The past decade saw investors do a tap dance to the tune of Boom and Bust. First there was the dot-com bubble and the slew of other technological breakthroughs that came with it. Then we witnessed the supposedly invincible housing market complete a jaw-dropping boom-bust cycle. The young 21st century even delivered a notable financial bubble, as well as its inevitable bust.

Sidling along in the background were the seedlings of an industry on the verge of taking flight — alternative-energy technology.

Despite a drop in the overall volume of venture-capital deals last year, investments in clean-technology companies totalled US$8.4-billion, up nearly 40% from 2007, says a 2008 report by Cleantech Group, a San Francisco-based trade organization. In the third quarter of 2008 alone, venture capitalists poured US$2.65-billion into clean technology, a quarterly record. In the fourth quarter, they invested US$1.7-billion.

Public and interest-group furor over climate change has escalated in the past decade. The result? Major governments are waking up from their long slumber and pumping dollars into the clean-tech industry. Leading this pack is Barack Obama, the U.S. President, who recently vowed to triple investment in the United States’ clean-tech industry over the next four years.

This is significant, says Donald Dewees, an environmental economist and professor at the University of Toronto.

“Governments are pouring millions or billions of dollars, euros or pesos on green-energy technology,” said Prof. Dewees. “Then there is the added factor of expectation of more aggressive public policy on global warming after Copenhagen. Stocks of alternative-energy producers will rise as investors anticipate these growing subsidies. We are definitely going to see a clean-tech bubble in the first few years of the next decade.”

Should breathless clean-tech investors be worried? Technological booms, after all, do not seem to have a history of sustainability.

“Whether or not this alternative-energy technology boom will last depends on how far we will go initially and how much we invest, and hence how disappointed we will be by the underperformance,” says Vaclav Smil, a leading environmental researcher and professor at the University of Manitoba.

Prof. Smil is skeptical. He says there is just too much hype about renewable conversions, while the reality is that they simply cannot supply as high a share of electricity consumption as is now widely, and mistakenly, assumed.

“We are not going to be able to heat our houses, power our industries and cars and grow our food with wind- or solar-generated electricity any time soon,” he says.

That overestimation, and the sky-high costs of generating alternative energy, seem to be the two main factors that may catalyse the burst of this bubble in the next decade. Alternative energy costs at least four times more than conventional energy. Thus, it cannot survive without subsidies.

“Where the subsidy is in the form of a feed-in tariff, the cost of the electricity that is generated will rise to unpopular levels. Public outrage will cause share values in alternative energy firms to drop as the bubble bursts,” said Mr. Dewees.

There is some optimism, however.

Kerry Adler, chief executive of Skypower Inc., an Ontario-based solar-panel energy firm, believes that next decade’s bubble will not be an alternative-energy technology one.

“I won’t call it a bubble. It’s more of a flower garden — some [innovations] will wilt and some will sprout,” said Mr. Adler. “We will definitely see a form of consolidation of the best technology.”

Mr. Adler is confident alternative energy is in for the long haul.

“This is not like the dot-com bubble. In that industry, it was all about traffic and revenue. This industry has the look and feel of dot-com, but it is much more advanced than that. When you are in a world that is energy-starved, there is no bubble — it is serious. Venture capital is going in but it is going to stay in.”

Financial Post