The reconstructed plant will be built at the Harlaw Reservoir dam, as part of plans to feed profits back into the local Balerno community.
Investors behind the green energy initiative to harness the Water of Leith started selling shares in the scheme on Monday to help fund the £313,000 project.
Hailed as an excellent alternative to controversial wind turbines, local Pentland Hills ward councillor Dominic Heslop said: “It fits in nicely and has no huge visual distraction unlike wind turbines, which can often ruin a view.”
The defunct structure, which has sat unused since the Second World War, was once part of a network that powered mills across the region.
The 65-kilowatt device would be connected to the National Grid, which would in turn pay the community for the power generated.
On track to be completed by next spring, it will generate enough electricity to power the equivalent of 56 homes for a year. Shareholders will receive feed-in tariffs from the Government for generating green energy. Any surplus cash will be fed back into the community via the Balerno Village Trust.
Company secretary Martin Petty said people did not have to live in Balerno to become a shareholder. He said plans were on track to start rebuilding the generator this autumn, adding: “In the grand scheme of things, this isn’t going to replace Cockenzie or anything like that. The old scheme died basically because the grid reached it. It was a very low-powered plant. All it ever did was power the local water bailiff’s house.
“Why we chose hydro is first of all the infrastructure’s all there to do it. We can also do it without a public inquiry. The intrusive nature of windmills means we’d have no chance of getting that up in this area, to be honest.
“It’s sustainable. The water’s going down the hill anyway. We can provide a relatively constant supply of power.”
The rebuilt turbine house will be located next to the discharge channel at the foot of the Harlaw Reservoir dam, replacing the disused building.
About £55,000 could be generated by the plant each year, although returns will depend on the size of bank loan repayments.
Cllr Heslop believes the reservoir is the ideal site for a hydro scheme.
He said: “I’ve always been a huge fan of hydro. I think it’s the energy way forward and you can see throughout the country that these schemes work very well indeed.
“Hydro, as opposed to wind turbines, can often visually enhance an area. The problem with wind energy is that it doesn’t generate enough energy to make it viable.”
20 applications for wind farms
Wind farms dotted around the Pentland Hills have been labelled inevitable, with more than 20 applications for the area.
First Minister Alex Salmond wants half of Scotland’s electricity to be supplied by renewable energy by 2015, but is facing opposition from community groups.
Lothian MSP Neil Findlay is among those to campaign strongly against wind farm developments.