The state government says it has accepted advice from SA Water that Billy Lights Point on the outskirts of Port Lincoln is the preferred location for the $313 million plant, should the project proceed.
The Uley South Basin currently provides about 75 per cent of the drinking water across the region, with the rest pumped from the River Murray.
In recent monitoring, SA Water found the supplies could be sustainably managed over the next few years, but a desalination plant would be needed by 2025 to prevent permanent damage to the basin.
The availability of water had been impacted by climate change and increasing salinity.
Environment Minister Susan Close said that, with time running out, SA Water would proceed with preparatory work at Billy Lights Point.
A final decision on the plant will be informed by a separate business case being prepared by Infrastructure SA, which is already examining a new and sustainable water supply for the far north and upper Spencer Gulf.
"If it does proceed, the plant will provide a reliable source of climate-independent drinking water and largely replace the existing reliance on groundwater and the River Murray," Ms Close said.
A South Australian Research and Development Institute report into the environmental impacts of Billy Lights Point found it could be built without negatively impacting the local marine environment.
Oceanographic modelling showed that once the plant was operational, long-term salinity levels in the bay would remain within natural background levels.
Billy Lights Point is a former industrial site situated away from residential properties in Port Lincoln and set back from the coastline.
Ms Close said up to 230 jobs would be created during construction, with Port Lincoln locals to be given priority.
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