The push for renewable energy sources could bring about the next golden frontier.

Recent legislation mandating that 20 per cent of Australian power be derived from renewable energy sources by 2020, up from about 8 per cent, is expected to generate massive spending on new infrastructure.

Renewable energy could become a major investment theme, with a further incentive being the launch on the ASX on November 24 of trading in futures and options contracts for Renewable Energy Certificates.

According to the Climate Institute, the Government's new renewable energy target should stimulate capital expenditure of at least $20 billion over the coming decade, on more than 200 projects. Other estimates are higher.

At present, hydroelectric power is responsible for much of Australia's renewable energy output. However, wind energy is seen as the big hope for the future. A lot of the expected investment will go towards new wind farms, although as costs come down and efficiency rises, solar power should play a growing role.

Further out, geothermal power is viewed as having enormous potential, while other promising technologies include wave and tidal energy and biomass (the conversion of biological material to energy).

Justin Beeton, managing director of JB Global Investment Services, which runs the JB Global Renewable Energy Investment Trust, says: "With governments shifting to tackle climate change it makes investment in renewable energy a no-brainer."

He notes some smaller investors have already invested in renewable energy companies for ethical reasons and were prepared to accept a lower-than-average return. But this is changing.

"We are in a unique place right now," he says. "You can still invest ethically through renewable energy and have that feel-good, warm-and-fuzzy feeling. But from now I would also expect it to provide a high return – certainly higher than a non-ethical investment. There is hardly any other industry that is getting stimulus packages and government investment with so much upside."

One reason this theme has not blossomed already in Australia is most of the companies with a strong exposure to renewable energy are small. Many do not make a profit. This contrasts sharply with the US, China and parts of Europe, where companies such as Danish wind turbine manufacturer Vestas Wind Systems or US solar module producer First Solar are profitable, multibillion-dollar enterprises.

Local investors might find managed funds are the best way to play this theme, unless they are prepared to take on the risk that is attendant with buying small stocks.

According to the head of strategy and development at Hunter Hall Investment Management, Michael Walsh, two main challenges face local companies focusing on renewable energy.

The first is boosting efficiency, in order to improve power output. "For example, the efficiency of a solar panel – the electricity produced versus the heat lost – might be about 12 per cent," he says. "So one challenge is to convert more heat to electricity."

He says the other significant issue is bringing costs down, to make renewable energy competitive with mainstream power generation.

What of the risks? As already noted, the local companies involved are generally small.

"They are still developing," Walsh says. "And smaller companies with a shorter track record of profitability are obviously risky."

Another issue is that government policies and incentives are crucial for the development of this industry and concerns have been expressed that these have not been consistent.

For example, in mid-October, just two months after the passage of the 2020 renewable energy legislation, the Federal Government suspended its $480-million program to supply schools with solar power systems. Earlier it had introduced a means test for its household solar panel rebate.

The portfolio manager for the Australian Ethical Smaller Companies Trust, Andy Gracey, recommends wind-farm operator Infigen Energy (formerly known as Babcock & Brown Wind Partners). The company has recently been selling overseas assets in order to develop more wind farms in Australia.

He also likes two small geothermal power companies, Petratherm and Panax Geothermal. The former is one of a number of listed companies – the best known is Geodynamics – that are hoping to exploit hot fractured rock technology.

This entails pumping water as deep as 4 kilometres underground, where it circulates through fractures in rocks that are more than 200 degrees in temperature. The super-heated water then returns to the surface and is used to produce steam for power generation.

Panex Geothermal is looking to generate power by tapping naturally occurring hot aquifers deep under the Earth's surface.

Gracey also recommends Energy Developments, which operates an international portfolio of power generation facilities, with some of its electricity production deriving from landfill gas and waste coal-mine gas.

Walsh recommends two local renewable energy companies that are included in the Hunter Hall Global Deep Green Trust.

They are CBD Energy, which is involved in a range of renewable energy ventures, and the electricity retailer Jackgreen.