One thing was clear at last week's Renewable Energy Finance Forum (REFF) in New York City: This budding industry is still a very risky one for investment. That reality has been illustrated by Congress' failure to extend the Investment (ITC) and Production Tax Credits (PTC); a situation that has spooked some investors and is starting to cause a shift of capital to other countries and other industries.

“If you don't like policy risk, you don't belong in this market,” said Rhone Resch, President of the Solar Energy Industries Association, in a speech to attendees. “But if you are willing to get into that risk, you belong in this business.”

All risks considered, the world's leading investors are recognizing that a transition to a clean energy economy is the single biggest economic opportunity of the 21st century — and possibly the biggest economic opportunity ever. The U.S. represents one of the largest renewable energy markets, so merchant bankers, private equity firms and venture capitalists are all educating themselves about how to navigate this immature yet promising marketplace and make the right decisions to drive the industry forward. REFF is an event designed to give financiers the tools to invest in this increasingly complicated space.

“It is clear that we are now a finance-driven industry. All of you here are in the right place at the right time,” said Michael Eckhart, President of the American Council on Renewable Energy (ACORE). “However, as we move forward there will be big successes and failures and only the strong will survive.”

Along with understanding policy risk, many investors want to know if the “clean energy revolution” is another bubble or just a replay of the short-lived enthusiasm for renewables during the oil shock of the 1970's. That's not the case, said conference speakers. The political and economic landscape is now perfect for strong, sustainable industry growth: The scientific debate over climate change is over; the price of oil will probably not fall dramatically, if it falls at all; developing countries like China and India are emerging as major energy consumers, increasing the demand for all types of energy; and despite the short-term political stalemate in Washington, there is bipartisan recognition that renewable energy is an economic driver and a necessary part of national security strategy.

“There are so many factors converging at once. It really is a perfect storm,” said David Sandalow, Senior Fellow at the Brookings Institution. “I just don't see this as another repeat of what happened in the 70's. This is the real thing.”

Although the expectations for growth are very high, the industry is still in its infancy. Renewables account for only 3.4 percent of total global power generation. The International Energy Agency recently issued a report estimating that in order to reduce greenhouse gas emissions 50% by 2050, global investment in renewable energy, energy efficiency and carbon sequestration will need to reach roughly US $45 trillion dollars by that date. That's the conservative estimate. Some analysts have said the figure could be much higher.

As the renewable energy industry works to put meaningful amounts of capacity online, the market remains very volatile for investors, especially in the U.S. However, the industry is finally approaching the form that it will eventually take on a larger scale, making the market a bit more clear for investors, said Michael Liebreich, CEO of New Energy Finance.

“We went through a number of years where people were waking up to renewable energy and energy efficiency, but they didn't know quite what that meant in terms of how they would integrate into the energy infrastructure,” Liebreich said. “We're now starting to get more clarity on how that will work.”

Liebreich and others point to the growing size of installations, increased consolidation of the industry and refined promotion policies as the factors creating this clarity. As a result of this continued “shake out,” the ability of firms to see how and where to invest their capital is continually improving.

All of this bodes well for the long-term picture. But in the short-term, there is a lot of concern about the U.S. market and what will happen over the next year if the ITC and PTC are not extended or are extended late in the year. By many estimates, if something is not passed in the next 30 days, there will be a significant derailment of investment with the U.S. wind and solar markets.

To raise more awareness about the issue, GE Energy Financial Services and ACORE released a report at the event weighing the long-term economic impact of wind development with the up-front cost of the production tax credit. The report found that the net present value of 2007 U.S. wind development is worth US $250 million more than the price tag for the tax credits, which was about US $9 billion last year. According to the report, the tax credit pays for itself because of federal tax revenue received from wind projects, worker wages and property taxes.

“This study needs to be combined with the other area we've been discussing, which is the dire impact it will have on the industry if we don't extend the tax credits and lose jobs and squander the opportunity to create a domestic, clean power source,” said Kevin Walsh, Managing Director of Renewable Energy at GE Energy Financial Services.

According to another widely cited report from Navigant Consulting, the wind industry could see the loss of 76,800 jobs and US $11.5 billion dollars in economic activity. Many in the industry estimate that up to 6 gigawatts (GW) worth of projects could be derailed at the end of 2008 and throughout 2009. In addition, the solar industry could see a 465-megawatt (MW) reduction in demand for PV modules if they do not get an ITC extension. Navigant estimates that around 39,400 jobs and US $8 billion in economic activity would be lost.

Almost everyone at REFF was hopeful that the credits would be extended by December. But even if that happens, there could still be a significant slowdown in the market as tax equity investors hesitate to make new deals in the second half of the year.

Due to the precarious situation in Congress, the talk at REFF was centered around policy as much as investment strategy and development figures. Due to the industry's infancy, it's very difficult to talk about renewable energy without talking about policy. Once the PTC and ITC issues are behind the industry, the next big battle on Capitol Hill will be over a carbon-weighted policy like cap and trade, according to presenters.

Most of the speakers had the same thing to say: Renewables can and will thrive without subsidies once the social and environmental costs of fossil energies are properly valued by a carbon-weighted policy. However, that will be a difficult piece of legislation to craft and one that could take years to become law. For the time being, many businesses in the industry are pushing ahead in spite of the politicking in Washington over incentives.

“We simply need more energy. We're not waiting around for governments to craft the perfect policies,” said Vivienne Cox, Executive Vice President of BP's alternative energy business. “This is an important market, and we're going to build a business around it.”