The primary, in which 96,651 members are eligible to vote, is the first electoral hurdle for Netanyahu who is hoping to secure a third consecutive term in office.
Political analysts say Netanyahu is expected to win the party vote in the face of just one challenge from Danny Danon, a former deputy defence minister and outspoken member of the party's far-right fringe.
Members are also voting to determine the frontrunners on the party list for the March 17 general election.
Polling stations will close at 10:00pm with the results due early tomorrow.
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There are 70 candidates vying for places on the party list, with all 18 of its lawmakers running for re-election except outgoing Culture and Sport Minister Limor Livnat who is retiring from political life.
The last time the party held a primary was in January 2012 when members voted out three leading moderates, heralding a notable shift to the right which is likely to be further cemented in today's ballot.
General elections had been scheduled to take place in late 2017, but the vote was brought forward by Netanyahu in early December after the collapse of his fractious coalition.
The hawkish premier has been in office since 2009, following a first term in 1996-1999.