Council water and waste services manager Rob Green said the intention would be to use the alum on site to reduce the costs of purchasing it.
"Phosphates will also be recovered, which is great news as it means the chances of these leaching into the Manawatu River from waste water are extremely minimal," he said.
Geoff Todd, chief executive of VicLink, which produced Wetox, said the new plant also provided a solution to headaches caused by having to get rid of the stuff.
"Waste water, water treatment and industrial processors that produce sludge face tighter constraints and rising costs of disposal," he said. "The Wetox system provides a cost-effective solution."
The plant received $1.1 million in funding from the Government's Minimisation Fund.
Palmerston North mayor Jono Naylor said the new scheme highlighted the need for more of this kind of problem solving.
"This kind of thinking is exactly what needs to be going on around the country," he said.
"Addressing the big issue with this unique solution ... makes us special."