First Solar is set to conquer the growing Chinese market.

The solar panel maker said Tuesday it has signed a memorandum of understanding with the Chinese government to build a 2-gigawatt solar power plant in Ordos City, Inner Mongolia. The project is the first in China for First Solar.

The announcement is significant not only for the size of the power plant: Tempe, Ariz.-based First Solar (NSDQ: FSLR) appears to be the first non-Chinese solar energy equipment maker to have snagged a large-scale project to be built in China.

China has traditionally been an exporter of solar panels and other components for building a power plant. But the government has announced incentives to boost solar energy production domestically (see Chinese Gov't Will Pay to Install 500MW Solar).

The announcements have been seen mainly as a way to help Chinese solar manufacturers that have struggled in a market marred by credit crunch and low demand.

Indeed, since the government talked about the first subsidy for building solar power plants earlier this year, a host of Chinese manufacturers have announced their signing of preliminary agreements with local governments, investors and power companies to build power plants.

Those projects tend to be in the hundreds of megawatts each. Chinese solar companies that have announced projects include Suntech Power, Yingli Green Energy, LDK Solar and Renesola.

China currently has less than 100 megawatts of solar energy installations now, many of which are off the grid. The government is looking at setting a goal of installing 10 gigawatts by 2020.

Some analysts are skeptical about whether China's solar market will grow so quickly (see True of False: China Will be a Bigger Solar Market Than the U.S.).

Aside from its plan to subsidize power plant construction, China also intends to subsidize solar electricity generation. The government is expected to announce a feed-in tariff soon that would set a long-term purchase price for solar power that is higher than the price for electricity from coal-fired power plants. Similar policies have made Germany and Spain the top solar energy markets in the world.

First Solar's project would be eligible for the feed-in tariff, the company said.

The company is one of the largest solar panel makers in the world, and it uses a compound of cadmium-telluride for its products, unlike most of its competitors in China and elsewhere. First Solar also claims to be able to make panels cheaper.

The company historically has been focused on making and selling panels, and its largest market is Europe. It entered the power plant construction business in earnest over the past year, mostly to create a market for its solar panels in the United States (see Armed for Battle: First Solar v. SunPower v. Suntech).

The MOU, which was signed in the presence of a Chinese delegation from the National People's Congress of China, only outlines roughly what the project would entail. First Solar still needs to negotiate a formal agreement to spell out, among other things, the costs of the project.

Building a 2-gigawatt power plant could cost roughly $5 billion to $6 billion to build in the American southwest, said Alan Bernheimer, a First Solar spokesman.

But the actual cost in China is likely to be different. Labor costs could be less. But other expenses would be higher, particularly in the early stages of the project, because First Solar will need to set up a supply chain in this new market, Bernheimer added. 

The MOU requires the solar panel maker to consider building factories in Inner Mongolia for making solar panels or other equipment used for building power plants.

First Solar plans to build the project in three phases. The first phase would be a 30-megawatt installation that would serve as a demonstration project, the company said. Construction for this phase would begin by June 1 next year.

Phase 2 would add 100 megawatts, phase 3 would add 870 megawatts and phase 4 would add 1 gigawatt. First Solar plans to complete phases 2 and 3 in 2014. The last phase would be completed by 2019, the company said.

Tags: china, feed-in tariff, first solar, solar, suntech power