BHADLA, India—In a dusty northwest India desert dotted with cows and the occasional camel, a solar-power plant is producing some of the world’s cheapest energy.

Built in 2018 by India’s Acme Solar Holdings Ltd., it can generate 200 megawatts of electricity, enough to power all the homes in a middle-size U.S. town. Acme sells the electricity to distributors for 2.44 rupees (3.4 cents) a kilowatt-hour, a record low for solar power in India, a country that data trackers say has the world’s cheapest solar energy.

More remarkable, the power costs less to generate in India than the cheapest competing fossil fuel—coal—even with subsidies removed and the cost of construction and financing figured in, according to the Indian government and industry trackers.

Price-conscious Indian utilities are eager to snap up that power. “We are infamous for low cost,” says Sandeep Kashyap, Acme’s president.

Solar power has entered a new global era. The industry was long dependent on subsidies and regulatory promotions. Now, technological innovation and falling solar-panel prices have made solar power inexpensive enough to compete on its own with other fuel sources in some regions, when it comes to newly built plants. That could turbocharge growth of renewables in the global energy industry, especially in fast-growing Asian markets where much of the world’s energy infrastructure expansion will take place.

Governments in many solar markets—including China, the biggest—are phasing out or reducing supports. Solar-plant development is going mainstream, with finance provided by global investors like Goldman Sachs Group Inc., Singaporean sovereign-wealth fund GIC and huge Western pension and private-equity funds.

So far, the renewable-energy push hasn’t halted the growth of global energy emissions. But the success of countries like India in feeding their rising power demands with clean energy will still be key to blunting the growth of global challenges like pollution and climate change.

The price declines in solar panels and the power they produce are jolting the industry. In the past decade, solar has grown from less than 1% of the world’s electric-power capacity to an estimated 9% by the end of this year, according to the International Energy Agency, an intergovernmental organization focused on energy policy. By 2040, the IEA expects that to grow to 24%, which would make solar the largest single energy source.

India is at the forefront of the trend, with a cost of building solar capacity that has dropped 84% in eight years, according to the International Renewable Energy Agency, an intergovernmental organization focused on renewable energy. Other countries are close behind, with costs falling fast in Australia and China.

India has increased the amount of solar power it has installed 10-fold in the past five years, to 32 gigawatts, and the government is hoping to triple that in the next few years—one of the fastest paces of growth anywhere. India’s prime minister last year said he wants 450 gigawatts of renewable energy including solar installed by 2030.

If India manages that, which many analysts say is a real stretch, it would account for nearly all the additional electric capacity the country’s Central Electricity Authority has projected it would add by then, and more than the country’s total from all power sources now. India has pledged as a climate goal that 40% of its electric capacity will come from non-fossil fuels by 2030; the latest renewable targets would likely put that percentage at over half.

Solar capacity growth by country and region.

Cheaper than coal

In 2018, India’s “levelized” cost of solar-power generation—an analysis removing the impact of direct subsidies and figuring in the costs of construction and financing for a new plant—fell to 14% below that of coal, the first time anywhere in the world that generating solar was cheaper than coal on that basis, according to international energy consulting firm Wood Mackenzie.

India’s national energy plan doesn’t anticipate construction of new coal power plants for at least several years. Even state-controlled Coal India, one of the world’s largest coal-producing companies, in November said it planned a pilot solar project as it navigated a future with less coal.

Across Asia, a region expected to account for two-thirds of the world’s new power demand during the next two decades, price declines will make wind and solar combined 17% cheaper than coal by 2030 on a levelized basis, says Wood Mackenzie. In India, solar generation will be almost 50% cheaper, it projects.

“This is a revolution in power generation costs,” says Wood Mackenzie analyst Alex Whitmore. “What it means is there will be a lot more solar investment in India, and in countries like India.”

Solar’s big problem: It generates power only when the sun shines. Wind power, similarly, works only with wind. So displacing fossil fuels could require cheaper ways to store energy. And the more renewables in the power-transmission grid, the more the grid will need to be rebuilt to accommodate those special characteristics.

That inefficiency is why the IEA forecasts the amount of power solar generates to rise to only 11% of the world’s total by 2040, around half that of coal or natural gas.

In India, which has some of the world’s best conditions for generating solar power, the mismatch is pronounced because demand for electricity swells after people go home and switch on air conditioners in the evening, when solar plants aren’t working.

Meanwhile, countries like India have made massive investments in coal-fired plants they can’t afford to simply scrap. Coal still provides two-thirds of India’s power. Coal shipments also underpin profits at the nation’s biggest employer, the railways.

As Indian solar developers push prices down, the thin margins for many are being pummeled by challenges ranging from an economic slowdown and tighter domestic financing conditions to power distributors that aren’t paying bills and squatters refusing to move off land slated for development.

During the past two years, the pace of solar development in India slowed. Although installations are expected to pick back up this year, many analysts and industry leaders now expect India won’t hit its aggressive solar goals.

Electricity generation in India by source, average day, February 2019.

‘Low-hanging fruit’

Challenges will likely multiply when solar power in India’s grid rises from the current 9% to around 20% or 30%—a level at which it may start replacing conventional power plants, say experts like Rahul Tongia, a fellow at the India arm of think tank Brookings Institution.

