The prospect of new limits on carbon emissions is driving demand for clean technology in the energy sector. But investors need to take the long view . Despite virtually assured growth of clean technology and energy industries, bets on individual stocks require more patience than investments in sectors where companies are already serving fully developed markets. In some cases, what makes a company a really compelling bet is the fact that it hasn't yet turned a profit—and is priced accordingly.

Much of what's driving the push toward cleaner energy sources and greater energy efficiency is the prospect of legislation within the next few years that will effectively impose a carbon surcharge on companies that are producing carbon emissions beyond certain defined limits.

Such legislation will likely be in place by 2012 in order to enable U.S.-based companies to keep up with global emissions standards expected to be enforced in 2013, when the Kyoto protocol gives way to the next phase of global environmental compliance.  Any country that hasn't taken steps to regulate carbon emissions from its own industries by then will probably be hit by tariffs from trading partners, predicts Kevin Book, senior energy policy analyst at Friedman Billings Ramsey.

Another factor that's ushered in demand for clean technology is the much greater cost of adding electric generation capacity in the traditional way—by building new power plants, which would also soon face the uncertainty of carbon caps. Yet currently the failure to build new power plants has caused spare capacity on the electric grid across S.A to fall off to the point where it's below comfortable safety margins in certain regions.

Silicon Solar Cells Will Be Edged Out

The dominant solar technology is currently based on silicon, a nonmetallic substance that is packed into wafers that fit into panels, which absorb sunlight and convert it into electricity and heat.  Eventually, however, silicon solar cells are likely to be edged out by thin-film cells, which at the moment aren't nearly as efficient as silicon-based cells.

While most solar panel manufacturers understand that they will eventually need to make the transition to thin-film, only two—SolarWorld and SunTech Power Holdings (STP)—have made public statements about their intention to do so, says Jack Uldrich, who heads a nanotechnology consulting firm and writes about investing in emerging technology. At the same time, they maintain strong positions in silicon.
Wind Generation May Have Reached Maturity

Unlike solar power, wind generation seems to have reached its maturity. Major players such as Siemens (SI), Vestas, and Spain's Gamesa (GCTAF) will keep building generation capacity, but Uldrich argues that the potential for high growth is no longer there. Part of that is due to the huge land requirements that wind turbines necessitate.

There are however research efforts in Denmark aimed at developing smaller wind turbines that could lead to equipment that can derive two to three times as much energy, per acre of land, as larger turbines. This could kick the wind sector back into high growth.
There's also an industry taking shape around a concept called demand response, under which residential and business customers agree to be connected to equipment that reduces their energy consumption at times of peak usage. Companies such as EnerNOC (ENOC) and Comverge (COMV) provide electricity monitoring systems.

Multiyear Contracts Make Revenue Predictable

Rob Stone, an analyst at Cowen in Boston, advises investors to look at companies such as Comverge as bets that will pay off over the long term. "What [they're] doing is building up a base of assets that will produce long-term recurring revenue and very good cash flow, particularly in the case where they can sign a new contract on an existing fully depreciated network," Stone says.

Congress Expected to Cap Carbon Emissions

Geothermal energy, which is produced by pumping water into volcanic rock, also has a lot of potential for growth, says Uldrich. One big advantage that geothermal power has over solar and wind, is that it's base load generation can be always be relied upon, no matter the weather conditions or time of day and it's a genuinely clean energy source.

Uldrich particularly likes Ormat Technologies (ORA), which develops and operates geothermal and recovered energy-based power plants, and also makes and sells power units and other power-generating equipment. The Nevada-based company has good opportunities, having already leased a great deal of land in Nevada and parts of California, "so they have the right to begin developing geothermal plants on that space."

A Large-Scale Update of Old-Tech

To keep older power plants firing under a carbon-cap regime will require sequestering carbon, or injecting it into the ground, which is not yet viable or without risk, says Book. That will mean a lot of carbon pipelines and sequestering plants will have to be built.

Ironically, it may turn out that the most lucrative bets for those who want to hitch a ride on the green bandwagon.  Companies with inextricable ties to the fossil fuels industry: pipelines. Besides having already built carbon pipelines for enhanced oil recovery in the Gulf Coast and parts of Alberta, Canada, pipeline master limited partnerships have the added advantage of a favorable tax structure, Book says.
With a little homework, green-focused investors may be able to find some plays that are Earth- and wallet-friendly.

Sourced: By David Bogoslaw - a reporter for BusinessWeek's Investing channel.