Investing in green energy can be good for both the climate and your wallet. How good depends on choosing the right investment vehicles (mutual funds, ETFs, or stocks) and sectors to invest in. This will get you started.

More and more investors are investing in green energy. According to the Cleantech Group, the Cleantech sector is now the largest sector for venture capital investment. Green Energy is not just for venture capitalists. Small investors have done well in 2009. Since the market bottomed at the start of March, the average green energy mutual fund topped the S&P 500 by 13%, while the average clean energy ETF beat the S&P 500 by 18%.

My entire portfolio of Geothermal companies received DOE cost-sharing grants Friday. Here's a quick run-down:

• Nevada Geothermal (NGLPF.PK, NGP.V) received $1.7M for its Crump Geyser project, and $1.6M for its Black Warrior project. NGP also celebrated completion of its Blue Mountain Faulkner 1 plant the same day.
• US Geothermal (HTM) received $3.77M for it San Emidio project.
• Sierra Geothermal (SRAGF.PK, SRA.V) received $10M for exploration at its Alum and Silver Peak projects.
• Ormat (ORA) received two grants, and is likely to benefit from other grants since geothermal exploration companies such as US Geothermal contract with them for many services.
• Up to $61.9M was awarded to ground source heat pump demonstrations, which will help my two Geothermal Heat Pump stocks, Waterfurnace Renewable Energy (WFIFF.PK) and LSB Industries (LXU).

Market Reaction

Green energy experts accept that solar panels are one of the least cost effective ways to reduce your carbon footprint. Nevertheless, many buy solar stocks. They should rethink their investment strategies.

I recently spoke on "Stock Selection in the Era of Peak Oil and Climate Change" at the ASPO 2009 International Peak Oil Conference. Whenever green energy enthusiasts find out that I analyze green energy stocks professionally, they react in one of two ways. Many want to know my top stock pick in general (New Flyer Industries NFI-UN.TO/NFYIF.PK) or in their favorite sector (see below). Others tell me about their own green energy investments.

Representatives of Dyadic International (DYAI.PK) were quite upset when I called the company "A Stock to Avoid." The company has now released audited financial statements for 2007 and 2008. The lack of such statements was one of the several reasons I said to avoid the company. Should I retract my article?

Mark Emalfarb, Dyadic International's CEO sent me an email this morning with attached audited financial statements for 2007 and 2008, saying,

Dr. Arthur Berman, of Labyrinth Consulting Services has taken a hard look at actual production data from Barnett Shale in 2007. What he found should worry anyone expecting this abundant, relatively clean, domestic energy resource to be cheap. It should especially worry investors in shale gas companies, such as CHK, DVN, and XTO.

In a panel entitled "Natural Gas Game Changers?" at the 2009 International Peak Oil Conference, Dr. Breman presented some results from his research into the actual production from the nearly 2000 horizontal gas wells drilled in the Barnett Shale in 2007. The Oil Drum has some interesting background and comments here. Here are a few of my take-aways from his presentation:

Often, knowing more about a company is less useful than knowing just a few of the right things. Knowing the right questions to ask can help investors wade through a sea of mostly irrelevant information.

Take a moment to answer the following poll:

I recently looked at a paper from the London Accord which used portfolio theory to recommend the best mixes of technologies to deliver different levels of carbon abatement. The most useful technologies to achieve the needed levels of carbon abatement were Forestry, Hydropower, Biofuels, Wind, Efficiency, and Geothermal. I suggested stocks that investors might consider to invest in each of these sectors.

Other technologies played on bit parts in the abatement portfolios (right) the report found are likely to achieve the needed levels of climate reduction most efficienctly.

Good Info, Not Enough Analysis

I've now read most of my review copy of Investment Opportunities for a Low Carbon World. The quality of the information is generally excellent, as Charles has described in his reviews of the Wind and Solar and Efficiency and Geothermal chapters. As a resource on the state of Cleantech industries, it's generally excellent. As an investing resource, however, it leaves something to be desired. Each chapter is written by a different expert in a particular field, which means that the information is up to date, and comprehensive, but this approach means that there is little attempt to compare the potential of the different investment opportunities presented. What is the point of in-depth research into carbon abatement technologies if we do not then take the next logical step and emphasize the technologies with the greatest potential for carbon abatement and investment returns?

Why ETFs?

Investors interested in a simple way to invest in a diverse basket of renewable energy and energy efficiency companies should consider Exchange Traded Funds (a.k.a. ETFs) first. Although green energy mutual funds will be more familiar to many investors, they come with costs that are difficult to justify in comparison. The following chart compares the annual expense ratio, or the percentage of fund assets which an investor pays every year for ETF fund management and expenses, compared to the expense ratio of one of the less expensive green energy mutual funds. (See my recent article comparing the green energy mutual funds.)

Most investors looking to get into clean energy think first of mutual funds. Here are the options, and how to choose.

