Last month Vital Energi started a Â£14.8m project to upgrade the heating and hot water systems at the John Radcliffe and Churchill hospitals.
But Oxford City Council said the company needs planning permission and none has been granted.
The firm has suspended work while it investigates the situation.
In a letter to Vital Energi the council's head of planning Patsy Dell said it has "no record of specific planning permission being sought or given".
She added: "At the current time our position is that planning permission appears necessary for the proposed works.
"I would urge you and the trust to address this situation by the submission of a full planning application at the earliest opportunity."
A council spokesman added that the contractor was informed it need planning permission before the work started. He said the authority supports the project in principle.
In a statement Vital Energi said: "Works associated with the energy link underground utility services and the formation of the service trench have been suspended whilst discussions with the local planning authority continue."
The Hospital Energy Project is an 18-month scheme and the pipeline will be 1.6 miles (2.2 km) long when it is finished.
Works are planned in Woodlands Road, Sandfield Road, London Road, Latimer Road, All Saints Road, Stapleton Road, Old Road and Churchill Drive.
Residents have previously complained about a lack of information regarding the project.
Oxford University Hospitals NHS Foundation Trust believes the pipeline will mean the buildings are less reliant on the national power grid during the winter months.
The trust said it was unable to comment.
A contractor installing an underground pipeline between two Oxford hospitals has been told it needs planning permission for the work.