The Holy Grail of investing is finding the next paradigm-shifting sector that changes the way the world works and offers potentially boffo investment returns in the process. The last great gold rush was the dot-com boom; the next one might already be here-green technologies, a vast sector running the gamut from renewable energy sources to clean technologies that enables businesses to boost performance while minimizing their environmental impact.

Many green tech stocks zoomed last year, perhaps none more so than those in solar, where a slew of initial public offerings-many from China-created a buzz that helped propel share prices at many solar companies by triple-digit amounts. Meanwhile, some of the sharpest minds in venture capital are making big-time bets on green tech. One alternative energy proselytizer is Vinod Khosla, a co-founder of Sun Microsystems, then a general partner at the heavyweight Silicon Valley VC firm Kleiner Perkins Caufield & Byers (early supporters of Amazon and Google) and later founder of his own VC firm. And current Kleiner Perkins partner John Doerr calls green tech possibly the greatest economic opportunity of the 21st century.

Effusive statements like that are commonplace in this sphere. "We're in the first inning of a 50-inning ballgame," says Rafael Coven, managing partner at Cleantech Indices, a developer of indexes tracking green tech stocks. "It's not dissimilar to the advent of the information age because water, energy and the environment are issues facing the entire world."

That's heady stuff. But many green solutions are expensive, alternative energy still accounts for just a small portion of global energy output, and enthusiasm for green investing might have gotten ahead of itself. Witness the gut-wrenching 20% to 50% price declines in solar and other green tech stocks during the early weeks of 2008, coupled with 15% to 20% losses in green tech-oriented mutual funds and exchange-traded funds. And like the Internet boom in the '90s, green tech is an evolving space filled with speculative companies that have little or no profits. In short, green tech can be volatile. Or worse.

Eric Janszen, a former venture capitalist who now runs an online investment Web site called iTulip, wrote in his February cover story for Harper's Magazine that alternative energy is the next investment bubble waiting to burst, fueled by government subsidies and by irrational exuberance from both VCs and market investors alike.

So, what's it going to be for green tech: bonanza or burst bubble? Someday, it might be the latter. But with global warming the catch phrase of the new century, with rising energy prices due to global economic growth and with government policies encouraging eco-friendly solutions, green tech likely will have staying power for the foreseeable future. The trick is finding the right ways to play it.

Fundamental Drivers

The International Energy Agency forecasts that worldwide energy demand will jump more than 50% by 2030 unless governments change their policies. China and India combined would account for nearly half of that rise, with coal use set to grow most rapidly in those countries. The agency says the expected reliance on fossil fuels would boost their energy-related emissions of the greenhouse gas carbon dioxide by 57%.

Oil demand is rising at a time when many mature oil patches around the world are being depleted and some of the most promising new finds are in hard-to-reach places that make them costly. The fear is that we're consuming more oil than we can replace, which could put long-term upward pricing pressure on it. Additional concerns center on the nationalization of oil reserves by some producers, as well as the political uncertainty surrounding major oil exporters such as Iran and Venezuela.

Pollution and energy security worries make alternative energy more appealing, but renewables won't go mainstream unless they become more cost competitive with fossil fuels, and for the most part that still depends on regulations and subsidies. For example, Europe's thriving wind and solar markets are built on a system of "feed-in tariffs" that require utilities to buy a certain amount of electricity from renewable energy sources.