Open-access (OA) literature is digital, online, free of charge, and free of most copyright and licensing restrictions. What makes it possible is the internet and the consent of the author or copyright-holder.
In most fields, scholarly journals do not pay authors, who can therefore consent to OA without losing revenue.
OA is entirely compatible with peer review, and all the major OA initiatives for scientific and scholarly literature insist on its importance. Just as authors of journal articles donate their labor, so do most journal editors and referees participating in peer review.
OA literature is not free to produce, even if it is less expensive to produce than conventionally published literature. The question is not whether scholarly literature can be made costless, but whether there are better ways to pay the bills than by charging readers and creating access barriers. Business models for paying the bills depend on how OA is delivered.
See also the Association of College and Research Libraries' short introduction to Open Peer Review
There are two primary vehicles for delivering OA to research articles: OA journals and OA archives or repositories.
For a longer introduction, with live links for further reading, see P2P Foundation's Wiki