Settled algae may be used as nutrient for macrophyte establishment, but also can induce marked macrophyte decline during deep anaerobic decomposition. Sediment microbial fuel cells (SMFCs) may promote the utilization of algae-derived nutrients and relieve bio-toxicity from settled algae to submerged macrophytes, thus facilitating plant production. To test these hypotheses, a 62-day comparative study was designed and conducted in microcosms with the following six treatments: control (open-circuit SMFC), plant (open-circuit SMFC with plants), algae (open-circuit SMFC with algae), algae-plant (open-circuit SMFC with algae and plants), algae-SMFC (closed-circuit SMFC with algae), and algae-plant-SMFC (closed-circuit SMFC with algae and plants). The results showed that the presence of Hydrilla verticillata improved the power generation of SMFCs when algae were used as substrates during the whole operation. The decomposition of sedimented algae experienced two periods since the injection. During the slight decomposition period (14–38 day), the algal retention in sediments was enhanced by H. verticillata as a nutrient source. Nitrogen (N) assimilation in plant shoots was facilitated under electrogenesis due to a simultaneous increase of algae-derived dissolved inorganic carbon (DIC) and ammonium (NH4+) in the water column. At the end of the 38th day, the biomass of H. verticillata were increased by 21.4% and 52.3%, respectively, in the algae-plant and algae-plant-SMFC, compared with that in plant treatment. Obvious NH4+-stress was exerted on H. verticillata during the following intense algal decomposition period (38–62 day). Compared with shoots, roots of H. verticillata were more sensitive to the biotoxicity of algae-derived NH4+. The electrogenetic process diverted the degradation pathway from acetoclastic methanogenesis to electrogenesis via redox cycle, resulting in delayed algal decomposition in algae-SMFC treatment. In addition, electrogenesis enhanced the removal of algae-derived N. As a result, NH4+ toxicity to plant roots was effectively alleviated, and sedimented algae served as a stable nutrient source for plant development. Stable transfer rate of algae-derived N from sediments to plant roots was observed, while the assimilation rate of algae-derived N from water column to plant shoots showed a constant increase in the algae-plant-SMFC treatment. Electrogenesis enhanced N-fixing capacity belonged to rhizosphere of H. verticillata, evidenced by greater enrichment of some plant growth-promoting rhizobacteria (PGPRs), including Bradyrhizobium, Mycobacterium, Paenibacillus, Mesorhizobium, and Roseomonas in the algae-plant-SMFC treatment. At the end of the experiment, marked increases in the production of H. verticillata in algae-plant-SMFC were observed, with 90.1% and 32.8%, respectively, when compared with algae-plant and plant treatments (p < 0.05). SMFC application could be used as a strategy to promote the growth of submerged macrophytes in algae-rich sediments.