Alternative energy exchange-traded funds (ETF)–particularly solar-focused vehicles–gapped sharply higher when markets opened Tuesday, July 5, in the wake of the long Independence Day weekend.

During his weekly radio address the preceding Saturday, President Obama announced that the government would provide nearly $2 billion in the form of loan guarantees to Abengoa Solar (OTC: ABGOY) to build one of the world’s largest solar plants in Arizona and Abound Solar Manufacturing to build plants in Colorado and Indiana. In addition to addressing what many characterize as an energy crisis, the projects are expected to create as many as 3,000 short-term construction jobs and around 2,000 permanent positions in the US.

Although alternative energy funds of all stripes benefited from renewed investor attention, the two US-based solar-focused funds were the biggest winners. Market Vectors Solar Energy (NYSE: KWT) and Claymore/MAC Global Solar Index (NYSE: TAN) opened 4.6 percent and 4.9 percent higher, respectively. I’ve also seen several articles expounding on the renewed flow of federal funding for alternative energy projects.

But has the tap been opened on government largesse, or is it just a leaky faucet waiting for a plumber? That’s a critical question given the fact that the most alternative energy projects, both here and abroad, depend upon government loans and subsidies for funding–in the US government assistance accounts for more than half of the funding of most projects.

The thing is these pledges were characterized as “conditional commitments,” meaning there’s a strong possibility they might not materialize. Considering the howls of protest coming from the Senate chamber, the deficit hawks won’t let this go without a fight. When attempts to rein in government spending extend so far as to impair the passage of a bill to extend benefits for the unemployed, it’s unreasonable to expect alternative energy to find much love from politicians facing tough midterm elections.

Voluntary programs run by utilities themselves to finance green energy projects also meet little success. I live in Northern Virginia; Dominion Resources (NYSE: D) is my local electric utility. The ute launched its voluntary Dominion Green Energy initiative in January, under which consumers agree to pay an extra penny and a half per kilowatt-hour of electricity consumption. The extra funds go toward purchasing renewable energy certificates, which, in turn, fund green energy programs.

I do my part to protect our environment by making sure nothing recyclable finds its way into our household garbage and dutifully haul the recycling to the collection point once a week. Meanwhile, my wife, a green energy fanatic, signed us up for the Dominion Green Energy program. In total, it adds a few bucks a month to our electricity bill that I really wouldn’t notice if I didn’t look.

Out of curiosity I decided to check out the plan’s reports and documentation, if for no other reason than to make sure my extra couple bucks were actually being spent as Dominion said it would be. Although the cash does in fact go toward developing green energy, I was shocked to learn that the number of participants last year was just 6,071, a tiny fraction of Dominion’s customer base in Virginia’s DC suburbs.

Based on all the hybrids I see on the roads, the environmental rhetoric I hear and the huge attendance at anti-global warming rallies in the District of Columbia, I figured a large percentage of folks in this area would support Dominion Green Energy. Granted, Dominion has only been running the program for about 18 months now. But I found similarly low participation rates in comparable programs offered by other utilities around the country.

The moral of the story is that if green energy projects are going to survive, much less flourish, the money has to come from somewhere. Because consumers seem to be reluctant to pay extra for renewable energy, if government assistance dries up green energy is in serious trouble. And the US isn’t the only nation worried about deficits. Similar efforts are being made by governments around the global to pull in their spending horns.

That makes this a particularly risky time to start looking at ETFs such as Market Vectors Solar Energy and Claymore/MAC Global Solar Index, especially since they really haven’t ever been a winning proposition.

Source: Bloomberg

The two solar power ETFs have lost almost 75 percent of their value, as concerns over government support and their long-term viability have dogged the industry for a couple years now. I strongly suspect that what we’re seeing is simply a short-term, news-driven bounce. The fundamentals haven’t changed. I’m a big supporter of alternative energy. But ardor alone is no basis for allocating capital. Don’t get lured into an investment by the flavor the current news cycle.

What’s New

No new funds were launched last week.