China's top legislature, the Standing Committee of the National People's Congress, approved the law Monday as the nation battles acute energy shortages and heavy pollution brought on by its rapid economic development.

The law, which takes effect next year, requires power grid operators to purchase resources from registered renewable energy producers, the China Daily said.

It also encourages oil distribution companies to sell biological liquid fuel, and offers financial incentives, such as a national fund to foster renewable energy development, and tax preferences for renewable energy projects.

The aim is to build up non-fossil energy sources such as wind, solar and thermal power.

"The development and use of renewable energy has special importance because China is a developing country with severe energy shortages," said Standing Committee member Li Congjun.

Greenpeace applauded the legislation.

"China could and should be a world leader in renewable energy development," said Yu Jie, Greenpeace energy policy advisor in Beijing.

"This law has been long anticipated by the global renewable energy industry.

"If the definition of renewables and the details are right then the international community will get behind China and support its ambition to become an international clean energy powerhouse."

At the Bonn conference on renewable energy last June, China pledged to increase its installed renewable energy generating capacity to about 60 gigawatts by 2010, about 10 percent of total power capacity.

The amount of renewable energy it currently generates is less than one percent of the total.

Despite the efforts, China faces a challenging situation.

The world's most populous country relies on coal for about 75 percent of its energy and coal-fired plants account for most of its pollution.

China is now the world's second biggest producer of carbon dioxide accounting for a seventh of the global total. Only the United States is worse, according to the International Energy Agency.

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