The West Islay Tidal Energy Park will have a generating capacity of up to 30 MW, enough to power around 18,000 homes.
The development by Ireland’s DP Marine Energy will create up to 32 full time jobs.
Best known for its many malt whisky distilleries, Islay is also known as the place where the world’s first commercial wave-powered electrical generation station was built in 2000 near Portnahaven.
Scottish Energy Minister Paul Wheelhouse, MSP, said: “Marine renewable technologies offer huge potential both to the Scottish economy and to rural communities throughout the world.
“Scotland has one-third of UK tidal stream resources and two-thirds of its wave resources. We are also home to the world’s leading wave and tidal test centre, the world’s largest planned tidal stream array and the world’s largest tidal turbine.
“The West Islay Tidal Energy Park builds upon this strong foundation, helping us to generate more clean, green electricity in Scotland”.