* Should focus on cutting costs, ambitious targets
* Marine industry, investors need more certainty on policy
LONDON, Feb 19 (Reuters) - Britain must not lose its lead in the development of marine energy like it did with wind power, and should focus on reducing costs and setting ambitious deployment targets beyond 2020, a report by a parliamentary committee said on Sunday.
Seven out of the eight large-scale prototype wave and tidal devices installed worldwide are in the UK but are not expected to make a large contribution to its energy mix before 2020.
"Britannia really could rule the waves when it comes to marine renewable energy," said Tim Yeo, chairman of the energy and climate change committee which produced the report.
"In the eighties the UK squandered the lead it had in wind power development and now Denmark has a large share of the worldwide market in turbine manufacturing.
"It should be a priority for the government to ensure that the UK remains at the cutting edge of developments in this technology and does not allow our lead to slip," he added.
Marine renewables are seen providing 20 percent of current UK electricity demand and the government is targeting 200 to 300 megawatts (MW) of marine capacity by 2020, 1-2 gigawatts (GW) less than its forecasts in 2010.
The government revised its figures based on what it said was realistically obtainable by industry but RenewableUK, the voice of the marine and wind industry, said 300 MW is achievable by 2017 and utility SSE alone expects to commission 200 MW of projects around 2020.
Being overly cautious could negatively impact market confidence about the long-term future of the industry in the UK and allow other countries to steal the lead, the report warned.
It said the government should not rule out setting an ambitious deployment target for marine renewables beyond 2020 if cost reductions until 2020 remain on track.
Several firms are exploring marine energy's potential. Alstom and SSE Renewables formed a joint venture to develop a wave energy installation in Scotland and other demonstration projects are gaining momentum.
But marine technologies are still in the early stages and are a costly way to make electricity compared to other sources.
Baseline costs are likely to be 38 to 48 pence per kilowatt hour (kWh) for the first wave farms and 29-33 pence/kWh for the first tidal farms, compared to 9-10.5 pence/KWh, according to the Carbon Trust.
The committee said the government should adopt a formal cost of energy target of 14 pence/kWh by 2020 to give a clear signal of its expectations to industry.
In terms of finance for projects, the costs and risks to private investors of the technology are currently too big for them to shoulder alone.
As project costs are set to rise to tens of millions of pounds from just millions in the next stages of development, the UK and Scottish governments' combined 38 million pound funding will not be not enough, though it may be possible to get extra cash from a reserve fund of EU carbon permits (NER300) and from the UK's Green Investment Bank, the report said.
To help bring down costs, the UK plans to raise revenue support to wave and tidal deployed before 2017 but more clarity is needed as soon as possible on support levels after 2017.
"We welcome the (...) commitment to provide absolute certainty on this issue by 2013-14. We will monitor whether (the government) keeps to this timetable and urge the department to deliver its decision in 2013 rather than 2014," the report said.
As the scale of deployment increases, inadequate grid connection access, slow planning and consent processes, impacts on wildlife and public opposition all have the potential to derail marine development.
UK marine technology firm Ocean Power Technologies said it welcomed the report, which makes a "timely and strong case" for further action if the UK is to get the industry to commercial scale and retain its leadership.