A lot has been written lately about the excellent Berkeley Lab report called Tracking the Sun, which describes cost trends in U.S. Solar production back to 1999. (The illustration is from the report.)

John Farrell at the Institute for Self-Reliance seems especially taken with the wide variation in costs on a state level, noting his state of Minnesota had the most expensive solar energy. His group is very interested in community solar projects and he sees little relationship between market size and installed costs.

But there’s an issue with the data that the authors of the report note up-front. It was collected in a highly-subsidized environment. Most projects built in the last decade depended on government money to make the numbers work, given the high cost of solar electricity and manufacuturing constraints.

That is changing.

In a recent update to the report, the lab notes these costs declined sharply in 2010, as much as $1 per watt, thanks mainly to a reduction in the cost of panels, which finally overwhelmed rising labor costs.

Another factoid. Tax incentives have cut the residential cost of solar panels to nearly the same level as commercial installations, $4.10 per watt vs. $4.

How bad are suppliers being hurt by these price cuts? First Solar saw its operating margins drop from about 32% to about 26%. Premium-priced outfits like SunPower are getting hammered by makers of lower-cost panels.

What’s happening is that solar panel production is scaling. Manufacturing efficiencies are dropping costs worldwide and while that hurts small American producers in the near term, it means lower costs for solar energy overall and a premium on bringing technology breakthroughs to market.

In short, solar is growing up. It’s becoming a real industry, where prices are determined less by government and more by market forces. This is good news. It means advances in the durability and efficiency of solar will go directly into production, as American companies are already hungry for them. Which will drive prices still lower.

The initial Berkeley report also points to another potential driver of lower costs. Non-module costs, installation costs, are still too high. Referring to a piece I did earlier here standards are a key to driving down costs. If we have global standards for panel sizes, for connectors, and for installation procedures, we can lower final costs significantly.

As the chart above shows, while California remains the unquestioned leader in solar power, its costs could be lower. The comparison is to New Jersey, the number-two solar state. So we need a different kind of California leadership, business leadership. If breakthroughs can get into the hands of California manufacturers and into production, and if California companies adopt the lessons of tech history, supporting standards for interoperability, solar energy has the chance to become the cheap energy.