Investors are constantly searching for the next "it" space. Could renewable energy be the one?

Brad Nordholm, CEO of Starwood Energy, the energy investment affiliate of private equity firm Starwood Capital, said in a recent interview that renewable energy has "huge" growth prospects.

"The next couple of years I think we're going to go through a process that you see with any rapidly growing area -- Internet in the late 90s, for example," Nordholm said. "Like any process, there are going to be winners and losers, but for the well-capitalized companies that have experience in this space, we think the opportunities are great."

A "sunny" spot
The economics of solar power are becoming very attractive in the United States, according to Nordholm. "The technology is improving and the pricing for solar power is decreasing," he said.

"We see solar power as becoming increasingly competitive with other sources of renewable power generation as well as conventional power generation." Nordholm says he expects solar power to reach "grid parity" -- when solar power is on par with conventional forms of generation -- in three to five years.

Specifically, he points to a combination of (1) improved competitiveness in pricing of wholesale energy and (2) the mandate for renewable energy that comes from state and federal renewable portfolio standards (RPSs) as the driving force behind utilities that seek renewable energy.

In the first five months of this year alone, U.S. utilities issued requests for proposals for over five gigawatts (GW) of renewable wholesale energy, according to Nordholm. About half the states have RPSs, which set goals for the percentage of electricity that must come from renewable sources by a future date. Nordholm also said that for these RPSs to be met, new renewable energy will need to be developed in the next 10 years to satisfy the existing renewable portfolio standards.

The federal climate energy bill that sets the federal RPS has currently passed the House, but remains in the Senate. Nordholm says the pace for adoption of renewable energy may accelerate (the federal RPS standard is being proposed at lower levels).

Nordholm's private equity firm has teamed up with Lockheed Martin (NYSE: LMT) to pursue solar generation projects in North America. The two companies signed a deal in May with Arizona Public Service to build the world's largest dispatchable solar energy plant. Nordholm says Starwood Energy is currently working on solar plant configurations that range from 75 MW to 290 MW and expects more deals to materialize in the second half of 2009 and into 2010.

Takeaways
I spoke with Nordholm about areas other than solar. Though he runs a private equity outfit, his thoughts can apply to retail investors. I've tried to distill some of his key takeaways:

Traditional forms of energy aren't passe investments.
Nordholm says significant firms are making investments in oil and gas exploration and production and other areas right now. As oil prices have recovered, Nordholm says smart people are reemerging to invest in that space.

"Oil prices have rallied substantially, while natural gas in contrast has remained rather flat," he said. "As the economy improves, the demand for these commodities will also increase, and I would expect to see some further recovery of those prices." Well-positioned traditional energy concerns could still make for good investments.

Europe isn't as attractive as it used to be.
Europe has been significantly ahead of the U.S. in terms of investing in renewable energy, including solar. According to Nordholm, Europe obtains more than 25% of its energy from renewable sources. Continued...