The TidEl generator will be tested in Scotland

Newcastle-based SMDHydrovision will use the �2.68m to test its "TidEl" energy prototype at Orkney's European Marine Energy Centre.

Energy Minister Malcolm Wicks said the award showed the government's "determination" to support renewable energy projects.

The company says a working prototype should be ready by 2006.

Mr Wicks said: "The TidEl project is a good example of technologies being produced by the UK's marine energy industry.

"The project demonstrates the opportunities for UK companies, as well as the attractiveness of the UK as a place to locate and develop these technologies.

Marine energy

"Our support for initiatives by companies such as this in Newcastle is designed to ensure that we maintain Britain's leading position, while promoting the generation of clean and sustainable electricity.

"New tidal energy testing facilities in Orkney are set to boost the development of this and other marine energy technologies, reinforcing the role of Orkney and Scotland at the forefront of renewables development."

John Reece, Managing Director of SMDHydrovision said: "We are delighted to be awarded this grant which as well as allowing the project to proceed also represents a vote of confidence in our technology.

"We are greatly looking forward to working with our partners and suppliers to reach a successful conclusion at the European Marine Energy Centre next year and to carry on with developments thereafter."

The TidEl system sits beneath the waves and generates power from the flow of tides that are concentrated around land masses.