A mine water treatment project aimed at improving water quality in Coxs River, which runs into Sydney's drinking water catchment, has been given the green light.

The Planning Assessment Commission has approved the Springvale Water Treatment Project, which will involve building a pipeline to divert salty water discharges from Springvale mine near Lithgow to Mount Piper power station for treatment.

The Springvale mine is the only source of coal for Mount Piper power station, which produces 15 per cent of New South Wales' electricity.

The mine and power station each employ about 300 people, and the site's owners, Centennial Coal and EnergyAustralia, have argued the water treatment project was vital to the future operations.

There have been long-running concerns about the wastewater being released into Sydney's drinking water catchment.

But Katie Brassil from Centennial Coal, said the project would completely address those issues.

"We've actually delivered on the commitment that we made," Ms Brassil said.

"The big job for us, now, is to get on and construct this really important piece of regional infrastructure, but we've got overwhelming support at the [Planning Assessment Commission] meeting and from the local community."

The Colong Foundation director Keith Muir said the water treatment project was a win for the environment and Sydney's drinking water.

"We're very happy about that; we just wish that it happened many years ago," Mr Muir said.

Conservationists concerned about project's timeline

But Mr Muir said he was worried about a condition included in the project's approval that would give the proponent two years to bring the changes into effect.

He said this would mean another two years of salty water discharges in the river before the situation improved.

"I don't see why the environment has to wait all this time before it improves, and you have to remember that this is the drinking water supply for Sydney we're talking about," Mr Muir said.

It has been a nervous time for the Lithgow region as the mine and power station faced potential closure if the project was not approved by June 30, because the mine would not be operating within its licence conditions.

Ms Brassil said the favourable decision came as a relief for the local community.

"Job security in a regional area is absolutely paramount, as is energy reliability, and I'm sure that the Lithgow community is going to be very pleased with this outcome," she said.