As oil prices rise, the chorus of voices pushing for alternative energy sources to power the U.S.'s electricity needs is getting louder.

At a hearing in Washington on Tuesday, Texas billionaire and wind energy producer Boone Pickens joined other advocates who say it's time the U.S. look to wind power as one way to reduce dependence on foreign oil.

Wind power accounts for just over 1% of our total electricity use. This may not seem like much when compared to natural gas's roughly 23% or coal's 54%, but it has grown rapidly. Last year, wind power capacity increased by 46%. This makes the U.S. the fastest-growing wind power market in the world for the third straight year.

Wind power begins on a wind farm where a collection of turbines catch the wind and, much like giant fans in reverse, use it to generate energy, most of which is then converted into electricity and transmitted by power lines.

Driven by record high oil prices, as well as concerns about how burning fossil fuels affects climate change, wind power may continue its upward trajectory. This translates into the potential for growth for wind power companies -- and for their investors as well.

But if you're thinking about investing in this industry, be aware of three risks.

Production tax credits

Just like the rest of the energy industry, wind power gets help from the government. But more so than other sectors, the wind-power sector is heavily dependent on these incentives, called production tax credits or PTCs.

Currently, the PTC provides a 1.5 cent per kilowatt-hour benefit for the first ten years of a renewable energy facility's operation. These incentives make projects more attractive to developers. Wind farms have very high start-up costs -- by lowering these costs, payback periods become shorter.

The current round of PTCs is scheduled to expire in December which, if it happens, would pose a challenge for the industry. "Production tax credits are still very important to the industry," said Walter Nasdeo of Ardour Capital Investments, an investment bank that specializes in alternative energy.

"The industry relies on their renewal for its growth."

In years when PTCs lapsed, production fell dramatically. The last time PTCs lapsed was in 2003, and production fell to 389 megawatts in 2004 -- a five-year low -- from 1,687 in 2003, according to the American Wind Association. Once they were reinstated, production took off again, with 2,431 megawatts produced in 2005.

In April, the PTCs were passed through the Senate as part of a housing stimulus bill. Currently, they are hung up in a divided Congress. Whether Congress will renew the PTCs before the December deadline is an open question, though many analysts, including Nasdeo, say they will most likely be renewed again this year in some form. Without the incentives, it's likely production will take a dive in 2009.

Intermittent source

Another limitation investors should consider has to do with the nature of wind itself. Wind isn't constant. It waxes and wanes, and that means that wind power is intermittent. Due to the nature of electricity transmission, electricity needs to be transported directly from the power plant to the grid. With no way to store the electricity, utilities and their customers become vulnerable to wind fluctuations, especially shortages.

One common solution has been to back wind farms up with natural gas plants. But with the soaring price of natural gas, this is an expensive option.
Some companies are working on technologies that smooth out the energy.

American Superconductor Corp., for instance, has developed products that regulate the voltage of individual turbines. This smoothes out the energy before it's added to the power grid, lowering the chance for fluctuations.

Batteries that store wind energy have also been experimented with, but these are costly and none have been released for widespread use.

Lack of transmission lines

Transmission is perhaps the single greatest problem that faces wind growth - and it was the subject of the Senate hearing Tuesday. Wind farms as a rule are located in unpopulated areas. They need transmission lines to transport their power to cities and other areas of high energy demand. In some cases those destinations are hundreds of miles from the wind farm. 

Many more lines will need to be built to accommodate growth. One study by American Electric Power Company, one of the country's largest utilities, calls for 19,000 miles of new transmission lines by 2030. 

Building these lines won't be easy. Aside from being costly (the same study estimated the cost at $60 billion by 2030), they face other pressures.

"There will be some political resistance," says David Shoenwald, the manager of the New Alternatives Fund, a fund that invests in alternative energy companies. "Most people don't want power lines in their backyard, so you have to decide where to put them."

Still, they have been getting built. Quanta Services Inc., a company that builds transmission networks for wind farms, expects to quadruple its revenues this year based on new wind infrastructure.

In the past, wind skeptics have pointed to the price of oil as a barometer of wind's popularity. As oil prices ease, those critics have held, so will the interest in renewable sources of energy.

But analysts, including Nasdeo, believe that this is no longer the case. "People have come to terms with oil not returning to where it was 10 years ago. There is an increased acceptance of having to find alternatives. We are in a different place than we were before," he says.

Ready to invest?

There are a number of alternative energy mutual funds and ETFs that will give you exposure to wind power.

The New Alternatives Fund, the oldest green fund, with about $280 million in assets, has been around since 1982. It has a three-year annual return of 22%.

Other funds have opened more recently. Guinness Atkinson started an alternative energy fund in 2006. Calvert Funds also began their own alternative energy fund just last year.

ETFs that participate in this space include the PowerShares WilderHill Clean Energy Portfolio listed in 2005, and the Van Eck Global Alternative Energy ETF, launched in 2007.

If you want to choose individual stocks, you'll need a much higher tolerance for risk, and you'll need to do your homework.

Most pure-play wind companies are European. Vestas Wind Systems of Denmark, and Iberdrola Renovables of Spain, two industry heavyweights, have their American Deposit Receipts traded on Pink Sheets. In their own countries, they are listed on the major exchanges.

Finding a pure-play wind company in the U.S. is more difficult. The wind companies that are publicly traded usually don't focus exclusively on wind. American Superconductor, for instance, manufactures high temperature superconductor wire completely unrelated to wind, and Quanta Services builds transmission networks for other kinds of electricity.

Whatever form of wind investing you decide, patience will be required. Wind has a lot of potential, but overcoming the barriers will take time.

David Englander is a MarketWatch reporter in New York.