Government accepts both recommendations of parliamentary inquiry critical of Dungowan Dam project

But the dam's final business case - which doesn't yet have a deadline for release - will be kept secret, the government said.

The state has also not yet made an investment decision on the dam.

Last year's upper house inquiry "was not convinced by the evidence that the proposed Dungowan Dam would secure Tamworth's future water availability" and recommended investigating alternative water solutions, like recycling.

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In a response to the inquiry published on Friday, the government accepted both recommendations.

"The Peel Valley community needs a multi-faceted approach to securing water supply to protect against increasing climate uncertainties," the government's response said.

"While the proposed new Dungowan Dam and pipeline may be an important part of any approach for Tamworth's water supply, the final business case for Dungowan Dam and the Namoi Regional Water Strategy will examine several infrastructure and non-infrastructure options for increasing the water security of Tamworth."

The government also supported a recommendation that it take note of "significant concerns" about high costs, limited usefulness and environmental impact of the new 22 gigalitre dam.

The project will be heavily scrutinised by planners before getting sign-off and will have to make its way through all seven possible planning "gateways" before getting final sign-off, it said.

The government also committed to an independent review of the dam's business case "before the NSW government considers whether to proceed with an investment decision".

"While the final business case will not be made publicly available, the [environmental impact statement] (which contains elements of the Final Business Case) will be publicly exhibited in 2022, and the community will have the chance to make submissions on the project and the proposed strategies to avoid, minimise and mitigate the impacts," the government response said.

The project's business case will include a comprehensive assessment of the costs, benefits, and environmental and financial impacts of the new dam, the government said.

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Released in July last year, the final report produced by the rationale for, and impacts of, new dams and other water infrastructure in NSW inquiry was heavily critical of the Dungowan, Mole River and Wyangala Dam projects.

Initially set to recommend that "the NSW Government not proceed with the Dungowan Dam and Pipeline Project, due to the significant and persuasive arguments against the project", committee members ultimately watered down their recommendations.

The final inquiry report recommended the NSW government "investigate alternative options to ensure water security in the Peel Valley, including managed aquifer recharge, water efficiency and water recycling as a matter of urgency".

The new dam is currently budgeted to cost $484 million and hold about 22 gigilitres of water when full.

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