Though there's recently been volatility in the sector, it's an understatement to say that investors are excited by the opportunities in green tech.

John Doerr, one of the world's most successful venture capitalists, called cleantech the " biggest economic opportunity of this century." And First Solar was up an incredible 795%in 2007.

Furthermore, though the market has soured on these stocks recently, investment in the sector remains hot. Recent data from Cleantech Group showed that venture capital investment in green tech increased 38% in 2008 to $8.4 billion. And support of clean, renewable energy and energy independence has become one of the key strategies in the new federal budget.

Triple back-up-the-truck booyah, right?

Not so fast
Even experts -- people who now devote their careers to advancing "green" technologies -- aren't sure what the perfect green policy, incentive, initiative, or technology looks like. But who can blame them?

First, there's significant government involvement in the sector, which distorts market forces. That should be an immediate red flag for prospective investors. Whenever the government is involved in something, there can be no certainty.

Second, green-tech development cycles are becoming increasingly rapid. That means that what seems like a great idea today could be obsolete tomorrow. For an investor in an early-stage company, that means your product may never get to market -- leaving you staring down a significant risk of total capital loss.

Finally, we still haven't decided what the goal of green tech is. Is it to increase efficiency and reduce demand? If that happens, energy prices would drop, and consumption would just rise again. Is it to build cleaner generation and consumption technologies? Unfortunately, every alternative solution has a shortcoming. Wind tends not to blow during hot days when demand is highest, and windmills aren't always welcome additions to a community's skyline. Is it energy independence? Then we're relying on cash-strapped American consumers to pay more in order to achieve this somewhat abstract goal.

Buyer beware
Yet optimism for the sector persists. Just look at the analyst ratings for a few well-known green-tech stocks:

Company

Buy
Recommendations

Sell
Recommendations

First Solar

18

4

American Superconductor (Nasdaq: AMSC)

5

1

Ener1 (AMEX: HEV)

5

0

Itron (Nasdaq: ITRI)

7

1

Quantum Fuel Systems (Nasdaq: QTWW)

1

0

Microsemi (Nasdaq: MSCC)

10

0

How productive will these companies ultimately be, given the noise in the sector? And how well can you see their futures, given that same set of circumstances?

A case study
For evidence of what happens when a once-hot green technology turns heel, look at what's happened to ethanol stocks over the past three years. Once considered a way to make the United States both greener andmore energy independent, recent research has revealed that ethanol production may actually offset, or even worse, outweigh the greenhouse gas reductions caused by ethanol use. What's more, the combination of rising corn prices and farmers growing more corn and less of everything else has led to higher food prices across the board.

Of course, demand for ethanol wasn't necessarily stoked by market forces. The government, politicians who coveted the Iowa primary, and several powerful interest groups were very much involved in making it a green-tech priority.

All of this combined to make ethanol stocks a very bad investment back when they were being touted in the spring of 2006. For example, in April 2006, analyst Michael Brush wrote abouta few "ethanol stocks to get revved up about." Here is the performance of those picks since his article was published: Continued...