The scheme, developed by consortium Meygen, will be installed in stages, starting with six turbines totalling 9MW capacity. This will ramp up to 86MW, enough to power the equivalent of 42,000 homes.
Energy minister Fergus Ewing announced the consent ahead of the Scottish Renewables Marine Conference in Inverness.
“This exciting development in the waters around Orkney is just the first phase for a site that could eventually yield up 398 megawatts,” he said.
Meygen is a joint venture between Morgan Stanley, GDF Suez and technology supplier Atlantis Resources.
Atlantis chief executive Tim Cornelius said: “In firing the starting pistol for Europe’s largest project today, the Scottish Government has yet again demonstrated its commitment to ensuring that tidal energy plays a major role in tomorrow’s energy supply.”
Michael Rieley, policy manager for Scottish Renewables, said: “Scotland has just been given another reason to be proud of its burgeoning marine energy industry now that Europe’s largest tidal energy project will be calling Scotland home. This is by far one of the most important milestones for the tidal energy sector to meet.
The minister also announced grants totalling £13 million for Aquamarine Power and Pelamis Wave Power under the Marine Renewables Commercialisation Fund.
Ewing said: “The tide is also turning for the wave sector. Both wave and tidal technologies need support if we are to maintain our leading position in marine energy.”
Marine power technology is at a relatively immature stage. Under the government’s Electricity Market Reform framework, it is set to command a guaranteed power price three times that of onshore wind.
The Carbon Trust has estimated wave and tidal resources could provide 20 per cent of the UK’s electricity if fully developed.