Mewtwo, after exploding the laboratory where he was created, was tricked by Giovanni into becoming his pokemon servant.
Giovanni gave him that weird armor to supress his power so he could control it better.
The armor gets exploded after Mewtwo realizes he's been duped and he bolts away to plot world domination/destruction.
We all remember the First Pokemon Movie right? There was actually a line you had to wait in to see it. Good stuff.
The blue fire is a psychic attack a brewen'...