The sputtering alternative-energy market, which has been mired in a deep slump for at least the last six months, is showing some signs of recovery.

Groups that track investment in alternative energy note substantial declines in the first part of 2009. An Ernst and Young report says that investments in the clean-energy sector fell to $277 million in the first quarter, down from $715 million in the first quarter of 2008. Greentech Media reports $836 million in venture capital was invested in the entire green sector in the first quarter, equivalent to 2007 levels. And one of the largest energy deals in the first quarter was a relatively modest $40 million investment in Kosmos Energy, an oil exploration firm.

But these numbers reflect deals worked on in the fourth quarter of 2008, notes Erik Straser, a partner at venture capitalist Mohr Davidow in Menlo Park, CA. Straser says that now “the climate is gradually improving.” Barring a worsening in the economy, such improvement should continue, he says.

Even in the first quarter, there were bright spots. The Ernst and Young report found that more than $100 million was invested in energy storage in the first quarter. Since then, two notable deals in battery companies include $30 million for Deeya Energy, which is developing low-cost, high-capacity batteries with no heavy metals for cellular towers, and a $69 million investment by General Electric in A123, a battery maker based in Watertown, MA. And SunPower, a maker of photovoltaics in San Jose, CA, raised $363 million by selling shares and issuing bonds.

Smart-grid and infrastructure services also did well. In April, EPS, which analyzes energy use and implements improvements for companies, received $30 million from investors. EPS’s CEO Jay Zoellner acknowledges that his company’s valuation was lower than after its first funding round, completed in 2007. But he says the market is “going to be turning around.”

Taken together, the SunPower share sale and the improvement in funding for energy storage and infrastructure show that money is now going into markets with good long-term potential, says Travis Bradford, president of the Prometheus Institute for Sustainable Development. The market tends to “thaw at the least risky sectors and works its way to most risky,” he suggests.

However, a number of alternative-energy companies will not survive the downturn. This week, Pacific Ethanol’s four ethanol-producing subsidiaries filed for bankruptcy, as part of an ongoing shakeout in the ethanol-production business. Two weeks ago, GreenFuel Technologies in Cambridge, MA, which was trying to commercialize algae as a source for biofuels, was shut down by its venture backers. In March, Optisolar, a maker of solar panels that also planned to run solar power plants, began selling off its assets.

And observers caution that companies should not expect immediate relief from the federal stimulus package, which allocates some $60 billion to energy. “The stimulus bill is a one-time opportunity,” said Chuck McDermott, general partner of Rockport Capital Partners, speaking on a panel at Venture Summit East this week in Boston. “It’s not an ongoing program, it’s an event.”

Dennis Costello, managing director of Braemar Energy Ventures, a Boston-based venture firm, adds that venture capitalists have to discount the long-term impact of stimulus money. He says it is unclear how the money will be distributed. “Will it go to the best company? The best proposal writer? The ones with the best political connections? It’s very unpredictable,” he says.

Costello does believe that the Obama administration’s emphasis on solving the nation’s energy problems has helped keep the energy-investing market from being even worse. But project financing, including securing loans to help build manufacturing facilities, remains challenging, he says. Braemar has portfolio companies that will need project financing in the next two to four quarters, and Costello says that potential lenders are just now “poking their heads up.”

Despite the market problems, venture capitalists still seem attracted to green technology and energy, believing they represent a strong market in the long term. Dave Power, a partner at Fidelity Ventures, says his firm is shifting its focus away from information-technology investing and into clean-tech companies, particularly those that improve energy efficiency. “It’s a huge market,” he says.