Proposed $4bn pumped hydro project could power a third of Sydney’s households by 2031

Warragamba Dam creates Lake Burragorang, the primary reservoir for water supply for Sydney. Photograph: Carly Earl/The Guardian

Sydney’s main source of drinking water could also supply enough renewable energy to power almost a third of the city’s households by 2031 if a pumped hydro project using a former coal washery proceeds as planned.

Zen Energy, an energy retailer, announced on Thursday it had signed an agreement with the state-owned Water NSW to build a reservoir at Nattai on the escarpment about 400m above Lake Burragorang on Sydney’s south-west fringe.

The project has an initial cost of $3bn to $4bn and would be financed mostly through debt, a Zen spokesperson said. At 1,000 megawatts of capacity and with about 3km of tunnels, the venture would be about half the generation size of the Snowy 2.0 pumped hydro project, which is presently estimated to cost at least $12bn with its 27km of tunnels.

The proposed Western Sydney pumped hydro venture would cycle about 10 gigalitres of water between the two water bodies. Lake Burragorang, which sits behind Warragamba dam and can hold more than 2,000GL, would see its water levels rise and fall about 10cm, the spokesperson said.

The Nattai site is a former coal washery that has been rehabilitated over the past two decades and is now mostly bare rock. However, the lake would still have to be lined to ensure that water cycling through does not contaminate Sydney’s water supplies below.

The close proximity to Sydney and the avoidance of land clearing in a national park are among the advantages the WSPH project has over its larger Snowy 2.0 counterpart. The region’s sandstone is expected to be easier to bore through than the mixed geological area the Snowy Hydro project has had to contend with, the spokesperson said.

Australia is home to many prospective sites for pumped hydro projects, a known technology that can help provide so-called firming electricity supplies during dark and still periods when wind and solar farm output is low.

The Nattai venture will still require several years of feasibility studies to determine whether it is viable, with the WaterNSW approval just the first hurdle to clear.

Zen said coal was mined in the area between 1930 and 1992, with the coal washery in use until 2001. If all approvals and a social licence are secured – with $1m a year to be set aside for a community benefit scheme – construction could begin in 2027 and be operational by 2031, it said.

“The vast water reserves of Lake Burragorang can supply Sydneysiders with clean drinking water and clean, renewable energy as well,” Zen’s chief executive, Anthony Garnaut, said in a statement.

“Western Sydney pumped hydro marks Zen’s entry into renewable energy development in New South Wales,” he said. The company is also considering five or six other projects in Queensland and NSW.

If it proceeds, the project could create as many as 1,500 construction jobs and 80 ongoing operations roles.

“While we are working to build a sustainable future, the most critical factor in considering this proposal is that the project does not impact catchment health or drinking water supply from Warragamba dam at any time, during the investigation,construction, or operational phases,” WaterNSW’s CEO, Andrew George, said.

“This is an opportunity to not only assist the transition to a renewable energy power grid, but also to create jobs, support the local community, and generate revenue to put downward pressure on water bills,” George said.

“WaterNSW is continuing to assess sites across our land and asset portfolio to identify opportunities for similar projects.”