Abu Dhabi unveiled plans yesterday to invest $2 billion (£1.02 billion) in a project designed to make it a world leader in solar power.

Despite the deserts of Arabia being rich in oil, the Gulf state is betting that this alternative source of energy could help to secure the region's long-term economic future.

The investment by Masdar, a state-sponsored renewable energy fund, represents one of the largest stakes in the solar industry.

“The idea is to plough oil profits back into the Abu Dhabi economy to diversify away from hydrocarbons,” said Steve Geiger, director of Masdar.

It will focus on the production of thin film photovoltaic technology, which can be applied to the surface of buildings to generate power.

Thin film aims to reduce drastically the cost of solar power by using less costly polysilicon rather than conventional crystalline panels. The material is in short supply globally because of soaring demand from the solar power industry.

The first phase of the project will involve spending $600 million on the development of two manufacturing facilities.

The first, in Erfurt, Germany, will be operational by autumn next year and will act as as a model for a second, much bigger, plant to be built in Abu Dhabi by the spring of 2010.

Germany, where a system of subsidies has encouraged rapid growth of the solar industry, is the world leader in the technology and Abu Dhabi hopes to tap into this expertise.

Raymond Greaves, an analyst for Collins Stewart, the broker, said that the technology makes a “huge amount of sense” in the Middle East: “If ever there was a place to do solar power, it is there.”

Mr Geiger claimed that the $2 billion investment would allow Abu Dhabi to achieve the manufacturing scale necessary to compete with rivals such as First Solar of America and other manufacturers in China.

Thin film, which is made by depositing ultra-thin layers of semiconductor material on to glass or stainless steel, is cheaper to make than crystalline panels because of reduced material, energy and transportation costs.

The modules are made in a vacuum chamber using a laser to separate and weld the electrical connections between individual cells.

According to Deutsche Bank, the global photovoltaic market is worth $15 billion and is growing at a pace of 40 per cent a year. Thin film photovoltaic is growing even faster, with an annual growth rate of 100 per cent.

Industry experts believe that thin film will constitute 20 per cent of the total solar market by 2010.

Sultan Al Jaber, the chief executive of Masdar, said: “Abu Dhabi is a global energy leader, so it makes sense to engage these new energy technologies and become a leader in alternatives.”

The combined annual production capacity of the two planned Masdar sites will be 210 megawatts, but the plan is to raise this to 1,000 megawatts by 2014.

Winfried Hoffmann, president of the European Photovoltaic Industry Association, the largest organisation representing the photovoltaic industry, described the Masdar investment as “very exciting”.

He said that it could change the dynamics of the entire industry by adding not only capacity but also big new markets in the future in and around the Middle East.

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