A high spatial resolution three-dimensional (3D) hydrodynamic ocean model of the Orkney Islands is used to investigate the tidal stream resource and physical environmental impact in the Pentland Firth, a high-resource area where the first arrays of tidal stream turbines are likely to be deployed in Scotland. Tidal stream turbines are represented in the model using a momentum sink in order to (1) find an upper bound estimate of the available resource, (2) explore alternative, more realistic scenarios, and (3) estimate their effect on the physical environment. The maximum extractable power scenario (M2 + S2 cycle mean of 5.3 GW) requires a high density of turbines deployed through the channels cross section and has a major impact on the physical environment. More realistic scenarios, with the placement of the turbines constrained by practical factors, resulted in considerably less extractable power but the physical environmental impact was disproportionately reduced. It was also found that a variable thrust coefficient can be used to optimise the performance of tidal arrays. Our work highlights the usefulness of 3D hydrodynamic models for tidal stream resource assessment and impact studies, and illustrates how the design of tidal stream arrays can affect the levels of sustainably harnessed tidal power.