Bega MP Andrew Constance has announced state funding for a new dam in the catchment of the Tuross River.
It would be built east of the river, south-west of Bodalla, between Bullockys Hut Rd, Big Rock Rd and Waincourt Rd.
Mr Constance said the NSW Government would invest $25.6 million to design and construct the "Eurobodalla Southern Water Storage", adding 3,000 Megalitres of storage.
"We are also investing $762,000 to eliminate the risk of sewage pollution to Wallaga Lake through the design and construction of a pressure sewerage system at Akolele to transfer sewage to the Bermagui sewerage treatment plant," Mr Constance said.
Water Minister Melinda Pavey said the current drought was "outside the history books".
"While we continue to invest in emergency water infrastructure, we must ensure we are maintaining our regional water infrastructure and investing in the future of our communities," Mrs Pavey said.
Eurobodalla Mayor Liz Innes said the state funding was vital.
"This funding is just so critical to the future water security and economic growth of the Eurobodalla," she said.
"The new storage also means improved environmental outcomes for the Tuross River and better support for our farmers who also rely on the river."
In March 2018, Eurobodalla Shire Council urged a new storage facility be built to ensure water security in drought.
Putting the plan on display at the time, the council said the proposed works would be located "on an unnamed third-order ephemeral stream about 950m east of the Tuross River, within the Tuross River catchment".
"The majority of the works would be located in the Bodalla State Forest," a council spokesperson said.
"Road access would be via the Princes Highway to Bodalla and then Eurobodalla Road.
"The works consist of an off-stream water storage facility and associated ancillary facilities.
"Raw water would be extracted from the Tuross River from a new river intake pump station and an existing bore field for transfer to the new water storage facility.
"Water would be pumped from the Tuross River to the proposed water storage facility."
The council said investigations to identify a feasible site for an off-stream storage facility were carried out in 2005.
Four sites were identified near the Tuross River. After a preliminary environmental assessment of each, a preferred site was selected, due to its close proximity to council's existing water treatment supply infrastructure.
The could said the project was deferred after water efficiency measures reduced demand and the shire's growth was less than predicted.
However, in the meantime, the council said NSW Government water sharing plans, which ensured environmental flows in rivers were maintained, came into force, bringing forward the need for the southern storage.