The clean technology industry experienced a big drop off in the last quarter of the 2008, falling 38 percent from the prior quarter as investors were leery of the economic slowdown.

However, the year overall saw another record-breaking investment in clean tech of $8.4 billion.

There is a growing issue -- or more precisely an issue of non-growth -- for clean technology companies. There is an urgent need for capital to help companies pass through the “Valley of Death,” the current gap in the market created by reluctant investors. This slowdown is not expected to change until more capital is made available. With new sources of non-traditional funding, such as the government’s stimulus package, clean tech is expected to be bolstered against this valley, and the report takes a positive stance, as well as encouraging investment at a stage which Cleantech Group refers to as bargain-hunting.

The report says utility companies are also part of these new sources of funding, as now clean tech assets have been recognized for their impressive return on investment and the increasing availability of tax credits.

The Electric Power Research Institute initiative (EPRI) is a strong example of utilities playing remarkably key roles in the evolution of clean technology. The goal of one initiative is to test the addition of solar thermal collectors to fossil fuel powered plants in an effort to reduce the amount of fuel required at these locations.

Participating plants, operated by well-known coal-based utilities that are not renowned for their focus on alternative energies, are being driven by efforts to battle rising per kilowatt-hour variable costs to achieve greater efficiency and reliability, among other gains.

The leading company in solar Nanosolar is focusing efforts on commercializing production of CIGS (copper indium gallium diselinide) thin-film solar cells, which is expected to cut production costs. This new method is receiving support, as venture investors shifted their focus significantly from traditional c-Si PV technologies to thin-film PV, which is quickly becoming a dominant investment theme.

Wind power saw a rise in investment from 2007 to $502 million, but still remained lower than 2006’s record results. While the market for wind power has been “historically lumpy” (per the report), if investments in wind technologies are separated from wind farms, the growth experienced by wind technologies is impressive, and up 124% this year. 2008 saw a change in wind power, as entrepreneurs approached smaller size turbine markets not already dominated by large manufacturers.

The group encourages a shift from solar, the leading clean tech investment area (40 percent), to the less popular but growing efficiency sectors, such as smart grid or green buildings, which together only comprise 8 percent of investments. Efficiency is a market that is not only receiving additional government attention, but also has opportunities that are primarily (70 percent) in the developing world.

Venture investment in green building has continued to rise steadily since 2004, and reached $364 million in 2008. One green building company highlighted by the report is Aspen Aerogels, which produces aerogel insulation which is superior to traditional insulation. Another company that received mention was ICE Energy, a company pioneering an energy system that will store energy in the form of ice, while energy costs are low at night, and then use that ice to power central cooling/air conditioners to reduce energy usage during peak hours.

Additionally, smart grid companies received recognition during this “breakout year for smart grid,” as the report mentioned that the top seven companies in the industry comprise 94% of the smart grid venture capital ($344 million): GridPoint, Tendril Networks, eMeter, Silver Spring, BPL Global, EKA systems and Trilliant.

Biofuels have remained somewhat stable, with no gains. However, the power structure is beginning to change. As technology improves, investments have begun to slow in large first-generation ethanol and biodiesel refineries and may be refocusing their interests in algae biodiesel companies, as biomass-to-biofuels venture capital rose significantly to $150 million.

Internationally, interests are continuing to rise in traditional sectors, such as energy generation. Europe and Israel’s top three sectors were solar, wind and biofuels.

The year saw mammoth deals in solar power in Germany, with the most significant country growth at an increase of over 200% from last year in clean tech investments, while the UK spread its investments across a wide range of clean technology sectors, though solar still led. Total investment in biofuels was down slightly from 2007 due to concerns regarding not only the ROI, but the effect investment could have on food prices.

China’s investment in clean technologies grew ($343 million), strengthened by numerous government initiatives. The year saw the enforcement of the Circular Economy Law, which punished companies that do not meet prescribed reduction, reuse or recycling directives.

India’s investments dropped 20% from the previous year to $456 million. India, however, triumphed over the global fourth quarter slowdown, a result of the SE Forge deal to develop crystalline silicon. One company mentioned was d.light design, a startup that is working with several organizations to replace the kerosene lantern in India with solid state LED lighting that is solar chargeable.

Both China and India were given limited coverage, and it is suspected by the Cleantech Group that there are likely a significant number of unreported and undisclosed deals, making the true investment total higher.

The Cleantech Group made the annual report and fourth quarter investment monitor for 2008, normally only released to members, available to the public for the week in honor of Earth Day, and you can download a copy here.