The announcement to potentially build a hydro-electricity hub on Lithgow's edge has been welcomed.

EnergyAustralia announced last week that its Lake Lyell dam, which supplies water to Mt Piper power station in Lithgow could be home to a new pumped hydro energy storage facility, pending approvals.

This announcement is the latest in a series of developments for Lithgow over the past year, including plans for a large grid-scale big battery and an eco-precinct at the old Wallerawang power site, along with a push to establish an electric bus manufacturing plant just outside of town, another chapter in Lithgow's long history of industry.

The proposal involves pumping water from Lake Lyell to a reservoir it plans to build high on the side of Mount Walker, west of Lithgow.

During times of peak power demand, water will be released from the reservoir to drive electricity turbines before returning to Lake Lyell.

Energy Executive, Liz Westcott, said early estimates suggest a Lake Lyell pumped hydro energy storage facility would be capable of producing 350 megawatts of electricity with around eight hours of storage, enough to power more than 150,000 households during peak demand.

"Initial studies show that a Lake Lyell pumped hydro energy storage facility has enormous potential to become a major piece of infrastructure for New South Wales in a transitioning energy system," Ms Westcott said.

"Pumped hydro will continue to play an important role in providing reliable, affordable and cleaner power for homes and businesses into the future. One of the benefits of Lake Lyell is that it's already located near major transmission lines.

"It's a low-emission technology that can store large volumes of electricity for quick release, helping to provide cover at times when renewables aren't available and fill a large gap that will be left by the retirement of coal power plants. The ability to operate in seconds will ensure the lights stay on and energy costs are kept down for customers."

The Nature Conservation Council has also weighed in and welcomed the plan with the Council's Chief Executive Chris Gambian calling this just another feather in Lithgow's cap.

"EnergyAustralia's plans to establish a pumped hydro-electricity facility near Lithgow will help the city maintain its position as a key player in the state's electricity sector," he said.

"These are the sorts of initiatives Lithgow needs to prosper as the economy moves past coal-fired power to clean, renewable wind and solar."

Lake Lyell would be used as a lower reservoir, and the upper reservoir would be located on the south side of Mt Walker, all on land owned by EnergyAustralia.

Head of Mt Piper Greg McIntyre said the facility would provide a welcome economic boost for the region and support Lithgow in becoming a future renewable energy hub.

"A new pumped hydro facility at Lake Lyell would ensure Lithgow's legacy in energy generation is preserved well into the future," Mr McIntyre said.

"If the project goes ahead, we anticipate hundreds of jobs would be created during construction, with roles also needed to oversee the facility's ongoing operation," he said.

"Detailed assessments will follow, including environmental impacts and planning approvals, before any firm decisions can be made; however, the first step is consulting with our community."