Last week SunEdison, one of the largest installers and financers of solar power, announced a new project that will deliver solar power to 30 villages in India. It’s already equipped one of these villages with solar panels, a small distribution grid carrying electricity to more than 70 houses, and battery backup system to provide electricity around the clock.

The first village is a pilot project that’s not expected to be profitable, says Pashupathy Gopalan, SunEdison’s managing director for South Asian and sub-Saharan operations. But he expects that economies of scale and refinements to the design and installation process will bring costs down, and the company could be making money within the next couple of years. “By 2014, we want to be able to scale up to thousands of villages,” he says.

The reason for SunEdison’s optimism is that plummeting prices for solar panels are making this type of electricity cheaper than power from diesel generators. “If the industry went after diesel displacement in a very big way, I think there is money to be had,” he says. “That’s where the money is if the industry wants to transition and not be dependent on subsidies.”

Diesel is a major source of power in south Asia and Africa, where many areas lack access to the grid and frequent blackouts prompt those who can afford it to install backup generators. These markets could help a solar industry that’s struggling with low profit margins due to an oversupply of panels. In turn, the lower prices for solar power could speed up deployment in poor countries by providing a more economical alternative to diesel-powered pumps and generators, and a much faster path to electrification than waiting for grid infrastructure.

One of the first economical applications for solar is replacing diesel-powered irrigation pumps, Gopalan says. These pumps don’t have to run at night, so batteries aren’t needed, keeping costs down. “The total available market in India alone is 15 to 20 gigawatts, and irrigation pumping is a massive application in all of Asia and Africa,” he says. For perspective, the current total installed capacity for solar power is 65 gigawatts, according to the management consulting firm McKinsey.

Solar panels could also augment existing diesel systems, such as those that run island communities or provide backup power for apartment blocks and businesses in blackout-prone India. According to McKinsey, diesel generators can produce power at prices ranging from just under 30 cents per kilowatt-hour to 65 cents per kilowatt-hour, depending on their size. Solar-panel systems can produce power for 12 to 35 cents per kilowatt-hour. In some areas in Cambodia, power from diesel engines is used to charge batteries, which are rented out at rates exceeding $1 per kilowatt-hour, Gopalan says. In these applications, solar would serve to displace diesel generation on sunny days, not to completely replace it.

Many governments are starting to find that it’s cheaper to install solar panels and batteries than it is to connect villages to conventional power plants or install diesel generators, says Stephen Phillips, the managing director of Optimal Power Systems, an Australian company that installs solar power plants and microgrids in remote areas. In some areas, diesel power can cost two to three times as much in the city because of transportation costs and problems with theft, he says. That means batteries that cost 55 cents per kilowatt-hour of storage capacity can still undercut diesel power by 60 percent.

OPS typically installs systems that have diesel generators for backup in case of prolonged cloudy weather. But Phillips says that new technologies could lower the cost of batteries by more than half, making it possible to introduce larger battery systems that further reduce the use of diesel. “Two to four years ago, these systems would only use solar power for 25 percent of the electricity. That’s going up to 50 percent, and soon diesel could be used only rarely,” he says. “Solar with batteries can compete directly with diesel-powered village electrification.”