The looming threat of climate change and soaring energy prices has attracted vast amounts of capital into clean energy companies in the past few years.

In 2007, the sector attracted $2.2 billion US in venture-backed investments, up 45 per cent from 2006. Biofuels production jumped from 4.9 billion US gallons in 2006 to roughly 6.5 billion US gallons last year. Meanwhile, in 2007 the U.S. added 314 megawatts of new solar energy systems to the grid, up by 125 per cent from the previous year.

In the past two years, solar energy has become an especially hot spot in the clean energy sector. In 2007, solar energy start-ups raised the lion's share of new investments in the sector, or roughly $600 million in capital raised in 39 deals.

And then came the credit crisis. Already companies have pulled IPOs, and worry is growing that the nascent industry could be choked off just as it is starting to take off. The question now: How bad will the hangover be? Or, more important, how long will it last?

The energy game is ill-suited to the stereotypical garage inventors who sparked the Internet revolution. The key difference is that technological innovation is a very small part of the picture. Future generations of solar energy technologies will produce cheaper and more powerful equipment, but a number of solar energy technologies are ready for prime time today even without those improvements, especially in states like California where government policies have given them an added boost.

The relentless pursuit of technical improvements has brought solar and wind power prices down enough to compete with conventional energy-generation technologies in many markets. Success in both wind and solar energy depends on scale, or the ability to lower costs by producing large amounts.

The trouble is that a number of solar energy companies have major projects in the pipeline that seek to scale up their operations to commercial size. In other words, they need to find a sizable chunk of change in the tightest credit conditions seen in decades. The bottom line: Energy projects depend on scale, and scale depends on capital.

"Unless you can scale it, it doesn't matter," said Vinod Khosla, a well-known Silicon Valley investor, while speaking at MIT last week.

Several green energy companies already pulled the plug on planned IPOs. In January, Imperium Renewables, a venture-backed bio-diesel producer that operates the largest bio-diesel plant in the U.S., shelved IPO plans to raise as much as $345 million, citing "current market conditions." Last week, Germany's solar energy start-up Schott Solar, which originally planned to announce its offering price range on Sunday, decided to delay its IPO until credit conditions improved.

To make matters worse, the collapse of investment bank Lehman Brothers has become a liability for many solar energy companies. In recent years, Lehman had become a principal underwriter for solar energy companies raising money or financing debt to build factories and solar farms.

Evergreen Solar, a solar panel maker in Marlboro, Mass., appears particularly vulnerable to Lehman's collapse. Evergreen loaned Lehman 30.9 million shares of its common stock in a recent deal to help the company raise more than $375 million through an offering of senior convertible notes. At least one industry analyst, Jeff Osborne of Thomas Weisel Partners, has cut his stock valuation by 26 per cent because he fears Evergreen will not be able to recover the shares from Lehman.

If these devaluations accelerate, the sector could see a wave of consolidation or significant investment from much larger companies like industrial giant General Electric, no stranger itself to the credit crisis.

"One model is for these clean-tech companies to make strategic alliances with the Fortune 100 companies," John Steuart of Claremont Creek Ventures told Greentech Media, a trade publication. "For example, they can trade sales and marketing rights for a capital investment. Or they can sell the licensing rights for a product in exchange for an investment."

This process has already begun to some extent. In 2007, Chevron-Texaco's venture capital arm bought significant stakes in two solar energy companies: BrightSource Energy, a developer of utility-scale solar plants, and Konarka Technologies, a developer of photovoltaic materials.

But while the credit freeze may kill off some firms, the good news is that those that can stick out the downturn will likely do as well if not better than originally expected if they can survive a few years. In a poll of nearly 300 venture capitalists, corporate buyers, bankers and entrepreneurs, 79 per cent of the respondents expect "a strong stream" of IPO activity to begin in 2010 or later, according to a recent survey by auditor KPMG.

If the Senate's last minute inclusion of renewable energy tax credits in the bailout package survives the legislative process, the turnaround could come much sooner than that.