“What happens after that point when the low-hanging fruit is done?” says Mr. Tongia.

India’s solar push started in 2010, when its government outlined plans for a modest boost in capacity during the next decade. Solar was a good fit for India’s growing energy needs. Plants are easy to build—essentially solar panels lined up in racks—and labor is inexpensive. India has big stretches of sparsely populated land and intense sun, good for vast spreads cranking out power.

In 2015, Prime Minister Narendra Modi quintupled the country’s solar target, aiming to install 100 gigawatts of capacity by 2022—roughly half of the world’s 2015 total. At the time, India had less than 3 gigawatts of solar power installed and the plan seemed crazy.

“It was a leap of faith,” says Anand Kumar, a top official in India’s Ministry of New and Renewable Energy. “We got very lucky that the price of solar panels fell.”

China had been cranking out solar panels in massive numbers in a government-subsidized effort to dominate the industry globally. Panel prices, which can account for around half the cost of a solar plant in India, plummeted. Globally, solar-panel prices fell more than 90% during the past decade, according to the International Renewable Energy Agency.

The Indian government’s system of auctioning out solar projects to developers that offered the cheapest electricity reduced prices there further. Aggressive entrepreneurs elbowed in, figuring the government’s eagerness to boost solar capacity coupled with ever-cheaper panels offered a profit opportunity.

Japan’s SoftBank Group Corp., whose chief executive, Masayoshi Son, is a solar proponent, set up an energy unit in Delhi around the same time Mr. Modi announced his ambitious goals. SoftBank snagged its first solar project in half a year. Acme switched its focus to solar from telecom equipment, figuring the industry was poised to repeat telecom’s rapid growth. ReNew Power Ltd., founded in 2011, enlisted a roster of blue-chip investors including Goldman, the Canada Pension Plan Investment Board and the Abu Dhabi Investment Authority.

As the government tendered hundreds of megawatts of solar capacity, the price at which solar developers were offering to sell their electricity roughly halved between 2015 and this year, according to Bridge to India, a data tracker.

Developers pushed to squeeze all the profit they could from projects. In the Bhadla solar park, where the Acme plant producing the cheap electricity is located, one problem is dust. The plant has 927,180 panels stretched over desert where sandstorms are common and temperatures can swing from over 120 degrees Fahrenheit in summer to nearly freezing in winter. If panels aren’t cleaned regularly, dust collects and electricity production declines.

Acme had used sprinklers on tractors driven by contractors to wash down the panels, a method letting them clean all panels three times a month. Last year, it rolled out robots that brush the panels down, doubling the monthly cleaning and boosting the maximum amount of energy the plant could produce.

Installed cost of utility-scale solar, weighted average.

Bottlenecks

As solar prices sank, some projects were delayed by a lack of transmission lines to ship the electricity. Others fell behind because of tussles between villagers, developers and local governments over land—issues dogging development in other countries as well.

Acme and other developers have been hamstrung by a delay in tax and tariff refunds they had counted on. “A lot of equity got stuck, which was planned for new projects,” says Mr. Kashyap, Acme’s president.

ReNew and other companies have been hit by payment delays from India’s struggling power distributors, mainly state-owned companies that buy electricity from producers and sell it to households. India’s Central Electricity Authority estimated that as of Nov. 30, renewable-energy companies were owed some $1.3 billion in overdue bills.

At any one time, distributors in roughly a quarter of the eight or nine states that ReNew Power operates in are behind on payments, says CEO Sumant Sinha. Although ReNew and other developers factor such payment delays into electricity prices they offer when bidding for projects, a miscalculation could hit profits. “Everyone sees delays in payments,” he says.

Some Indian state agencies, hoping solar prices fall lower, have canceled solar auctions when they thought developers were offering to sell power at too high a price.

Last year, the southern state of Andra Pradesh—which has one of the highest levels of renewable-energy consumption as well as one of the largest unpaid bills—threatened to cancel old solar contracts and renegotiate them at lower prices, sending the industry into an uproar.

The Andra Pradesh government says paying those higher prices has left its electricity distributors in financial distress, and that it is trying to “persuade” renewable-energy generators to supply power “at a mutually beneficial rate.”

By early 2019, many developers were starting to pass on solar auctions, threatening the country’s aggressive development timetable. Many developers and analysts now say India is likely to fall behind in achieving its renewable-energy goals.

India is working to remove roadblocks, building more transmission lines and tweaking rules governing auction, development deadlines and solar parks to make it easier to build plants. It is holding auctions for projects bundling solar with wind power and electricity-storage capacity to help even out solar generation’s peaks and troughs. ReNew recently won one such contract.

And India is considering projects that bundle existing coal plants with renewable-energy sources, to help smooth the transition from fossil fuels, says Mr. Kumar, the renewable-energy official.

Experts like ReNew’s Mr. Sinha say it will likely be several years before India builds so much solar capacity that the technology’s daytime power surges and nighttime plunges could affect the country’s overall electricity supply. By that time, says Mr. Sinha, other new technologies such as batteries and systems for shipping electricity may be available to smooth out irregularities.

India has already shown it can expand its solar capacity far faster than anyone would have expected, he says: “That is not an achievement to be scoffed at.”

Live Mint

—Bill Spindle contributed to this article.