"We are opening negotiations on the Swansea Bay Tidal Lagoon," British Chancellor George Osborne said in his annual budget statement to parliament.

The government has been exploring the potential of the proposed scheme in Swansea Bay, developed by Tidal Lagoon Power, which will be able to generate around 500 gigawatt-hours of electricity a year - enough to power around 155,000 homes.

The negotiations will establish whether a support mechanism, called a Contract for Difference, for the scheme is affordable and value for money for consumers, the government's Department for Energy and Climate Change said in a statement.

The project, which is still subject to a planning decision, would involve constructing a 9.5-km (6-mile) breakwater wall near the port of Swansea which would enclose an 11.5 square km tidal area.

When the tide drops, there is a difference between water levels inside and outside the lagoon. The water would pass through turbines to produce electricity. Similarly, when the tide rises, power would be generated as water fills the lagoon.

Two investors - InfraRed Capital Partners and Prudential - have agreed to commit up to 100 million pounds each to the project.

(Reporting by Nina Chestney; Editing by Dale Hudson)