It seems the stuff of fantasy. Giant ships sail the seas burning fuel that has been extracted from water using energy provided by the winds, waves and tides. A dramatic but implausible notion, surely. Yet this grand green vision could soon be realised thanks to a remarkable technological transformation that is now under way in Orkney.

Perched 10 miles beyond the northern edge of the British mainland, this archipelago of around 20 populated islands – as well as a smattering of uninhabited reefs and islets – has become the centre of a revolution in the way electricity is generated. Orkney was once utterly dependent on power that was produced by burning coal and gas on the Scottish mainland and then transmitted through an undersea cable. Today the islands are so festooned with wind turbines, they cannot find enough uses for the emission-free power they create on their own.

Community-owned wind turbines generate power for local villages; islanders drive nonpolluting cars that run on electricity; devices that can turn the energy of the waves and the tides into electricity are being tested in the islands’ waters and seabed; and – in the near future – car and passenger ferries here will be fuelled not by diesel but by hydrogen, created from water that has been electrolysed using power from Orkney’s wind, wave and tide generators.

“A low-carbon renewable future, which is much talked about elsewhere, is coming early to Orkney,” says ethnographer Laura Watts in her book Energy at the End of the World: An Orkney Islands Saga. The book, published by MIT Press next month, tells the intriguing tale of how Orcadians have begun to create their own low-carbon future against incredible odds and with only a little help from the mainland.

And that may come as a surprise, says Watts, a senior lecturer at the School of GeoSciences, Edinburgh University. “When people think of future technologies or innovation, they assume it has all got to be happening in cities,” Watts told me when we met earlier this month. “But this revolution – in renewable energy – is being done in a place that lies at the very edge of the nation.”

The idea that such an intellectual revolution could occur in a place closer to the Arctic Circle than it is to London may seem unexpected. But Orkney turns out to have a long history of generating ideas that are exported to the south. At the Ness of Brodgar, excavations at a recently discovered neolithic ceremonial complex show there was flourishing culture on the islands long before the construction of Stonehenge, Avebury and other giant edifices in the south. Neolithic grooved pottery and the first henges were conceived in Orkney before they were exported to the rest of ancient Britain. “We need to turn the map of Britain upside down when we consider the neolithic and shrug off our south-centric attitudes,” says Nick Card, Brodgar’s director of excavations.

“Words such as wind and windy are redefined in Orkney,” says Watts. “They are no longer mild inconveniences but powerful enough to close schools.” They are also powerful enough to run more than 700 micro wind turbines – and that has been the crucial factor that has changed life on the islands, though the route to this transformation has been a rather erratic one.

In the early 1980s, Britain began experiments aimed at developing turbines that could turn wind power into electricity – at a test site on Burgar Hill, on Orkney. “However, the UK pulled the plug on it and instead the Danes and Germans went ahead and developed wind turbine technology – because their governments invested in it,” says Watts. “They put in millions. The British government did not. We could have had a UK wind energy industry but we just did not invest.”

The impact of wind turbine technology in Orkney was nevertheless profound and islanders took to its generation in a big way. “Orkney used to import its power but now generates, on average over the year, electricity that fulfils 120% of its own needs,” says Watts. “So you have all this energy. The question is: what are you going to do with it?”

Watts outlines the three options open to islanders: build a new cable so it can export its excess renewable energy to the mainland; use more electricity on the islands; or turn its excess renewable power into another fuel – such as hydrogen – and then store it. Finding the right course is likely to have a profound impact on Britain as the nation looks to the example set by Orkney and embraces its low-carbon future.

“Consider the issue of laying another cable to link the mainland and Orkney,” says Watts. “That is something that Orcadians cannot do for themselves. It is too costly. You need government help for that sort of thing and the idea of a new cable has been shunted round and round the houses for years without resolution. The islanders are having to be much more self-reliant as a result.”

