It will be another six months before it is known whether the Illawarra will be home to a desalination plant.
The idea was raised by Water Minister Melinda Pavey in January this year as a measure to combat the drought.
Despite heavy rain in February filling dams, Ms Pavey said the potential plant was still on the agenda.
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However, as any possible plant forms part of a broader water strategy for the state, a decision on going ahead with the plant is still some time away.
"We do know that in the future we're going to require more water supply to service the growing population that we've see across Sydney and the Illawarra region," Ms Pavey said.
"By the end of the year the government will have considered our greater Sydney water strategy, which will help define the right order in the decision-making along with the work that we've done and the community consultation we've had."
Ms Pavey confirmed a site in Port Kembla had been chosen but would not specify the location.
The Minister was in Wollongong to announce Sydney Water's new 10-year deal with BlueScope to supply recycled water to the steelworks.
The Wollongong Water Recycling Plant will supply up to 20 megalitres of water a day to cool steel as well as other uses in the steelworks.
"To put that in context, 20 megalitres a day represents 20 per cent of the daily demand on Avon Dam, which is the main water supply for Wollongong and the Illawarra," Ms Pavey said.
John Nowlan, the chief executive of the Australian Steel Products division, said BlueScope was making further investments to help with the delivery of the recycled water.
"We are committing to invest around $800,000 to upgrade the Sydney Water pipeline that supplies recycled water to our plant," Mr Nowlan said.
"For the last 14 years, less than 3 per cent of our total water usage at the Port Kembla steelworks has drawn down on dam water reserves with the other 97 per cent coming from recycled water and saltwater from the ocean."
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