The fund will be used for research and development and equipment purchases, the Ministry of Finance said last week.

The budget for the project, which also includes biomass, ocean wave and geothermal energy, was not disclosed. But the ministry did say funds would be distributed through direct subsidies and loan interest allowances.

China is seeking to develop more alternative fuels such as ethanol-gasoline blends and coal-to-liquid products to meet rising energy consumption propelled by a rapidly expanding economy.

"To quench the energy thirst, China has only two ways out: conservation and alternative fuels," said Shu Zhaoxia, a senior engineer at the economics and development research institute at China's largest refiner SINOPEC..

The latest move in the nation's effort to raise the contribution from renewable energy sources by 15 percentage points by 2020 is a wind-power agreement that was signed this month between the Chinese and Danish governments.

Under the deal, Denmark will provide China with wind generating technology and expertise worth 45 million kroner (US$7.58 million) over the next three years.

The Chinese government earlier this year unveiled electricity pricing rules that encourage the development of other energy sources. As an economic incentive, power producers using renewable energy are allowed to charge grid operators more than their coal-fired counterparts, leading to more economically viable renewable projects.