TEMPE, Ariz. - First Solar Inc said on Tuesday it plans to build the world's largest solar plant in China in the first major foray by a U.S. company into the Asian nation's fast growing alternative energy sector.

The thin-film solar maker (Nasdaq:FSLR) said today it signed a memorandum of understanding with the Chinese government to build a 2-gigawatt solar power plant in Ordos City in Inner Mongolia.

The announcement comes as the solar industry struggles to emerge from a year-long slump that saw financing for new projects dry up and reduced subsidies in Spain create a glut of unsold cells and panels.

The project is part of China's program to generate 10 percent of its energy from renewable resources by 2010 and 15 percent by 2020 to help meet its growing energy appetite that has made the country the world's top emitter of carbon dioxide.

The project is expected to be the largest in the world when completed in 2019. The first phase calls for 30 megawatts, with construction slated to begin in June 2010. The second and third phases are expected to be completed in 2014, bringing the project to 870 then 1,000 MW. The fourth stage would double the capacity to 2,000 MW by 2019.

First Solar CEO Mike Ahearn attributed the project to China's progressive energy policies. The power plant is expected to operate under a feed-in tariff, which officials have yet to finalize.

"In most people's heads, (solar) is a nice little niche thing," First Solar Chairman and Chief Executive Michael Ahearn told Reuters. "Having a demonstration of something that's nuclear plant size will begin to change that image."

Such a project would cost about $6 billion to build in the U.S. Southwest, but First Solar expects lower costs in China.

The agreement hinges on signing contracts with a power generator to operate the project in China, as well as Beijing's approval of a feed-in tariff mandating utilities pay a premium for solar power, similar to supports in place in Germany.

That tariff is expected to be enacted by the end of the year, with a support likely in the range of 15 to 25 cents per kilowatt hour, Ahearn said.

The Chinese Ministry of Finance has already adopted a $2.90-per-watt subsidy for installed solar that is expected to halve the cost for installations 50 kilowatts or more. In July, the central government also announced the Golden Sun project to subsidize up to 70 percent of the costs of building solar farms with a total capacity of at least 500 MW by 2012, up from the country’s current capacity of 80 MW.

“The Chinese feed-in tariff will be critical to this project,” Ahearn said in a news release. “This type of forward-looking government policy is necessary to create a strong solar market and facilitate the construction of a project of this size, which in turn continues to drive the cost of solar electricity closer to grid parity.”

First Solar expects to reach 1,100 MW of manufacturing capacity this year. In July, the company said it reduced the manufacturing cost for its cadmium telluride thin-film modules to $0.87 per watt, down 6.5 percent from the previous quarter.

Under today's deal, the company plans to review the possibility of building a module factory in Ordos. In addition, First Solar plans to help expand recycling of used photovoltaic modules. Financial terms of the deal were still being determined.

The project still needs approval from the government's National Development and Reform Commission.

The announcement sent First Solar shares up more than 10 percent before they slightly pared gains to trade up nearly 8 percent at $130.62.

The news also boosted shares of peers Canadian Solar, JA Solar Holdings and Solarfun Power Holdings more than 8 percent.

The Tempe, Arizona-based company has long been a favorite of alternative energy investors, and is about 40 percent owned by heirs to John Walton, founder of Wal-Mart.

The announcement could also quell complaints that Beijing's support for its solar manufacturers was giving companies such as Suntech Power Holdings, Trina Solar and Yingli Green Energy an unfair trade advantage over European and U.S. companies vying for market share in the global sector.

"It kind of debunks some of the thinking that non-Chinese companies could never participate in the market, regardless of how the law might read nominally," Ahearn said.

Sources: First Solar, Reuters, Cleantech Group

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