability to count on capturing all new demand, which historically has fuelled a large share of annual revenue growth." Solar may already account for up to half of new consumption, McKinsey says.

It's too early to predict the winners from these coming fundamental shifts in the marketplace. But it's a safe bet that the stronger solar performers will be those that have followed the path blazed by previous energy innovators, who sought to control all the revenue-producing aspects of their business.

As the collapse of dozens of solar-panel makers has shown, putting all your eggs in manufacturing – a part of the business ripe for commoditization – isn't the ideal growth strategy. Look instead to the consolidators that amass sizable footprints in development, financing, installation and servicing.

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