LOS ANGELES/FRANKFURT Investors who went on this week's green energy buying binge because of Japan's nuclear crisis may be in for a painful hangover.
Japan's race to avert a meltdown at a tsunami-wracked nuclear power plant was viewed as a rallying cry to some supporters of renewable energy, triggering a debate about whether the power source is a safe and viable form of emissions-free energy.
That led to a surge in shares of alternative energy stocks, including some double-digit gains in solar companies that were lagging of late.
But investors cautioned that renewable energy still depends heavily on government subsidies and won't get a meaningful shot in the arm without new laws in many nations.
In addition, nuclear power is hardly expected to be replaced altogether, given its size in the global market -- and any short-term gaps could be filled by traditional power sources such as oil, gas and coal.
For now, the Japan crisis is a wake-up call to investors who might have concentrated their energy holdings in too few sources.
"For the institutional investment community this, like the BP (BP.L) disaster in the Gulf, has given them a vivid reminder of the virtues of diversification," said Alan Salzman, chief executive of Silicon Valley-based venture capital firm VantagePoint Venture Partners, a top investor in green energy startups.
The WilderHill New Energy Global Innovation index .NEX of alternative energy stocks has gained 4 percent since the earthquake hit on March 11 despite a 1.8 percent decline in the Standard & Poor's 500 index .SPX.
But the rise in green energy stocks has been stoked by knee-jerk sentiment rather than a fundamental shift in demand, experts said. In fact, shares in the sector have been battered recently because several European markets have trimmed their lavish subsidies for solar power, in particular.
"The sentiment on renewables before the crisis can be summed up like this: It was not in the focus of investors -- until Japan," Robin Batchelor, fund manager at BlackRock, said.
Batchelor, who oversees about $8.2 billion in energy-related funds, added, however, that other nations may follow Germany and China, where nuclear projects were immediately suspended.
Germany earlier this week reacted decisively to several explosions at a Japanese nuclear plant by backtracking on last year's decision to extend the life of aging nuclear stations.
China, too, temporarily suspended approval of nuclear power projects, putting a halt to its major push into the power source and fueling hopes by advocates of green energy that the sector may see a regulatory revival.
But notwithstanding those moves, Batchelor said it was far too soon to know what the impact would be.
In fact, fears about the safety of nuclear power could even make dirtier fuel sources such as coal look better to both investors and the public.
"Anybody who is promoting renewables is going to say 'Look, it's clear that nuclear is not your answer, renewables is your answer,'" said Lance Markowitz, manager of the leasing and asset finance division at Union Bank in Los Angeles. Union Bank is a unit of Mitsubishi UFJ Financial Group (8306.T)
"I have also heard some people say the same thing about fossil fuels," Markowitz said.
In fact, coal mining shares have also rallied over the uncertainty of nuclear power.
SPLIT ON SOLAR
Shares in solar companies such as the United States' First Solar Inc (FSLR.O), China's Suntech Power Holdings Co Ltd STP.N and Germany's SMA Solar (S92G.DE) as well as such wind players as Denmark's Vestas (VWS.CO) have shot up this week.
But analysts appear to be split on how the crisis in Japan will affect near-term demand for solar energy, in particular.
PiperJaffray earlier this week downgraded several solar stocks, saying the industry is at risk of a supply glut as demand from Japan, a major solar market, slows this year.
Jefferies Equity Research, meanwhile, said it expects a reevaluation of nuclear spending in Japan, the United States and other countries, leading to "incremental demand for solar in 2011." Stefan Freudenreich, analyst at Equinet, said solar subsidies in Germany could be cut less than planned.
In fact, German Chancellor Angela Merkel said she wanted to speed up Germany's exit from nuclear power, only weeks after a decision to further cut support to solar subsidies, which have helped Germany to become the world's largest solar market.
"But taking out nuclear altogether will be a tough thing to do for governments," BlackRock's Batchelor said.
The United States echoed that sentiment earlier this week when President Barack Obama's top energy official said the nation should press ahead with approving construction licenses for new nuclear power plants.
Removing nuclear power from the global energy equation would indeed leave governments scrambling for ideas how to fill the gap. According to the latest available statistics from the International Energy Agency, 5.8 percent of total primary energy supply in 2008 came from nuclear power, compared with just 0.7 percent from solar, wind and geothermal.
While experts agree there will be a drastic shift toward wind and sunpower and other sources of green energy in the long term, the short-term gap is more likely to be filled with cheaper fossil fuels.
"The first person to benefit is gas-fired generation because it's the lowest-cost source of supply today. So they probably benefit first. Support for renewables is probably a secondary impact," said John Anderson, head of power and infrastructure investing for John Hancock in Boston.
Union Bank's Markowitz hit a similar note, saying all remaining energy sources had to be used to compensate for any looming end of the nuclear age.
"I don't think in the world we live in there is really any one solution, and renewables have certain disadvantages. When the wind blows you get wind power, when the sun shines you get solar," he said. "You just can't go with one thing."
(Additional reporting by Hakan Ersen in Frankfurt; Editing by Mary Milliken; Graphics by Vincent Flasseur; Editing by Gary Hill)