A $5 million Plan B will shore-up the supply of clean drinking water for residents of Tamworth, Kootingal and Moonbi.
The Calala Dam will be able to store 120ML of raw water and is expected to be finished as soon as next year.
Tamworth Regional Council forecasts how much water the city will use and orders two days in advance, if there's too much and nowhere to hold it, the extra water goes to waste down the river.
Council can keep its hands on 13 per cent more of the water it's already paid for with the dam, Water and Waste manager Dan Coe said.
"The idea is that instead of that water travelling down the river, we'll be able to pull it all out, store it in the dam and reuse it later," he said.
Next door to the Calala Water Treatment Plant, there are other operational benefits to off-river storage.
In a flood, it's difficult to treat the water, instead the raw stored water can be used while the dirty water flows down the river.
"It sounds a bit stupid in the drought to talk about that but it is one of the benefits," Mr Coe said.
Machines at the treatment plant run constantly, and using electricity during peak times jacks up the prices.
With the dam, the council will be able to run the plant in off-peak times and reduce operating costs, Mr Coe said.
"The dam also gives us some storage for operational backup in a contingency, if something does go wrong we have this water here that we can treat," he said.
"If we have a failure of the pump system we can still use the dam to maintain our operations while we're doing repairs."
With the ambitious 100,000 population goal by 2041, more water storage will need to be built in the future.
The dam couldn't be made bigger due to physical limitations at the site.
At that size the council admits it won't go far in terms of drought-proofing the city, so more discussions will need to be had about larger water storage and how to improve water security in Tamworth.
The plant can treat up to 60 million litres of water every day, on average that's a week's worth of water for Tamworth, Kootingal and Moonbi.
The dam storage is about two-days worth of water in peak demand.
A 60ML water pump station is covered in the $5 million cost for the major project in the Annual Operational Plan.