By Maggie Shiels
Technology reporter, BBC News, Silicon Valley
Tesla's two-seat electric Roadster went on sale this summer
San Jose is aiming to be the capital of clean technology following a $250m (£139m) deal with electric car maker Tesla to base its new factory there.
The city beat other contenders to secure a project that will bring more than 1,000 jobs to the area.
"This is a big step toward being the centre of world cleantech innovation," said San Jose Mayor Chuck Reed.
Tesla boss Ze'ev Drori said that "this is proof the time has come for the electric car."
The company plans to produce an all-electric luxury sedan, called the Model S, at the plant with a retail price of around $60,000 (£33,000.)
It already manufactures a two seater zero emission Roadster which sells for $109,000 (£61,000) and is built by Lotus in England.
Mr Drori told BBC News Tesla hopes to deliver its first cars by 2010. They will have a range of about 240 miles (390 km) per battery charge. The production run is set for around 15,000 vehicles initially, with half of the line being sold in Europe.
"This car signals an end to dependency on foreign oil. The summer of high gas prices has accelerated demand for such a vehicle."
San Jose's mayor Mr Reed agrees. "This is the next step in transportation.
Oil prices hit a near high in the summer of $150 a barrel
"Shifting from petroleum to electric vehicles will make a huge change to how the world moves and we are excited to be part of that happening."
Analysts however believe Tesla will face a tough challenge with its five-seater sedan, especially from GM's Volt, which was unveiled this week.
"Tesla's electric sedan will be a tough sell alongside the Volt which will cost around $35,000 (£19,500)," said Michael Kanellos of Greentech Media.
"Price will play a big role in this battle."
'Vote of confidence'
San Jose along with the State of California devised an incentive programme estimated at around $150m (£84m) to persuade Tesla to site its new plant in the city.
While California came up with a hefty $100m (£56m) financing package, San Jose put land into the deal.
The first 10 years of the 40 year lease on the 90-acre plot will be rent-free. After that a yearly lease payment of $1.5m (£835,000) will be paid over the next ten years with a 2% increase year on year for the last 20.
Mayor Reed told BBC News he believed this part of the package was worth around $50m (£28m) but stressed the land was not being used anyway.
"A lot of investment decisions are based on faith in the future and confidence in the future and this 250 million dollar project is a real stamp for us and a vote of confidence in San Jose.
General Motors said the Volt symbolises its commitment to the future
"Hopefully it will help other companies to make investment decisions and locate their businesses here."
He said that San Jose, which is said to have America's highest per-capita concentration of hybrid cars, is aggressively encouraging cleantech companies to the area.
The Mayor claimed the city is the leader in attracting these types of companies with more than 40 already calling San Jose home and providing more than 2,500 jobs.
"San Jose is the capital of Silicon Valley, which offers the best opportunities because it is right here where the innovation is happening.
"It is important for Tesla to be close to that innovation and this is a big boost for us."
Tesla's Mr Drori said his business represents the beginning of a burgeoning growth sector.
"Cleantech is a completely new paradigm and what we are doing represents a major seismic shift. That's the reason we chose San Jose and we will lead this charge."
Greentech Media's Mr Kanellos said cleantech is "going through a really exciting time."
"It's cool the fact the government of California sees a bit future in this and certainly companies are saying they are getting swamped with applications for people to work in the sector," he said.
"There is a whole generation of kids who want to work in this area not just for the money but because it's cool."