Rishi Sunak has hailed a £4bn pledge by the owner of Jaguar Land Rover to build an electric car battery gigafactory in Britain as a “vote of confidence in the UK economy”.

The factory is expected to be sited in Somerset and to bring 4,000 new jobs to the area after the investment by Tata Group. It will become one of Europe’s largest battery cell manufacturing sites when it starts production in 2026, according to Tata Sons, the holding company behind the Indian conglomerate.

Tata had been locked in negotiations for nine months to secure state aid for the project, which would aim to produce 40 gigawatt hours (GWh) of batteries a year, enough to power hundreds of thousands of electric vehicles (EV). It had initially considered a rival site in Spain for the plant.

The prime minister, Rishi Sunak, met leaders from Tata at JLR’s headquarters in Gaydon, Warwickshire. He said the investment meant that the UK was “well on the path to building the EV capacity that we need for the future”.

It came ahead of three byelections on Thursday, which polls suggest the government could lose. One of the byelections will be in Somerset and Frome, a constituency near to the likely location for the gigafactory.

Sunak said commercial sensitivities meant he could not yet declare what subsidies the factory was expected to receive, but an official who worked on the deal said they were worth hundreds of millions of pounds, and could reach as much as £500m.

Sunak insisted it was not just taxpayers’ money that had persuaded Tata to build its battery plant in the UK.

The Unite union welcomed the investment, but called for a long-term industrial strategy. Its general secretary, Sharon Graham, said: “The US and Europe have clear, proactive plans for jobs and investment. We cannot continually lag behind.

“As part of a comprehensive industrial strategy, the government must ensure the gigafactory is constructed with UK steel. There must also be reform of the sky-high energy business costs that are proving to be a serious risk to the future of manufacturing in the UK.”

Natarajan Chandrasekaran, the chair of Tata Sons, said the investment would “bring state-of-the-art technology to the country” and that the group’s investment “further strengthens its commitment to the UK”.

The only other planned battery plant at gigafactory scale in the UK is the Envision plant in Sunderland, which is owned by a Chinese corporation and supplies Nissan. Envision plans to expand its site to produce 38GWh.

The failure of Britishvolt, a gigafactory startup that collapsed after securing pledges of £100m in government support, has cast a shadow over the future of carmaking in Britain.

The two gigafactories will help the UK attract investment and new jobs in other parts of the battery supply chain, to replace tens of thousands of roles that are likely to disappear as production of petrol and diesel vehicles is wound down before the ban on new fossil fuel cars in 2035. Asked about the prospect of future investments in the UK car industry, Sunak said the government was “always in dialogue with lots of companies around the world on ways we can invest in the UK”.

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Mike Hawes, the chief executive of the Society of Motor Manufacturers and Traders, described the move as “a shot in the arm for the UK automotive industry, our economy and British manufacturing jobs”.

He added: “It comes at a critical moment; with the global industry transitioning at pace to electrification, producing batteries in the UK is essential if we are to anchor wider vehicle production here for the long term.”

Tata is also in talks with the government over another of its key UK assets, a steelworks in Port Talbot, south Wales. Port Talbot and another site in Scunthorpe will require billions of pounds in separate investment to upgrade to green electric technology that does not emit carbon dioxide. Sunak said that “the government has a range of levers to support steel companies transition to net zero” and that “conversations are ongoing” with steel companies.

“I’ve demonstrated my commitment to the steel industry in this country, which I passionately believe in and I think is important,” Sunak said.

Sunak added that the UK was still in talks with the EU over changes to post-Brexit rules that could impose tariffs on electric cars exported to the EU after 1 January if their batteries are made in Asia. Carmakers including JLR have called for the deadline to be pushed back to allow them time to build battery supplies from the UK or Europe.