The scheme is thought to be the first of its kind in the UK
Sewage created by residents across Manchester is to be recycled to power about 500 homes in the city.
The £4.3m scheme, thought to be the first of its kind in the UK, is being tried out at waste water treatment plants at Davyhulme in Manchester.
Human waste is converted to biomethane which is pumped into people's homes.
Developed by National Grid and United Utilities, the method has been hailed as the "fuel for the future" because of its low carbon emissions.
Caroline Ashton, United Utilities biofuels manager, said: "Sewage treatment is a 24-hour process so there is an endless supply of biogas.
"It is a very valuable resource and it's completely renewable.
"By harnessing this free energy we can reduce our fuel bills and reduce our carbon footprint."
Biomethane will also be used to power the utilities firm's sludge tankers.
The project has received funding from the government department Defra, through the Waste and Resources Action Programme (Wrap).
Janine Freeman, head of National Grid's Sustainable Gas Group, said the pilot scheme would power about 500 homes.
She added that a plant the size of Davyhulme would be able to provide energy for more than 5,000 properties in the future.
Several plants in Europe are already using the method to power homes and businesses.
Dr Richard Swannell, director of retail and organics at Wrap, said: "The project aims to be the first in the UK to process and inject biomethane into the gas grid on a commercial scale.
"By using biomethane as a fuel for sludge tankers, it could also help our country make more widespread use of renewable energy."
It is hoped the project will be up and running by 2011.