The highest-tech effort yet to ease China's water crisis sits between a wide, flat grid of salt farms and two giant cooling towers that rise up from a vast expanse of reclaimed land on the western shore of the Bohai Sea.

Odourless, quiet and billowing clear white smoke into a sharp blue sky, the Beijiang desalination and power plant contrast sharply with the tangled pipes, dirty chimneys and foul waterways more usually associated with China's traditional industrial landscape.

The 12.1bn yuan (£1.1bn) facility is the most advanced of a series of showcase megaprojects rising up in the Tianjin-Binhai development zone. This stretch of coastline is at the forefront of the government's ambitious and costly attempt to use science and technology to shift China on to a more sustainable path of development. A 10-minute drive away, a cluster of cranes and half-completed towers marks the site of the country's most ambitious eco-city project, which aims to create a community the size of Bristol from scratch within 10 years. Further on, another giant construction site marks the emergence of what looks set to be the world's first industrial-scale experiment of cutting-edge coal gasification and carbon-capture technology.

But while those projects are works in progress, the desalination plant is already operational, and as such gives an indication of the enormous financial and technical challenges facing China's attempted transition.

Engineers from the operating company – the State Development and Investment Corporation – say the facility is the biggest and most advanced of its type in Asia.

It combines a Chinese ultra-supercritical power plant with state-of-the-art Israeli desalination equipment to generate 4,000MW of coal-fired electricity and supply 200,000 cubic metres of salt-free potable water from the sea.

To avoid the usual environmental problems associated with desalination, the plant collects – and sells – the salt derived from the seawater, rather than discharging it back into the ocean. While other plants are energy-intensive, Tianjin's engineers boast of a more efficient use of coal, because excess steam that would otherwise be emitted from the thermal power plant is instead run through pipes in seawater distillation chambers.

But it is leaking money. Since it began operations last April, the plant has never run at more than a quarter of capacity. The plant's owner has yet to sign supply deals with three local utilities.

"The plant is not profitable at present. But as the economy develops, its value will increase," said Guo Qigang, the general manager. "Desalination provides value for society, it bolsters economic development and contributes to the environment because it prevents overdrawing of underground water."

As is the case for the one-third of Chinese wind turbines that are not yet connected to the grid, supply from the desalination plant is being partly held up by the shortcomings of the distribution infrastructure. Unless extra minerals are added, the purified water can damage existing pipes, and often appears yellow when it comes out of the taps.

But the main problem is cost. Companies are reluctant to switch from the cheaper water that can be pumped from rivers, lakes and aquifers, even though these traditional sources are straining from decades of overutilisation. The price of a cubic metre of desalinated water is 8 yuan, compared to the normal 5 yuan tariff in Tianjin.

Industry sources say the utilities are also worried that once they accept expensive desalinated water, there will be no going back.

"They don't want to give up the old resources because they know they won't get permission to use them again," said Wang Shichang, head of the desalination research centre at Tianjin University. "But the delay won't last long. China is working on plans to further develop desalination, because we face scarce water resources and rising demand."

Tianjin has a chronic shortage. Drought, overuse and pollution have left its population of 10 million with just a 10th of the water of the average global citizen.

Vast expanses of northern China, including Beijing, face much the same problem, with an accumulated water deficit of 200bn cubic metres. Until now, it has has been made up by the steady depletion of non-renewable aquifers.

To head off a looming crisis, the government is resorting to ever more desperate and expensive measures, including the world's biggest hydro-engineering project – the South-North Water Diversion Project – which aims to divert part of the flow of the Yangtze along three massive channels. This scheme has been plagued by contamination fears, cost overruns and resettlement difficulties that have left it several years behind schedule and unlikely to undercut desalination on price.

No solution is going to be cheap or easy. Environmentalists warn that even with advances in technology, seawater is not the best answer to China's problems. Desalination plants put pressure on marine ecosystems, create extra demand for coal and water and, critics say, distract attention from the more important goals of improving efficiency, conserving resources and reducing carbon dioxide emissions.

Other sceptics contrarily deride the megaprojects in Tianjin as Potemkin eco-showcases that mask a broader trend of waste and environmental destruction. They say these problems would be better addressed by applying market principles to water prices, which are currently among the lowest in the world due to government caps.

Holding down prices will be more difficult in the future as the Politburo – which is dominated by Communist party engineers – adopts increasingly expensive supply-side strategies to ease the pressure on the environment.

Guo Youzhi, head of the China Desalination Association, predicts the next five-year economic plan, due this spring, will ramp up incentives for alternative supplies of energy and water and set a target of 2m cubic metres of desalinated water per day, up 150% from current levels.

Researchers are also looking into the possibility of piping desalinated water 150km to Beijing, which is the biggest urban drain on conventional resources.

Market analysts foresee steady expansion.

"We think China will build an additional 20 plants. They have to," said Simon Powell, head of sustainable research at the CLSA brokerage. "We think tariffs will go up and desalination costs will come down so it will be profitable in future."

But he cautioned that even this would not solve China's water problems. "All the planned desalination plants will at best supply only half of Beijing's water. It's a drop in the ocean."

• This article was amended on 17 February 2011. We originally said that the plant would generate 400MW of coal-fired electricity. This has been changed to 4,000MW.