Drive through even the sunniest parts of the nation today, and you probably won’t see more than a smattering of roofs decked out with solar panels.

But with heating costs projected to rise sharply this winter, demand for electricity swelling and tax incentives for solar-powered homes taking effect, rooftop panels are likely to become a much more common sight in coming years. For solar-minded investors, that could be a good thing.

Solarbuzz, an energy-research firm, estimates that the global market for solar-power system installations generated $6.5 billion in revenue in 2004 and predicts sales will nearly triple to $18.5 billion by 2010. Just last year, worldwide shipments of photovoltaic cells and modules, used in rooftop panels, surged by more than 50 percent, according to Strategies Unlimited, another research firm.

For investors in the solar sector, picks are reasonably varied, ranging from diversified large caps with steady incomes to startups still waiting to turn a profit. Given that solar power supplies only a tiny share of energy consumed today, prospects for growth are sound. Still, it’s wise for investors to take some precautions to avoid getting burned.

Solar sector is already hot: New tax incentives at the state and federal level and a boom in construction have boosted the solar energy industry in the past year — and stocks are reflecting that.

In some cases, pure-play solar energy stocks have increased several hundred percent in the past year.

Evergreen Solar (ESLR), a maker of solar cells and panels, currently trades above $8. A year ago, the stock was below $3. Another developer of solar cells, DayStar Technologies (DSTI), has seen its stock surge in the past year — from a low of $2.24 to just under $11 now. Energy Conversion Devices (ENER) and Spire (SPIR), two other solar players, are also up sharply for the year.

Investors’ heightened interest in solar is also drawing newcomers to the public market. Sunpower, a Silicon Valley developer of solar electric power products, is planning an initial public offering of stock to raise as much as $115 million. The company, which filed for its IPO in August, is owned by Cypress Semiconductor (CY), a maker of microprocessors and memory chips.

While some companies have logged enormous stock price gains despite thin or nonexistent profit margins, that state of affairs is unlikely to continue. Tim Woodward, managing director of venture capital firm Nth Power and a member of Evergreen’s board, predicts that profits for more mature firms in the solar power business will pick up next year. Looking at current valuations, it seems shareholders are betting the same thing.

By Joanna Glasner

More here.