Power over Ethernet (PoE) is a system that passes electric power AND data on twisted pair Ethernet cables. In this case, a single cable is used to deliver both electric power and data to any compatible device (IP camera, VoIP phone, wireless access point, etc.). More specifically, the data cable carries the electrical current.
The benefit of cutting the number of wires is both in cost and labor. Additionally, troubleshooting is easier and there is more installation flexibility.

How POE Works

PoE can work with both data signal and electrical current needed to run on one data cable without interfering with each other. The two must run separately from one another. One of two techniques can be used to transmit power over an Ethernet cable. Both techniques have been standardized by IEEE 802.3 in 2003. The two are Alternative A and Alternative B.

Alternative A

Alternative A runs power and data on the same wires for 10 and 100 Mbit/s Ethernet variants. Power is transmitted to the data conductors by applying a common voltage to each pair. Because twisted-pair Ethernet uses differential signaling, it doesn’t interfere with data transmission. The common-mode voltage is extracted easily using the center tap of the standard Ethernet pulse transformer.

Alternative B

Alternative B separates the data and the power conductors for 10BASE-T and 100BASE-TX so that two of the four signal pairs of the Cat5 cable are used. This alternative results in easier troubleshooting. It also uses all four twisted pairs of the Cat5 cable (positive voltage runs along pins 4 & 5, and negative along pins 7 & 8).
For Gigabit Ethernet and faster, all four pairs are used for data transmission, hence both Alternatives A and B transport power on wire pairs are also used for data.