The scheme is intended to boost the supply of environmentally friendly electricity and generate money that could boost local services or help keep council tax down.
The Government will encourage town halls to install solar panels and wind turbines as well as other sources of renewable energy.
However, first it must reverse a decades-old ban on councils selling power back to the grid, which Chris Huhne, the energy and climate change secretary, will soon announce, The Independent reported.
It said the coalition would claim it was a further step towards hitting targets for reducing Britain's carbon dioxide emissions by a third by 2020.
According to the newspaper's estimates, the average town hall could generate £10,000 of electricity per year from solar panels, and potentially more than ten times that with a large wind turbine.
Other possible power sources include waves, for councils on the coast, and tides, for those on major estuaries such as the Severn.
Gary Porter, of the Local Government Association, said: "This has the potential to revolutionise the way we produce electricity by turning town halls into green power stations. This could save huge amounts of money to help maintain services in these difficult financial times and keep council tax down."