The above chart is the five-year performance of the Renixx Renewable Index. For shareholders in clean energy companies the picture tells one word: trouble. Unless of course you got in a month ago …

The index, the oldest clean energy index in the world (set up in 2002), incorporates the 30 biggest renewable energy companies. It includes the likes of solar heavyweights Suntech, First Solar, Yingli and Trina as well as major wind players Vestas, Goldwind, Gamesa and Suzlon.

But while wind and solar investment has surged since 2002, the index has largely tanked — alarmingly so from April 2011 to December last year (as well as obviously tumbling during the peak of the GFC).

The Australian‘s environment editor Graham Lloyd recently argued the index’s fall mirrored faltering global action to cut emissions. It’s a convenient contention but the past month shows it is not really accurate. Little was achieved out of Doha, at least not in the short-term, but clean energy stocks have been rallying ever since. Instead, the weakness in the index has been a by-product of two problems: oversupply and inconsistent energy policies.

A flood of new entrants came into the solar market around 2008, just as the global economy was set to dive. More competition and less economic activity is not a recipe for success. These companies then were left with weakened balance sheets that couldn’t be easily mended as many competitors stuck around on life support, ensuring a continued glut of supply. A shake-out has begun in solar but still has a long way to go, with Beijing continuing to prop up many underperforming businesses that surely must collapse at some point in coming years.

Wind, meanwhile, has largely struggled thanks to stop-start policy around the world — rearing its head most obviously with the US and its wind tax credit. The result has been plummeting prices for solar and boom-bust cycles in wind. Neither of these problems — supply glut and policy uncertainty — are likely to resolve themselves soon, leaving the clean energy sector facing persistent headwinds.

But while the Renixx index is a doom and gloom story on the surface, there is reason for optimism. The index omits large companies that are mainly focused on other areas, even though they may have significant interests in renewable energy.

For example, AGL Energy is a major player in Australia’s renewable energy sector, but won’t appear on the list as more than 50% of its revenue doesn’t come from renewable assets. Likewise engineering giant Siemens is a significant participant in the wind sector, yet doesn’t appear in the index. GE, EDF and the Buffett-backed MidAmerican Energy, all play a noteworthy role in the sector but aren’t in the index. The list goes on.

As such the index doesn’t explain the full tale — that utilities around the world have been investing in clean energy in a big way.

While 2012 was likely the first down year in clean energy investment for the eight years that Bloomberg has compiled data (the figures are not available yet), it was likely not far shy of the record $US280 billion seen in 2011. By comparison, in 2007 and 2008, investment was around the $150 billion mark. As such solar and wind are playing a much more significant role in the energy sector in 2013 than they were at the peak of the Renixx index five years ago.

However, despite utility interest and some positive policy moves, the major solar and wind players are still bracing for another challenging year in 2013.

There is hope the bottom has been reached, with the surge over the past month certainly encouraging. Indeed, last week the index had its best two-day surge in over a year, led by news of another clean energy investment from master share trader Warren Buffett. But until a shakeout in solar takes place and politicians stop turning the policy tap on and off, the index will do well to maintain its current level.

*This article was originally published on Climate Spectator