We track seven mutual funds with a focus on green energy and climate change at AltEnergyStocks.com, since the American Trust Alternatives Fund closed early this year. I split them into two categories: the funds with a primary focus on clean energy, and those with a primary focus on the environment.

I never thought 2009 would be a good year for risky stocks, but my readers asked for them anyway. The market's strong third quarter have paid off for risk-takers who gambled on my 10 Green Energy Gambles for 2009.

I started out the year by providing readers with a portfolio of ten relatively conservative plays on green energy. That portfolio was representative of how I planned to approach the market this year, and has produced stronger returns and less volatility when compared to both green energy stocks and the market as a whole. Many of my readers are looking for big gains on little stocks, so I also provided (but did not endorse) ten such green energy gambles.

Dyadic International hopes to use proprietary gene discovery to revolutionize cellulosic biofuel and pharmaceuticals. Investors should stay away.

Dyadic International (DYAI.PK) says they are applying their "proprietary enabling biotechnologies for multi-billion dollar markets in industrial enzymes, biofuels and biotherapeutics." A very exciting prospect, and just the sort of thing I've long warned investors to avoid. In short, they are a company with gigantic claims and not a lot of track record to back them up.

Should reduced liquidity at New Flyer Industries concern investors?

New Flyer Industries (NFI-UN.TO, NFYIF.PK) is one of my largest single clean energy investments. The company describes itself as the "leader in the heavy-duty bus market for the US and Canada." This is why I first brought it to the attention of readers in April 2008, as a company likely to benefit from peak oil. Increasing the fuel efficiency of our vehicle fleet can reduce our consumption of oil in North America, but not at a pace sufficient to both accommodate declining oil supplies and increasing oil demand from the developing world.

For the first 9 months of 2009, my ten green energy stocks for 2009 are up 23.4% vs. the S&P 500, and up 20.4% over my clean energy benchmark, the iShares S&P Global Clean Energy Index (ICLN). For the third quarter, that amounts to a loss of 1% relative to the S&P 500, and a gain of 7% relative to ICLN.

In my second quarter update, I attributed the out-performance of both clean energy in general, and my picks to the Obama Effect. That is, green energy outperformed the market strongly in the first half of the year because of the strong political and financial support it received from the new administration and Congress.

My Quick Clean Energy Tracking Portfolio has produced unexpected out-performance. Is it because of high beta (β) in a rising market?

I recently asked why two portfolios which I had designed to track green energy mutual funds ended up out-performing them by a wide margin.

My Quick Clean Energy Tracking Portfolio continues to outperform all benchmarks and expectations... is it luck, or did I stumble onto a better way to invest in green energy stocks?

I continue to be stunned at how the portfolio which I intended as an easy way to duplicate green energy mutual fund performance at much lower cost continues to blow those green mutual funds out of the water. I last published an update on this portfolio at the end of May, and was shocked to find that it had beaten the funds it was intended to replicate by over 20% in 3 months. The trend continues... it's now almost 7 months later, and the portfolio has widened its lead over the mutual funds by 30%.

I'm getting more and more company in worrying about a market peak. If you, like me, are

1. Interested in green investing, and

It's the Biomass, Stupid

Although they have considerable political momentum, cellulosic ethanol and advanced biofuels are not the best way to use biomass in order to reduce carbon emissions. Greater carbon reductions can be had at lower cost by cofiring the same biomass in existing coal plants. If the goal is more ethanol to displace gasoline, wouldn't it make more sense to feed cows on grass instead of corn, and use the corn to make ethanol, than it makes to use grass to make ethanol? If the goal is more miles driven per ton of cellulose, you will get more miles per ton by burning the cellulose to make electricity and using that to charge an EV or PHEV. Finally, biomass can be used to sequester carbon as biochar, while also producing electricity, heat or liquid fuel.

The Algonquin Power Income Fund (AGQNF.PK) has been one of my star performers in an excellent year. Is it still a good investment at these prices?

Since I recommended the Algonquin Power Income Fund in January as a renewable energy income stock for 2009, the company is up 69%, in addition to the C$0.02 monthly dividend, worth approximately another 8% through August on the US$1.82 purchase price, making it the second-best performing of my ten picks (after Cree, Inc (CREE)). However, since the major basis for my recommendation at the time was the stock's extremely cheap valuation and high yield, I thought it was worth revisiting, on the occasion of the company's Q2 update [pdf].

Nassim Nicholas Taleb's The Black Swan: The Impact of the Highly Improbable changed the way I trade; I can't give a book higher praise. This isn't a book review; since the book is over two years old, and I did not get around to reading it until this Spring, I direct readers to this Foolish Book Review, which agrees with my viewpoint quite well, and to the New York Times for a detailed critique. The latter seemed overly nit-picky to me, but then, I'm a fan.

Human Biases