The report, which audited the activities of the Department of Planning, Industry and Environment and Sydney Water since 2016, found the agencies had not met key requirements of the metropolitan water plan for a secure and affordable water supply.

The report on Tuesday prompted independent NSW MP Justin Field to say the coalition had exposed Sydney residents to a greater risk of water shortages and higher prices.

NSW Greens MP Cate Faehrmann called for an urgent intervention by Premier Gladys Berejiklian and an inquiry into Sydney Water.

The report said Sydney Water had not met all its operating licence requirements for water conservation, and both agencies had not effectively investigated, implemented or supported conservation initiatives in greater Sydney.

"There has been little policy or regulatory reform, little focus on identifying new options and investments, and limited planning and implementation of water conservation initiatives," the report said.

"As a result, greater Sydney's water supply may be less resilient to population growth and climate variability, including drought."

The report said a lack of planning meant Sydney Water was slow to respond to the recent drought.

"Sydney Water should have increased its water conservation investments as dam levels dropped from 2017 but it did not start to do so until May 2019."

Sydney Water in a statement said it welcomed the report and acknowledged the areas earmarked for improvement.

"We recognise the critical value of our most precious resource and place a high priority on water conservation as part of a range of measures to ensure a resilient and secure water supply for greater Sydney," a spokesperson said.

"We have already made very significant achievements in water conservation and will continue to work collaboratively with the department ... on further water sector improvements including the development of the Greater Sydney Water Strategy."

Mr Field said the report should serve as a wake-up call to Sydney and the state government.

"Our water planning needs to set clear targets for water recycling and efficiency, with regular and transparent reporting," Mr Field said in a statement on Tuesday.

"The government should bring forward the statutory review of the metropolitan water plan, implement the recommendations of the auditor-general, and put in place clear targets for water conservation, recycling and efficiency targets."

Ms Faehrmann said in an era of climate change, it was vital that the community had faith in Sydney Water's ability to manage water supply.

"That's why the government must urgently respond to this report by investigating the management and culture of Sydney Water, including its continued non-compliance," Ms Faehrmann said.

The report's recommendations included a clear department policy and regulatory position on water efficiency, potable water reuse, water recycling and stormwater harvesting, and a detailed five-year plan by Sydney Water for water conservation.

Australian Associated Press