China is launching what it calls the "Golden Sun" demonstration project to install at least 500 megawatts of solar farms across the country in the next two to three years.

In a notice posted on the Ministry of Finance website Tuesday, the government said it would subsidize 50 percent of the costs of building a solar power project and transmitting and distributing the solar power from that project. The incentive would go up to 70 percent for photovoltaic projects in remote areas without connections to the grid. The government didn't provide a budget for carrying out the initiative.

China said it's keen on promoting renewable energy development while stimulating the economy. It is home to many solar energy equipment makers who have seen their sales and profits decline quickly because of a softened market demand worldwide. These companies have been exporting their products largely to the Europe and the United States rather than the domestic market.

The Golden Sun project provides the latest evidence that China is on an ambitious path to become a major consumer of solar electricity. In March this year, the government said it would subsidize rooftop and building-integrated solar power projects with as much as 20 RMB per watt (see Confusion, Political Spat Emerge for China Solar Subsidies). These projects would start at a minimum of 50 kilowatts in generation capacity.

Chinese solar companies are expecting the government to create a feed-in tariff program that would allow solar power plant operators to sell electricity at premium prices.

Just last week, Suntech Power (NYSE: STP) and ReneSola (NYSE: SOL) said they had inked roughly 2.3 gigawatts of deals with provincial and city governments to build solar farms. Suntech makes solar cells and assemble them into panels while ReneSola makes silicon wafers for making solar cells.

China is looking at installing 10 gigawatts of solar energy capacity by 2020, and some analysts expect more than 2 gigawatts of new generation could be added by 2011, reported Reuters.

Other analysts said they strongly doubt that China could go from less than 100 megawatts nationwide to gigawatts in a few years (see True or False: China Will Be a Bigger Solar Market Than the U.S.).

"Historically, China has made a lot of announcements that have not come to pass. They have affordability issues, and they have cheap coal and other problems to solve," Paula Mints, principal analyst of solar services at Navigant Consulting, said at Intersolar North America in San Francisco last week. "They aren't going to go from 25 to 50 megawatts, mostly off the grid, into a multi-gigawatt market in a few years."

For the Golden Sun initiative, each project would need to have a minimum of 300-kilowatt capacity, and it should be completed in one year. To make sure the money is spread out across the country, the government said each province should limit the projects to 20 megawatts total.

The government didn't specify whether the new incentives would apply only to ground-mounted systems. But the 300-kilowatt requirement is larger than the 50-kilowatt minimum mandated for the incentives announced in March. 

If a project generates more than can be used onsite, the project owner could sell the excess electricity to grid operators at prices on par with power from coal-fired power plants.

"This program is more suitable for off-grid solar power development where power generated from diesel generation costs over $0.15/kilowatt hour," wrote Vishal Shah, senior analyst at Barclays Capital, in a research note. He added that incentives aren't likely to drive a lot of demand for solar energy equipment for 2010.

Still, Chinese solar companies have seen their share prices jump after the news made its way around the world Tuesday. Suntech's shares rose 9 percent to reach $17.70 per share in recent trading. Renesola's increased nearly 4 percent to reach $5.57 per share, while LDK Solar's stock shot up 12.50 percent to reach $10.63 per share.