By Kim Richters

German engineering giant Siemens AG said Friday that it will build a hydrogen production plant in Southern Germany that will only use renewable energy sources.

Siemens' smart infrastructure division and local utility SWW Wunsiedel GmbH agreed to construct the plant in the city of Wunsiedel, Siemens said, without disclosing the financial terms of the project.

The site will initially have a capacity to produce more than 900 tons of hydrogen a year, increasing to up to 2,000 tons when fully expanded, Siemens said.

The plant will contribute to the supply of hydrogen in northern Bavaria, Siemens said, helping to mitigate grid bottlenecks as well as serving regional end customers. Construction for the plant will start at the end of the year.

Write to Kim Richters at kim.richters@wsj.com