The feasibility of generating a lipid-containing algal-bacterial polyculture biomass in municipal primary wastewater and enhancing biomethanation of lipid-extracted algal residues (LEA) through hydrothermal pretreatment and co-digestion with sewage sludge (SS) was investigated. In high-rate algal ponds, the polyculture of native algal and bacteria species demonstrated a monthly average net and gross biomass productivity of 30 ± 3 and 36 ± 3 g m day (summer season). The algal community was dominated by Micractinium sp. followed by Scenedesmus sp., Chlorella sp., pennate diatoms and Chlamydomonas sp. The polyculture metabolic activities resulted in average reductions of wastewater volatile suspended solids (VSS), carbonaceous soluble biochemical oxygen demand (csBOD) and total nitrogen (N) of 63 ± 18%, 98 ± 1% and 76 ± 21%, respectively. Harvested biomass contained nearly 23% lipid content and an extracted blend of fatty acid methyl esters satisfied the ASTM D6751 standard for biodiesel. Anaerobic digestion of lipid extracted algal residues (LEA) demonstrated long lag-phase in methane production of 17 days and ultimate methane yield of 296 ± 2 mL/gVS (or ~50% of theoretical), likely because to its limited biodegradability and toxicity due to presence of the residual solvent (hexane). Hydrothermal pretreatment increased the ultimate methane yield and production rate by 15-30% but did not mitigate solvent toxicity effects completely leading to less substantial improvement in energy output of 5-20% and diminished Net Energy Ratio (NER < 1). In contrast, co-digestion of LEA with sewage sludge (10% to 90% ratio) was found to minimize solvent toxicity and improve methane yield enhancing the energy output ~4-fold, compared to using LEA as a single substrate, and advancing NER to 4.2.