This paper presents a numerical modeling study for simulating in-stream tidal energy extraction and assessing its effects on the hydrodynamics and transport processes in a tidal channel and bay system connecting to coastal ocean. A marine and hydrokinetic (MHK) module was implemented in a three-dimensional (3-D) coastal ocean model using the momentum sink approach. The MHK model was validated with the analytical solutions for tidal channels under one-dimensional (1-D) conditions. Model simulations were further carried out to compare the momentum sink approach with the quadratic bottom friction approach. The effects of 3-D simulations on the vertical velocity profile, maximum extractable energy, and volume flux reduction across the channel were investigated through a series of numerical experiments. 3-D model results indicate that the volume flux reduction at the maximum extractable power predicted by the 1-D analytical model or two-dimensional (2-D) depth-averaged numerical model may be overestimated. Maximum extractable energy strongly depends on the turbine hub height in the water column, which reaches a maximum when turbine hub height is located at mid-water depth. Far-field effects of tidal turbines on the flushing time of the tidal bay were also investigated. Model results demonstrate that tidal energy extraction has a greater effect on the flushing time than volume flux reduction, which could negatively affect the biogeochemical processes in estuarine and coastal waters that support primary productivity and higher forms of marine life.