Understanding energy–water system interactions is critical to the effective management of urban infrastructure. This paper explores the potential for hydropower as a co-benefit in a novel operating regime for Sydney׳s main water reservoir (Warragamba Dam). Hydropower could be generated as part of storage level management in the reservoir aimed at introducing flood retention ‘airspace’ (to mitigate downstream flood risk from extreme rainfall) whilst augmenting the use of installed desalination capacity to maintain secure supplies of water. A purpose-built systems dynamics model provides the mechanism for evaluating and comparing future operating scenarios over a 25 year period (i.e. until 2040). Importantly, the findings reveal the potential for desalination plants, integrated into a populous city׳s water supply network, to satisfy a much broader planning agenda. Specifically, the study provides evidence that Sydney’s interdependent goals of deferring capital intensive flood storage works, maintaining water security, better utilising existing desalination and hydropower assets, and increasing renewable energy generation can be achieved through applying systems thinking to a complex citywide water planning problem. The work also makes a valuable contribution to the energy–water nexus literature at the under-explored city-scale.