Melbourne's water providers have begun planning for a possible water crisis, as a new report suggests the city could start running out of water within a decade.

Melbourne Water analysed the effect of greater consumption caused by population growth, and the possibility of worsening droughts due to climate change.

It found, at worst, demand could outstrip supply by 2028, with the best case scenario seeing the city facing a water crisis within 50 years.

With Melbourne's population expected to double by 2065, the report said the community could expect to see more apartments and smaller blocks.

"Some of these changes can have a positive impact on water use, like using less water as homes become smaller, less outdoor water use in gardens, more efficient fittings installed at construction, and houses built to higher efficiency standards," it said.

"However, these same changes can also provide challenges for water and liveability. With smaller block sizes and gardens, we could see less urban greening which could increase urban heat.

"More houses create more hard surfaces that create stormwater runoff, leading to more potential flood risk and damage to our rivers and creeks."

Environment Victoria's Nicholas Aberle said Victoria must not ignore the warning.

"We've got a bit of time before this really gets difficult but if we sit on our hands for the next 10 years and just hope that it'd all going to get better, and assume that climate change won't be as bad as we probably know it's going to be, if we don't use that time wisely, this will become a crisis," he said.

The report said while household usage had become more efficient, the increase in population would push up demand.

This year Victoria experiences its driest start to winter on record.

More use of recycled water, stormwater

But the report outlined the aims of Melbourne's future water strategy to help combat those changes.

The city's four water retailers — City West Water, South East Water, Yarra Valley Water and Melbourne Water — have responded by suggesting digital water meters be installed in all homes and businesses.

They said this would allow better monitoring of water usage and to identify and fix leaks faster.

They also suggested the city consider sourcing more water from alternative supplies such as recycled water, and treated stormwater and groundwater.

Mr Aberle said they were an untapped resource.

"Future droughts will come and we know that they will be bad. We need to start to think of Melbourne, the city itself, as a water catchment," he said.

"Enormous volumes of water fall on our streets and our roofs and we need to make sure we're capturing that and that will reduce the pressure on storages.

"There are already many examples of alternative water use across Melbourne, including private rainwater tanks used in many homes and larger schemes in Melbourne's growth areas in the north, west and south east where recycled water is provided to homes for use in gardens, toilets and the laundry," it said.

Victoria's controversial desalination plant at Wonthaggi was switched on for the first time over summer, pushing up water bills.

The plant appeared to be a key part of the city's water supply in the report. It said the order process would be reviewed to keep it in line future planning and customer needs.