Sir Richard Branson’s announcement that Virgin will invest an estimated $3bn (£1.6bn) in renewable energy over the next decade looks to some investors like confirmation that clean energy production is one step closer to becoming the next technological revolution.

Alternative or “green” energy such as biofuels, wind power, solar energy and hydro-electric power are expected to enable a shift away from the current global carbon-based economy. On the strength of this expectation, investors hope that buying into the right new technology company now could reap massive rewards in the future.

There are a number of options available which will allow you to invest your money and feel that you may have a hand in the future care of the planet. But whether the rewards are as profitable as they are philanthropic is less certain.

The companies in this sector tend to be small and risky and the choice of potential investments is limited, though growing steadily. Alternative energy investment is not for everyone, but there are some good long term growth indicators.

One of the best is government initiatives which are setting tough carbon emission performance targets. These are pushing private companies to invest in new environmental technologies to prevent them hitting their carbon quotas, government imposed limits on companies for carbon emissions.

In the UK, the government has created incentives for individuals to purchase clean energy products in order to boost demand. It has also committed to supporting new energy technology development by announcing plans to grant tax breaks to biofuel production plants.

This sort of government backing is what’s convincing some investors that clean energy is not the new technology bubble.

According to Clean Edge, the US-based green technology consultant, the four clean-energy technologies of biofuels, wind power, solar energy and fuel cells, were worth $40bn in 2005. They estimate the industry could grow to $167bn in the next decade. The problems associated with a new technology sector, which attracts a high number of entrepreneurs, are off-set by government commitments to support industry growth.

Last year solar energy was the big story. One of the biggest new companies, Suntech Power, a Chinese manufacturer of solar cells, had sales of $226m in 2005 and, listed on the New York Stock Exchange at the end of the year at $15 per share, are now trading at $33.50 per share.

New energy technology is judged less risky by many investors because some unprofitable companies are underpinned by generous government subsidies. However some companies are profitable in their own right and do not rely on government incentive schemes according to Poppy Allonby, who jointly runs both of Merrill Lynch’s New Energy Technology Trusts.

“The new energy universe has grown dramatically since we began investing in it six years ago,” she says. “We started out with 300 companies on our list of global renewable energy companies to invest in, and we now have 900. The sector has a combined worth of $500bn. Some require subsidies, but others are fully profitable.”

Merrill Lynch runs the UK’s biggest new energy fund with $2.2bn in assets. Their largest holdings in the sector are Vestas Wind Systems, Solarworld and Archer-Daniels-Midland. Like Vontobel’s €105m (£71m) Global Trend New Power Tech fund, Merrill Lynch’s fund slumped in the first year of trading, but has since revived.

“We invest in companies which are not necessarily profitable but which have a product,” says Allonby. “This is a very fast-growing industry. It is estimated that the solar market will grow by 28 per cent and the wind market by 22 per cent in the next year. But of course, as with any fast growing market, there is a lot of volatility.”

Peter Holden, of specialist advisers Holden & Partners believes this is something investors must be prepared for.

“You have to look at these as opportunistic funds,” he says. “There is no doubt in my mind that long term, new energy sources are important. Think of it like emerging markets. If you put your money into them it’s going to be a rough ride.”

One of the most volatile aspects of the new energy market is its link with oil prices. “Biofuels Corp is one example of a company that’s gone up recently but is tied to price of oil,” says Holden.

The recent increase of interest in clean energy has been driven more by rising unease with traditional energy than a consequence of the sector itself making a significant technological breakthrough. A lot of the companies are small cap stocks which don’t make money and whose share prices have appreciated as a result of high energy prices.

Though oil prices have fallen since August, the cost of a barrel is still high, prompting governments of all colours to look to alternative energy technology. President George W. Bush said in his State of the Union address this summer that the US was “addicted to oil” and had to move away from dependence on foreign suppliers.

Fears centred on energy supply security do not apply just to oil. When Russia’s state gas company cut supplies to Ukraine, European supplies were also disrupted and the vulnerability of net energy importers moved quickly up the political agenda. Alternative energy stocks can quickly gain momentum on the back of these events.

James Allsopp, fund manager at New Star Asset Management says: “The green sector is a highly emotional sector. There are a lot of concept stocks out there so it’s important to focus on whether they are profitable.

“At the moment there's a lot of legislation- driven demand. So large companies like BP, Shell and Rolls-Royce, which have carbon emission targets to meet, are investing in smaller companies like Clipper Wind, and boosting their share price as a consequence.”

Clipper Wind, a wind turbine manufacturer listed on Aim, the alternative investment market, has risen by 150 per cent, largely on the strength of its involvement with BP.

This sort of increase can lead to potential overpricing and inevitable price corrections. Solarworld, the German solar panel manufacturer, is a component of the TecDax, the German technology index. From a low of around €0.5 in 2002 the company’s share pricehas risen to just over €40, although it was subject to a price correction in May.

“There probably is a bubble at the moment,” says Holden. “Renewable energy is a theme in a lot of investment managers’ minds and as they jump on the bandwagon the price is pushed up, so it’s not necessarily a good value market at the moment.”

Experts in this field agree that the high- risk nature of new energy stocks means investors are best off investing in them as part of a diversified portfolio. Funds such as Norwich Union’s Sustainable Future funds, offer investors the chance to combine new energy investment with more conservative stock choices.

Financial planner Garry Villis of Paradigm Norton says: “If a client was interested in sustainable energy investment we would put in a small percentage of their investments as part of a balanced portfolio.”

“We would also tell them that the performances of these stocks tend to be different to the normal market. The FTSE contains a lot of traditional energy stocks and when these do well, alternative energy stocks don’t tend to perform as well, and vice versa.”

Venture capital trust managers Foresight Venture Partners have been looking into clean technology for the past three years and have increased their attention in the last year.

“It’s an area which offers a lot of profitable investment opportunities,” says Bernard Fairman, managing partner. “We’ve seen growing interest from investors wanting to put money in this field which is why we’re launching a new Sustainable Development fund in October.”

Mike Appleby, manager of Morley Fund Management, who run Norwich Union’s six new energy funds, says: “We concentrate on earnings-positive companies, rather than the newest technology and some stocks have done amazingly well. We believe that long term, these are good investments.”

As with any new technology, some of the early frontrunners in new energy development are likely to fall by the wayside, and investors need to consider how mature a company’s technology is, and how close it is to commercialisation, when picking stocks or funds.

Although international government support means that this sector is unlikely to collapse altogether, and despite headline grabbing investments such as Sir Richard Branson’s, this will remain a risky, long-term growth area for the foreseeable future.