In partnership with chemical manufacturer Fertiberia, the project will be based in Puerollano, central Spain, and consist of a 100 megawatt solar photovoltaic plant and hydrogen production system which will use electrolysis to convert renewable energy into hydrogen fuel.
The hydrogen produced will be used at the Fertiberia ammonia factory in Puertollano to help make fertilisers, the company said.
The investment will total 150 million euros (136 million pounds).
The plant should be operational by 2021 and cut 39,000 tonnes of carbon dioxide emissions a year.
Hydrogen has been touted as a clean alternative to fossil fuels. When it is extracted from water with electrolysis powered by renewable energy, it is called "green" hydrogen and it is still costly at around $6/kg today.
Earlier this month, the EU launched a strategy to promote green hydrogen as it tries to reach net zero emissions by 2050.
(Reporting by Nina Chestney, editing by Louise Heavens)