This study investigated the first-ever reported use of freshwater Nannochloropsis for the bioremediation of dairy processing side streams and co-generation of valuable products, such as β-galactosidase enzyme. In this study, N. limnetica was found to grow rapidly on both autoclaved and non-autoclaved whey-powder media (referred to dairy processing by-product or DPBP) without the need of salinity adjustment or nutrient additions, achieving a biomass concentration of 1.05–1.36 g L−1 after 8 days. The species secreted extracellular β-galactosidase (up to 40.84 ± 0.23 U L−1) in order to hydrolyse lactose in DPBP media into monosaccharides prior to absorption into biomass, demonstrating a mixotrophic pathway for lactose assimilation. The species was highly effective as a bioremediation agent, being able to remove > 80% of total nitrogen and phosphate in the DPBP medium within two days across all cultures. Population analysis using flow cytometry and multi-channel/multi-staining methods revealed that the culture grown on non-autoclaved medium contained a high initial bacterial load, comprising both contaminating bacteria in the medium and phycosphere bacteria associated with the microalgae. In both autoclaved and non-autoclaved DPBP media, Nannochloropsis cells were able to establish a stable microalgae–bacteria interaction, suppressing bacterial takeover and emerging as dominant population (53–80% of total cells) in the cultures. The extent of microalgal dominance, however, was less prominent in the non-autoclaved media. High initial bacterial loads in these cultures had mixed effects on microalgal performance, promoting β-galactosidase synthesis on the one hand while competing for nutrients and retarding microalgal growth on the other. These results alluded to the need of effective pre-treatment step to manage bacterial population in microalgal cultures on DPBP. Overall, N. limnetica cultures displayed competitive β-galactosidase productivity and propensity for efficient nutrient removal on DPBP medium, demonstrating their promising nature for use in the valorisation of dairy side streams.