The world's first commercial wave power station is to be built in Portugal by a Scottish company which employs 35 people but believes it is tapping into a market worth billions.

Ocean Power Delivery (OPD), based in Edinburgh, is to install three wave power machines in the Atlantic, three miles off the coast of northern Portugal, near Povoa de Varzim.

The contract, initially worth euros 8m (pounds 5.4m), will provide 2.5 megawatts of electricity to the Portuguese grid, enough to provide power for 1,500 homes, but the company has a letter of intent for another 30 machines before the end of 2006, subject to satisfactory performance of the first three.

Richard Yemm, managing director of OPD, said: "This is a significant milestone for our company and for wave energy. We see this order as just the first step in developing the Portuguese market, which has the potential to be worth up to euros 1bn over the next 10 years."

The company is hoping to build another 30 machine power stations off the north coast of Scotland but the Department of Trade and Industry has been slow to offer support to the project.

Portugal, which has to import most of its energy from abroad, sees a huge potential for wave renewables because of its long Atlantic coastline.

At present, power from wave machines will cost about 15p a kilowatt hour, less than solar power and less than wind at the same stage of development.

Max Carcas, a spokesman for OPD, said: "Obviously, at this stage it is expensive, but cheaper than power from the first turbines.

"Once production is ramped up, then costs come down. Wind is 80% cheaper than it once was, and we believe we can do the same."

Unlike other wave generators that are in the development stage, the OPD's Pelamis P-750 machines face the waves and the power comes from the articulated body driving hydraulic rams, which push fluid through a motor.

If the weather gets too rough the machines go through the waves rather than attempting to ride over them, avoiding damage.

The initial phase of the project will save 6,000 tonnes of carbon dioxide a year.

Portugal, which imports gas from Algeria, needs renewable projects to become more selfsufficient in energy and keep to its EU imposed target under the Kyoto protocol to control its emissions.

guardian.co.uk/renewable

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