On the other hand, new uses for electricity are being found – by islanders who are driving increasing numbers of electric cars. “You can either pay £2 a night to charge your car or pay a fortune for a vehicle powered by diesel or petrol. It is a no-brainer. For good measure, electric cars’ main disadvantage – they need recharging every 100 miles or so – is not a problem on islands that are mostly only a few miles across.”

That leaves the issue of energy storage, a particular problem when dealing with renewable power. Energy cannot be simply collected from a wind turbine and exploited later when conditions are calm and windless – because there is as yet no reliable way to store it. It is a basic drawback that Orcadians are now tackling. On the Orkney island of Eday, a device known as an electrolyser – powered by renewable energy sources – splits water into its two elemental components: hydrogen and oxygen. The former can be stored and later burnt to generate electricity when needed. Already a fuel cell – powered by locally derived hydrogen – is being used to generate electricity for berthed vessels on one Orkney pier.

That is just the beginning, however. Plans are now under way to expand the use of hydrogen as a fuel for a new generation of ferries that will replace the nine ageing vessels that currently connect the various islands of the archipelago. By running these on hydrogen, massive reductions in use of diesel fuel could be made in Orkney. The first of these vessels – the world’s first hydrogen-fuelled seagoing car and passenger ferry – is scheduled for launch in 2021. “We realised that if we could use hydrogen to power our ferries, we would put another dent in our carbon addiction,” Neil Kermode, head of the European Marine Energy Centre (Emec) told the Financial Times last month.

The centre – based in Stromness, Orkney’s second largest town – has become one of the key players in the transformation of Orkney as a power provider. Opened in 2003, it acts as a plug-and-play site for testing prototype wave and tide energy generators. A year after its opening, one such device – a giant 120-metre machine called a Pelamis converter – became the world’s first wave power generator to put electricity into the National Grid. Since then dozens of other different prototypes have been put through their paces there.

Generators that exploit the power of the sea have advantages over wind turbines because the latter exploits a source of energy that is far less predictable than the tides. On the other hand, machines immersed in deep, fast flowing waters are not easily repaired when a fault occurs. “You cannot buy a book that tells you how to anchor a seabed generator to the sea floor in a 7-knot tide,” says Watts. “You have to go and do it yourself and people in Orkney have been doing it for 15 years now. Marine energy is an everyday topic of conversation in Orkney.

“However, they have been doing it on a shoestring and a message needs to be made very clearly. If the UK wants to create a wave and tide industry to make up for the wind industry that it lost 30 years ago then it needs to put its money where its mouth is and invest more heavily.”

On the other hand, when central agencies do intervene, the outcome is not necessarily plain sailing. In 2009, the Crown Estate – which owns the seabed around Britain – decided it would lease out areas around Orkney to companies seeking to develop wave and tide energy. “It was the first such leasing anywhere in the world,” says Watts.

The trouble was that many of the sites it leased were good for placing power generation but also for catching lobster and crab. “No one talked to the fishermen, nor to anyone else on Orkney,” adds Watts. Instead, without consultation, the Crown Estate closed large areas of inshore fishing grounds. “Areas of sea where Orcadians fish, which is essential to their livelihoods, were threatened without warning, discussion or negotiation.”

The Crown Estate has since tried hard to improve the situation and closer discussions are now occurring between its agents and local fishermen. Nevertheless, the episode shows how tricky it can be to merge new technologies with older, but still highly important industries.

However, adds Watts, the story of Orkney’s marine energy revolution is important for another reason: it promises to have an encouraging outcome – and that certainly makes it worth telling. Our vision of the future is currently a very dark one. “We perhaps don’t feel outright despair but our view is still a pretty bleak one, given the threat that is posed by climate change. The great thing about Orkney is that they are now getting on with doing something about it. I find that very cheering.”

• Energy at the End of the World: An Orkney Islands Saga by Laura Watts is published by MIT Press (£27). To order a copy for £23.99 go to guardianbookshop.com or call 0330 333 6846. Free UK p&p over £10, online orders only. Phone orders min p&p of £1.99