The Donside Hydro scheme in Tillydrone has began construction and is due to completion by the start of October 2016.
The project aims to generate renewable electricity on the site of the former Donside paper mill and power around 130 homes each year.
It is being developed by Aberdeen Community Energy (ACE), a community benefit society set up by members of the Donside Community Association (DCA).
Sinclair Laing, Founding Director at ACE, said: "Getting to the construction stage has been a tremendous challenge, with hurdles at almost every juncture, but I'm delighted to say that with sheer determination and a huge amount of support from everyone involved we have reached this vital milestone.
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"ACE and the DCA have been working on this project for over three years and it's a fantastic feeling to finally see our contractors and diggers on site, preparing the site for construction."
Energy Minister Paul Wheelhouse said: "This is a great example of a local community capitalising on its own urban natural resources. This hydro project will benefit the whole community and will provide a long-term income that will support local projects for more than 20 years."
The project will be funded through a Community Share Offer (CSO), with a targeted annual return of around 7%.
Following construction of the schemes main body, landscaping of the riverside area will follow shortly thereafter.
The CSO is expected to launch in early July 2016.
(LM/MH)
