Jaguar Land Rover’s owner, Tata Motors, has reportedly asked the UK government for more than £500m in state subsidies to build a battery factory in Somerset, in a move seen as crucial to the future of the British car industry.

Tata, the Indian conglomerate that owns Jaguar Land Rover (JLR), has asked for the money in the form of grants and support packages such as assistance for energy costs and research funding, the Guardian understands.

The carmaker is choosing between a potential site in Somerset and another in Spain, according to the Financial Times, which first reported the £500m figure. Spain has been offering large grants to companies considering battery production, in the hopes that it can attract the new industry with the potential for cheap solar power.

The decision on where JLR, Britain’s biggest carmaker, sources its batteries is seen as a key test of the strength of the government’s desire to sustain a large car industry.

One person with knowledge of JLR’s strategy said it was likely that a final decision would come within the next two months. “We may be already past added-on time in extra time,” the person said. “If JLR, as the UK’s biggest motor manufacturer, can’t make a business case to build electric batteries in this country, who else is going to build batteries in this country?”

The UK government had offered JLR a funding package that was larger than those from rivals in the EU, the person said. However, higher energy costs for industry than other European nations were a key issue, given the needs of a gigafactory.

Other industry sources have suggested the Tata gigafactory talks are linked to those on support for the conglomerate’s steelworks at Port Talbot. The government has offered £300m to help the works upgrade to lower-emission technology.

The Tata Motors chief financial officer, PB Balaji, said last month that the company was planning a plant in India and another in Europe to produce battery cells. JLR was unable to say whether the reference to Europe included the UK.

A senior car industry source said there was “no financial logic” to JLR supplying its UK factories with batteries from Spain as the cost of transporting the batteries by sea and road would be likely to negate any savings from cheaper labour. “There is zero arbitrage,” the source said. “I think they are just positioning to get money.”

A £500m subsidy would represent a very large investment for the UK government in a single project. Its “automotive transformation fund”, the key vehicle for supporting the UK industry’s shift from internal combustion engines to electric vehicles, is only worth £1bn in total.

However, the government is under pressure to show it is committed to a future for the UK car industry, particularly after the collapse of Britishvolt, a startup that was lauded by the former prime minister Boris Johnson before its collapse this year.

Some experts suggest the industry, a source of well-paid and secure jobs, especially in the Midlands, will wither without gigafactories to supply car factories. Others dispute that, pointing out that manufacturers including Stellantis and Toyota plan to supply batteries for their British factories from outside the UK.

Jaguar Land Rover and Tata were contacted for comment.